**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q/A**


**(Amendment
      No. 1)**




x  **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended March 31, 2008**




**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**  **001-33537**




**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


*(Exact
      Name of Registrant as Specified in Its Charter)*




**Delaware**
              *(State
                or Other Jurisdiction of Incorporation*
              *or
                Organization)*
            **20-2903562**
              *(IR.S.
                Employer Identification**No.)***No.
                2**,**Jing
                You Road,**
              **Kunming
                National Economy**&
              **Technology
                Developing District**
              **People’s
                Republic of China 650217**
              *(Address
                of Principal Executive Offices)*
            **N/A**
              *(Zip
                Code)*





**0086-871-728-2628**


*(Registrant’s
      Telephone Number, Including Area Code)*




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.


Yes o No x *




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
      Act.




Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer o Smaller
      Reporting Company x




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




There
      were 19,679,400 shares outstanding of the issuer’s common stock, par value
      $.0001 per share, as of May 1, 2008.




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






*
      Other
      than the disclosure that the issuer has not filed all reports required to be
      filed by Section 13 or 15(d) of the Exchange Act during the past 12 months,
      the
      disclosures on the cover page of this Amendment No. 1 to Form 10-Q continue
      to
      describe conditions as of May 20, 2008, the date of the original
      filing.











**EXPLANATORY
      NOTE**




This
      Amendment No. 1 (this “Amendment No. 1”) on Form 10-Q/A, which amends the Items
      identified below with respect to the Form 10-Q, filed by China Shenghuo
      Pharmaceutical Holdings, Inc. (“we” or the “Company”) with the Securities and
      Exchange Commission (the “SEC”) on May 20, 2008 (the “Original Filing”) is being
      filed to reflect amendments and changes to financial and other disclosures
      contained in the Original Filing.




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




On
      August
      22, 2008 and September 12, 2008, the Company issued Current Reports on Form
      8-K
      and Form 8-K/A, respectively, announcing a pending internal investigation being
      conducted by the Audit Committee of the Board of Directors (the “Audit
      Committee”) based on preliminary information received from Hansen, Barnett &
Maxwell, P.C. (“HBM”), the independent registered public accounting firm of the
      Company, regarding errors in the accounting for certain sales representative
      commission advances and trade receivables, the Company’s internal controls, the
      Company’s personnel involved and related matters. The errors concern cash
      transaction journal entries in which uncollected trade accounts and notes
      receivables were credited (i.e., deemed paid) and corresponding cash debits
      (i.e., cash deemed received) were recorded, and in connection therewith,
      corresponding cash credits (deemed decreases) and debits (deemed increases)
      to
      other receivables from sales representatives were recorded. Under GAAP, it
      was
      incorrect to record these transactions as cash transactions. The effect of
      the
      incorrect entries was to improperly reflect the aging of the Company’s trade
      accounts and notes receivables and to understate the Company’s bad debt
      allowance. These errors resulted in the understatement of general and
      administrative expenses (the line item that includes bad debt allowance) and
      the
      resultant overstatement of net income and earnings per share. The errors also
      resulted in an overstatement of the deferred tax asset, which could adversely
      affect future operations and profit levels on a continuing basis. HBM also
      advised the Audit Committee that no further reliance should be placed on the
      (1)
      previously filed financial statements and related audit report dated March
      28,
      2008 contained in the Company’s Form 10-KSB for the fiscal year ended December
      31, 2007, as amended, and (2) previously filed financial statements for the
      fiscal quarter contained in the Original Filing.




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




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




The
      Company has restated its financial statements for the fiscal year ended December
      31, 2007 and the fiscal quarter ended March 31, 2008 to correct the accounting
      errors. The fiscal year ended December 31, 2007 and the fiscal quarter ended
      March 31, 2008 were the only periods found to have been impacted by the
      accounting errors. HBM has advised that there would be no need for the Company
      to restate its previously filed financial statements for the interim periods
      contained in the Company’s Forms 10-QSB for the fiscal quarters ended June 30,
      2007 and September 30, 2007 (as originally indicated by HBM) and that those
      statements may be relied upon. For further information regarding the effect
      of
      the Restatement on the fiscal year ended December 31, 2007, see the Company’s
      Form 10-KSB/A, filed with the SEC on November 14, 2008.




The
      restatements (1) decrease net income by approximately $2,296,253, from
      $4,016,640 to $1,720,387, in the fiscal year ended December 31, 2007 and
      increase net loss by approximately $514,319, from $(338,341) to $(852,660),
      in
      the fiscal quarter ended March 31, 2008 and (2) decrease earnings per share
      by approximately $0.12, from $0.21 to $0.09, in the fiscal year ended December
      31, 2007 and increase loss per share by approximately $0.02, from
      $(0.02) to $(0.04), in the fiscal quarter ended March 31, 2008. For more
      information regarding the restatement, refer to Note 1 and Note 10 of the Notes
      to the Condensed Consolidated Financial Statements contained
      herein.









The
      effects of the restatement of the financial statements for
      the
      first fiscal quarter of 2008 were as follows (the “Restatement”):




**As
                  Previously**
              
              **Effect
                  of****Reported**
              
              **Restatement**
              
              **As
                  Restated****Consolidated
                  Balance Sheet****As
                  of March 31, 2008**Accounts
                  and notes receivable, net
              
              $
              8,532,652
              
              $
              1,125,378
              
              $
              9,658,030Employee
                  advances, net
              
              
              12,727,818
              
              
              (3,063,462
              )
              
              9,664,356Total
                  Current Assets
              
              
              28,151,948
              
              
              (1,938,084
              )
              
              26,213,864Deferred
                  Income Taxes
              
              
              1,487,729
              
              
              (1,487,729
              )
              
              -TOTAL
                  ASSETS
              
              
              38,595,969
              
              
              (3,425,813
              )
              
              35,170,156Taxes
                  and Related Payables
              
              
              735,612
              
              
              (186,819
              )
              
              548,793Total
                  Current Liabilities
              
              
              15,452,257
              
              
              (186,819
              )
              
              15,265,438TOTAL
                  LIABILITIES
              
              
              23,996,588
              
              
              (186,819
              )
              
              23,809,769Minority
                  Interest in Net Assets of Subsidiaries
              
              
              637,065
              
              
              (208,898
              )
              
              428,167Stockholders'
                  Equity:Retained
                  earnings
              
              
              5,997,249
              
              
              (2,810,572
              )
              
              3,186,677Accumulated
                  other comprehensive income,foreign
                  currency translation
              
              
              1,622,149
              
              
              (219,524
              )
              
              1,402,625Total
                  Stockholders' Equity
              
              
              13,962,316
              
              
              (3,030,096
              )
              
              10,932,220TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              
              38,595,969
              
              
              (3,425,813
              )
              
              35,170,156**Consolidated
                  Statement of Operations****For
                  the three months ended March 31, 2008**General
                  and administrative expense
              
              
              1,571,115
              
              
              896,463
              
              
              2,467,578Total
                  Operating Expenses
              
              
              3,331,593
              
              
              896,463
              
              
              4,228,056(Loss)
                  Income from Operations
              
              
              55,413
              
              
              (896,463
              )
              
              (841,050
              )(Loss)
                  Before Income Taxes
              
              
              (7,512
              )
              
              (896,463
              )
              
              (903,975
              )Benefit
                  from (provision for) income taxes
              
              
              (352,981
              )
              
              350,805
              
              
              (2,176
              )Minority
                  interest in income of subsidiaries
              
              
              22,152
              
              
              31,339
              
              
              53,491Net
                  (Loss)
              
              
              (338,341
              )
              
              (514,319
              )
              
              (852,660
              )Foreign
                  currency translation adjustment
              
              
              591,003
              
              
              (118,021
              )
              
              472,982Comprehensive
                  (Loss) Income
              
              
              252,662
              
              
              (632,340
              )
              
              (379,678
              )Earnings
                  (loss) Per ShareBasic
              
              $
              (0.02
              )
              $
              (0.02
              )
              $
              (0.04
              )Diluted
              
              $
              (0.02
              )
              $
              (0.02
              )
              $
              (0.04
              )**Consolidated
                  Statement of Cash Flows****For
                  the three months ended March 31, 2008**Cash
                  Flows from Operating Activities:Net
                  loss
              
              
              (338,341
              )
              
              (514,319
              )
              
              (852,660
              )Deferred
                  income taxes
              
              
              167,983
              
              
              (167,983
              )
              
              -Minority
                  interest in income of subsidiaries
              
              
              (22,152
              )
              
              (31,339
              )
              
              (53,491
              )Change
                  in current assets and liabilities:Accounts
                  and notes receivable
              
              
              1,487,331
              
              
              (167,262
              )
              
              1,320,069Employee
                  advances
              
              
              (2,101,062
              )
              
              1,063,726
              
              
              (1,037,336
              )Taxes
                  and related payables
              
              
              (151,701
              )
              
              (182,823
              )
              
              (334,524
              )Net
                  Cash Used in Operating Activities
              
              
              (391,880
              )
              
              -
              
              
              (391,880
              )









**As
                  Previously**
              
              **Effect
                  of****Reported**
              
              **Restatement**
              
              **As
                  Restated****Consolidated
                  Balance Sheet****As
                  of December 31, 2007**Accounts
                  and notes receivable, net
              
              $
              9,651,304
              
              $
              916,368
              
              $
              10,567,672Employee
                  advances, net
              
              
              10,147,415
              
              
              (1,897,609
              )
              
              8,249,806Total
                  Current Assets
              
              
              27,581,623
              
              
              (981,241
              )
              
              26,600,382Deferred
                  Income Taxes
              
              
              1,593,159
              
              
              (1,593,159
              )
              
              -TOTAL
                  ASSETS
              
              
              37,910,118
              
              
              (2,574,400
              )
              
              35,335,718Minority
                  Interest in Net Assets of Subsidiaries
              
              
              655,962
              
              
              (176,644
              )
              
              479,318Stockholders'
                  Equity:Retained
                  earnings
              
              
              6,335,590
              
              
              (2,296,253
              )
              
              4,039,337Accumulated
                  other comprehensive income,foreign
                  currency translation
              
              
              1,031,146
              
              
              (101,503
              )
              
              929,643Total
                  Stockholders' Equity
              
              
              13,709,654
              
              
              (2,397,756
              )
              
              11,311,898TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              
              37,910,118
              
              
              (2,574,400
              )
              
              35,335,718




**Remedial
      Actions Relating to Controls and Procedures**




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




**Risk
      Factors**




*The
      following disclosure reflects potential risks as a result of the Company’s
      accounting errors and the resulting Restatement of the Company’s financial
      statements. These risk factors did not exist as of the date of the Original
      Filing and should be read in conjunction with the Risk Factors section in Item
      1A of Part I of the Company’s Form 10-KSB/A, filed with the SEC on November 14,
      2008* .




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




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









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




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





**Legal
      Proceedings**





*The
      following disclosure reflects developments as a result of the Company’s
      accounting errors and the resulting Restatement of the Company’s financial
      statements. These developments did not exist as of the date of the Original
      Filing and this section should be read in conjunction with the Legal Proceedings
      section in Item 1 of Part II of this Amendment No. 1.*





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





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





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





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





**This
      Amendment No. 1**





For
      the
      convenience of the reader, this Amendment No. 1 sets forth the Original Filing
      in its entirety. However, this Amendment No. 1 only amends and restates Items
      1
      and 2 of Part I and Item 6 of Part II of the Original Filing, in each case,
      to
      reflect the Restatement of the Company’s financial statements and to clarify
      certain other disclosures. No other information in the Original Filing as
      Amended is amended hereby.





Unless
      indicated otherwise, the disclosures in this Amendment No. 1 continue to
      describe conditions as of the date of the Original Filing, and the disclosures
      contained herein have not been updated to reflect events, results or
      developments that have occurred after the Original Filing, or to modify or
      update those disclosures affected by subsequent events. Among other things,
      forward-looking statements made in the Original Filing have not been revised
      to
      reflect events, results or developments that have occurred or facts that have
      become known to us after the date of the Original Filing, and such forward
      looking statements should be read in their historical context. This Amendment
      No. 1 should be read in conjunction with the Company’s filings made with the SEC
      subsequent to the Original Filing, including any amendments to those
      filings.




As
      a
      result of this Amendment No. 1, the certifications pursuant to Section 302
      and
      Section 906 of the Sarbanes-Oxley Act of 2002, filed as exhibits to the Original
      Filing have been revised, re-executed and re-filed as of the date of this
      Amendment No. 1.









**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**FORM
      10-Q QUARTERLY REPORT**





**TABLE
      OF CONTENTS**


**Page**PART
                I - FINANCIAL INFORMATION
            1ITEM
                1.
            FINANCIAL
                STATEMENTS
            1Condensed
                Consolidated Balance Sheets as of March 31, 2008 and December 31,
                2007
                (Unaudited)
            1Condensed
                Consolidated Statements of Operations and Comprehensive Income for
                the
                Three Months Ended March 31, 2008 and 2007 (Unaudited)
            2Condensed
                Consolidated Statements of Cash Flows for the Three Months Ended
                March 31,
                2008 and 2007 (Unaudited)
            3Notes
                to Condensed Consolidated Financial Statements (Unaudited)
            4ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            15ITEM
                3.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            23ITEM
                4T.
            CONTROLS
                AND PROCEDURES
            23PART
                II - OTHER INFORMATION
            25ITEM
                1.
            LEGAL
                PROCEEDINGS
            25ITEM
                1A.
            RISK
                FACTORS
            25ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            25ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            25ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            25ITEM
                5.
            OTHER
                INFORMATION
            25ITEM
                6.
            EXHIBITS
            25SIGNATURES
            26










**PART
      I - FINANCIAL INFORMATION**




**ITEM
      1.**  **FINANCIAL
      STATEMENTS**






**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(unaudited)**


**March
                31,**
            
            **December
                31,****2008**
            
            **2007****ASSETS:**
            
            **As
                Restated**
            
            **As
                Restated****Current
                Assets:**Cash
                and cash equivalents
            
            $
            1,005,333
            
            $
            2,800,641Accounts
                and notes receivable, less allowance for doubtfulaccounts
                of $4,930,751 and $3,218,661, respectively
            
            
            9,658,030
            
            
            10,567,672Employee
                advances, less allowance for doubtful accounts of$1,380,365
                and $729,995 respectively
            
            
            9,664,356
            
            
            8,249,806Advances
                to suppliers
            
            
            1,284,423
            
            
            669,858Inventory,
                net of reserve for obsolescence of$126,992
                and $136,359, respectively
            
            
            4,482,262
            
            
            4,125,193Receivable
                from related parties
            
            
            35,967
            
            
            27,555Other
                current assets
            
            
            83,493
            
            
            159,657**Total
                Current Assets**
            
            
            **26,213,864**
            
            
            **26,600,382**Property,
                plant and equipment, net of accumulated depreciation of$4,624,115
                and $4,247,993, respectively
            
            
            7,762,163
            
            
            7,573,204Intangible
                assets, net of accumulated amortization of$49,443
                and $42,957, respectively
            
            
            670,330
            
            
            648,090Long-term
                employee advances, less allowance for doubtful accounts of$1,108,512
                and $1,717,078, respectively
            
            
            523,799
            
            
            514,042Deferred
                income taxes
            
            
            -
            
            
            -**TOTAL
                ASSETS**
            
            **$**
            **35,170,156**
            
            **$**
            **35,335,718****LIABILITIES
                AND STOCKHOLDERS' EQUITY:****Current
                Liabilities:**Accounts
                payable
            
            $
            1,734,154
            
            $
            745,514Accrued
                expenses
            
            
            1,769,458
            
            
            2,017,748Deposits
            
            
            4,043,789
            
            
            3,439,892Payable
                to related parties
            
            
            83,384
            
            
            94,939Short-term
                notes payable
            
            
            4,131,940
            
            
            5,334,260Advances
                from customers
            
            
            105,810
            
            
            119,287Taxes
                and related payables
            
            
            548,793
            
            
            855,084Current
                portion of long-term debt
            
            
            2,848,110
            
            
            4,101,667**Total
                Current Liabilities**
            
            
            **15,265,438**
            
            
            **16,708,391****Long-Term
                Debt**
            
            
            **8,544,331**
            
            
            **6,836,111****Total
                Liabilities**
            
            
            **23,809,769**
            
            
            **23,544,502****Minority
                Interest in Net Assets of Subsidiaries**
            
            
            **428,167**
            
            
            **479,318****Stockholders'
                Equity:**Preferred
                stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares
                outstanding
            
            
            -
            
            
            -Common
                stock, $0.0001 par value, 100,000,000 shares authorized,19,679,400
                outstanding , respectively
            
            
            1,968
            
            
            1,968Additional
                paid-in capital
            
            
            6,193,927
            
            
            6,193,927Statutory
                reserves
            
            
            147,023
            
            
            147,023Retained
                earnings
            
            
            3,186,677
            
            
            4,039,337Accumulated
                other comprehensive income, foreign currency translation
            
            
            1,402,625
            
            
            929,643**Total
                Stockholders' Equity**
            
            
            **10,932,220**
            
            
            **11,311,898****TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **35,170,156**
            
            **$**
            **35,335,718**




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





1




**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **AND
        COMPREHENSIVE INCOME**
 **(unaudited)**
  **Three
                  Months Ended****March
                  31,****2008**
              
              **2007****As
                  Restated****Sale
                  of Products**
              
              $
              5,486,468
              
              $
              4,327,125**Cost
                  of Products Sold**
              
              
              2,099,462
              
              
              1,141,698**Gross
                  Profit**
              
              
              3,387,006
              
              
              3,185,427**Operating
                  Expenses:**Selling
                  expense
              
              
              1,641,502
              
              
              1,602,824General
                  and administrative expense
              
              
              2,467,578
              
              
              973,605Research
                  and development expense
              
              
              118,976
              
              
              2,877**Total
                  Operating Expenses**
              
              
              4,228,056
              
              
              2,579,306**(Loss)
                  Income from Operations**
              
              
              (841,050
              )
              
              606,121**Other
                  Income (Expense):**Interest
                  income
              
              
              3,265
              
              
              6,462Income
                  from research and development activities
              
              
              263,037
              
              
              1,218Interest
                  expense
              
              
              (256,082
              )
              
              (180,183
              )Non-operating
                  expenses
              
              
              (73,145
              )
              
              -**Net
                  Other Expense**
              
              
              (62,925
              )
              
              (172,503
              )**(Loss)
                  Income Before Income Taxes**
              
              
              (903,975
              )
              
              433,618Benefit
                  from (provision for) income taxes
              
              
              (2,176
              )
              
              1,137,478Minority
                  interest in loss (income) of subsidiaries
              
              
              53,491
              
              
              (97,920
              )**Net
                  (Loss) Income**
              
              $
              (852,660
              )
              $
              1,473,176Foreign
                  currency translation adjustment
              
              
              472,982
              
              
              85,735**Comprehensive
                  (Loss) Income**
              
              $
              (379,678
              )
              $
              1,558,911**Earnings
                  (Loss) Per Share****Basic**
              
              $
              (0.04
              )
              $
              0.08**Diluted**
              
              $
              (0.04
              )
              $
              0.08**Weighted-Average
                  Shares Outstanding****Basic**
              
              
              19,679,400
              
              
              19,119,400**Diluted**
              
              
              19,679,400
              
              
              19,119,400


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




2




**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(unaudited)**
  **Three
                  Months Ended****March
                  31,****2008**
              
              **2007****As
                  Restated****Cash
                  Flows from Operating Activities:**Net
                  income (loss)
              
              $
              (852,660
              )
              $
              1,473,176Adjustments
                  to reconcile net income to net cashfrom
                  operating activities:Depreciation
                  and amortization
              
              
              199,872
              
              
              166,155Deferred
                  income taxes
              
              
              -
              
              
              (37,177
              )Minority
                  interest in (loss) income of subsidiaries
              
              
              (53,491
              )
              
              97,920Change
                  in current assets and liabilities:Accounts
                  and notes receivable
              
              
              1,320,069
              
              
              (1,861,831
              )Employee
                  advances
              
              
              (1,037,336
              )
              
              (863,563
              )Advances
                  to suppliers
              
              
              (574,171
              )
              
              (251,294
              )Inventory
              
              
              (181,623
              )
              
              109,494Other
                  current assets
              
              
              76,870
              
              
              4,048Accounts
                  payable
              
              
              937,166
              
              
              28,511Accrued
                  expenses and deposits
              
              
              (325,048
              )
              
              1,170,727Deposits
              
              
              451,037
              
              
              -Advances
                  from customers
              
              
              (18,041
              )
              
              (55,780
              )Taxes
                  and related payables
              
              
              (334,524
              )
              
              (1,034,633
              )**Net
                  Change in Operating Activities**
              
              
              (391,880
              )
              
              (1,054,247
              )**Cash
                  Flows from Investing Activities:**Receivable
                  from related parties
              
              
              1,942
              
              
              (579,050
              )Restricted
                  cash
              
              
              -
              
              
              371,186Capital
                  expenditures
              
              
              (72,119
              )
              
              (42,233
              )**Net
                  Change in Investing Activities**
              
              
              (70,177
              )
              
              (250,097
              )**Cash
                  Flows from Financing Activities:**Payable
                  to related parties
              
              
              (15,170
              )
              
              (323,676
              )Proceeds
                  from short and long-term loans
              
              
              -
              
              
              8,470,252Payments
                  on short and long-term loans
              
              
              (1,393,596
              )
              
              (8,843,200
              )**Net
                  Change in Financing Activities**
              
              
              (1,408,766
              )
              
              (696,624
              )Effect
                  of exchange rate changes on cash
              
              
              75,515
              
              
              28,645Net
                  Change in Cash and Cash Equivalents
              
              
              (1,795,308
              )
              
              (1,972,323
              )Cash
                  and Cash Equivalents at Beginning of Period
              
              
              2,800,641
              
              
              3,691,438**Cash
                  and Cash Equivalents at End of Period**
              
              $
              1,005,333
              
              $
              1,719,115**Supplemental
                  Information**Cash
                  paid for interest
              
              $
              256,082
              
              $
              180,183




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




3




**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**


**NOTE
        1 - BASIS OF PRESENTATION**
 
 The
        accompanying unaudited condensed consolidated financial statements of China
        Shenghuo Pharmaceutical Holdings, Inc., (formerly known as SRKP 8, Inc.)
        (the
“Company”) were prepared pursuant to the rules and regulations of the United
        States Securities and Exchange Commission. Certain information and footnote
        disclosures normally included in financial statements prepared in accordance
        with accounting principles generally accepted in the United States of America
        have been condensed or omitted pursuant to such rules and regulations.
        Management of the Company (“Management”) believes that the following disclosures
        are adequate to make the information presented not misleading. These condensed
        consolidated financial statements should be read in conjunction with the
        audited
        consolidated financial statements and the notes thereto included in the
        Company’s Form 10-KSB for the year ended December 31, 2007.
 
 These
        unaudited condensed consolidated financial statements reflect all adjustments
        (consisting only of normal recurring adjustments) that, in the opinion of
        Management, are necessary to present fairly the consolidated financial position
        and results of operations of the Company for the periods presented. Operating
        results for the three months ended March 31, 2008 are not necessarily indicative
        of the results that may be expected for the year ending December 31,
        2008.
 
 ***Translating
        Financial Statements*** - The
        consolidated financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        The
        functional currency of the operating subsidiaries in the People’s Republic of
        China (“PRC”) is the Chinese Yuan Renminbi (“CNY”); however, the condensed
        consolidated financial statements have been expressed in United States Dollars
        (“USD”). The accompanying condensed consolidated balance sheets have been
        translated into USD at the exchange rates prevailing at each balance sheet
        date.
        The condensed consolidated statements of operations have been translated
        using
        the weighted average exchange rates prevailing during the operating periods
        of
        each statement.
 
 ***Restatement
        of Financial Statements*** -
        During August 2008, the Company was informed by its auditing firm that the
        March
        31, 2008 consolidated financial statements needed to be revised to correct
        certain errors related to accounts and notes receivable and advances to
        employees. The Audit Committee of the Board of Directors commenced an internal
        investigation which focused on the reported errors.
 
 As
        a
        result the Company has restated its consolidated financial statements for
        the
        three months ended March 31, 2008 to correct the errors to accounts and notes
        receivable and advances to employees and the related impact on allowance
        for bad
        debts, general and administrative expenses, income taxes and the minority
        interest in income of subsidiaries. In addition, the consolidated balance
        sheet
        as of December 31, 2007 has been restated to correct errors during 2007 related
        to accounts receivable and advances to employees. The effect of the restatement
        is shown in the tables below. See Note 10. The errors also affected the
        realization of the deferred tax asset creating a valuation allowance that
        was
        caused by  unsettled
        circumstances that, if unfavorably resolved, would adversely affect future
        operations and profit levels on a continuing basis in future years.
 
 4
 
 **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 **As
                    Previously**
                
                **Effect
                    of****Reported**
                
                **Restatement**
                
                **As
                    Restated****Consolidated
                    Balance Sheet****As
                    of March 31, 2008**Accounts
                    and notes receivable, net
                
                $
                8,532,652
                
                $
                1,125,378
                
                $
                9,658,030Employee
                    advances, net
                
                
                12,727,818
                
                
                (3,063,462
                )
                
                9,664,356Total
                    Current Assets
                
                
                28,151,948
                
                
                (1,938,084
                )
                
                26,213,864Deferred
                    Income Taxes
                
                
                1,487,729
                
                
                (1,487,729
                )
                
                -TOTAL
                    ASSETS
                
                
                38,595,969
                
                
                (3,425,813
                )
                
                35,170,156Taxes
                    and Related Payables
                
                
                735,612
                
                
                (186,819
                )
                
                548,793Total
                    Current Liabilities
                
                
                15,452,257
                
                
                (186,819
                )
                
                15,265,438TOTAL
                    LIABILITIES
                
                
                23,996,588
                
                
                (186,819
                )
                
                23,809,769Minority
                    Interest in Net Assets of Subsidiaries
                
                
                637,065
                
                
                (208,898
                )
                
                428,167Stockholders'
                    Equity:Retained
                    earnings
                
                
                5,997,249
                
                
                (2,810,572
                )
                
                3,186,677Accumulated
                    other comprehensive income,foreign
                    currency translation
                
                
                1,622,149
                
                
                (219,524
                )
                
                1,402,625Total
                    Stockholders' Equity
                
                
                13,962,316
                
                
                (3,030,096
                )
                
                10,932,220TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY
                
                
                38,595,969
                
                
                (3,425,813
                )
                
                35,170,156**Consolidated
                    Statement of Operations****For
                    the three months ended March 31, 2008**General
                    and administrative expense
                
                
                1,571,115
                
                
                896,463
                
                
                2,467,578Total
                    Operating Expenses
                
                
                3,331,593
                
                
                896,463
                
                
                4,228,056(Loss)
                    Income from Operations
                
                
                55,413
                
                
                (896,463
                )
                
                (841,050
                )(Loss)
                    Before Income Taxes
                
                
                (7,512
                )
                
                (896,463
                )
                
                (903,975
                )Benefit
                    from (provision for) income taxes
                
                
                (352,981
                )
                
                350,805
                
                
                (2,176
                )Minority
                    interest in income of subsidiaries
                
                
                22,152
                
                
                31,339
                
                
                53,491Net
                    (Loss)
                
                
                (338,341
                )
                
                (514,319
                )
                
                (852,660
                )Foreign
                    currency translation adjustment
                
                
                591,003
                
                
                (118,021
                )
                
                472,982Comprehensive
                    (Loss) Income
                
                
                252,662
                
                
                (632,340
                )
                
                (379,678
                )Earnings
                    (loss) Per ShareBasic
                
                $
                (0.02
                )
                $
                (0.02
                )
                $
                (0.04
                )Diluted
                
                $
                (0.02
                )
                $
                (0.02
                )
                $
                (0.04
                )**Consolidated
                    Statement of Cash Flows****For
                    the three months ended March 31, 2008**Cash
                    Flows from Operating Activities:Net
                    loss
                
                
                (338,341
                )
                
                (514,319
                )
                
                (852,660
                )Deferred
                    income taxes
                
                
                167,983
                
                
                (167,983
                )
                
                -Minority
                    interest in income of subsidiaries
                
                
                (22,152
                )
                
                (31,339
                )
                
                (53,491
                )Change
                    in current assets and liabilities:Accounts
                    and notes receivable
                
                
                1,487,331
                
                
                (167,262
                )
                
                1,320,069Employee
                    advances
                
                
                (2,101,062
                )
                
                1,063,726
                
                
                (1,037,336
                )Taxes
                    and related payables
                
                
                (151,701
                )
                
                (182,823
                )
                
                (334,524
                )Net
                    Cash Used in Operating Activities
                
                
                (391,880
                )
                
                -
                
                
                (391,880
                )
  5
  **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
  **As
                      Previously**
                  
                  **Effect
                      of****Reported**
                  
                  **Restatement**
                  
                  **As
                      Restated****Consolidated
                      Balance Sheet****As
                      of December 31, 2007**Accounts
                      and notes receivable, net
                  
                  $
                  9,651,304
                  
                  $
                  916,368
                  
                  $
                  10,567,672Employee
                      advances, net
                  
                  
                  10,147,415
                  
                  
                  (1,897,609
                  )
                  
                  8,249,806Total
                      Current Assets
                  
                  
                  27,581,623
                  
                  
                  (981,241
                  )
                  
                  26,600,382Deferred
                      Income Taxes
                  
                  
                  1,593,159
                  
                  
                  (1,593,159
                  )
                  
                  -TOTAL
                      ASSETS
                  
                  
                  37,910,118
                  
                  
                  (2,574,400
                  )
                  
                  35,335,718Minority
                      Interest in Net Assets of Subsidiaries
                  
                  
                  655,962
                  
                  
                  (176,644
                  )
                  
                  479,318Stockholders'
                      Equity:Retained
                      earnings
                  
                  
                  6,335,590
                  
                  
                  (2,296,253
                  )
                  
                  4,039,337Accumulated
                      other comprehensive income,foreign
                      currency translation
                  
                  
                  1,031,146
                  
                  
                  (101,503
                  )
                  
                  929,643Total
                      Stockholders' Equity
                  
                  
                  13,709,654
                  
                  
                  (2,397,756
                  )
                  
                  11,311,898TOTAL
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                  
                  
                  37,910,118
                  
                  
                  (2,574,400
                  )
                  
                  35,335,718
  **NOTE
          2 - ORGANIZATION AND NATURE OF OPERATIONS**
 
 ***Nature
        of Business*** - The
        Company (“the Parent”) and its subsidiaries designs, develops, markets, exports
        and sells pharmaceutical, nutritional supplements and cosmetic products
        throughout PRC and abroad. The Company also conducts research and development
        for third parties as well as for itself using the medicinal herb Panax
        notoginseng, also known as Sanqi, Sanchi, or Tienchi and sells pharmaceutical,
        nutritional supplements and cosmetic products that contain this herb, which
        is
        grown in two provinces in the PRC. Sales from the cosmetic products represent
        less than 10% of total Company sales and revenue. The Company does not maintain
        accounting records by line of business as the Company’s subsidiaries sell
        products from multiple lines of business and management evaluates each
        subsidiary as a separate entity.
 
 ***Organization*** **** -
        The
        Company was organized under the laws of the State of Delaware on May 24,
        2005.
        On August 31, 2006, the Company consummated a share exchange agreement, as
        amended (the “Agreement”), with Lan’s Int’l Medicine Investment Co., a Hong Kong
        corporation, and a shareholder holding 93.75% of the equity interest of Kunming
        Shenghuo Pharmaceuticals Co., Ltd. (“Shenghuo”) whereby the Company, in exchange
        for 15,213,000 shares of its common stock, acquired 93.75% of Shenghuo’s
        shares.
 
 In
        addition, the Company agreed to cancel 2,036,000 shares of its common stock;
        issue 1,242,400 shares of its common stock and warrants to purchase 100,000
        shares of its common stock (the “Warrants”) for services rendered, and issue
        2,000,000 shares for $1,800,000 cash (less costs of $535,304).
 
 There
        was
        no written agreement for the services to be performed in connection with
        the
        1,242,400 shares of common stock or the 100,000 warrants. The shares issued
        for
        services were valued at $0.90 per share. This value was taken from the value
        of
        the shares issued for cash on the same day. In accordance with FAS 123(R),
        as
        the fair value of the common shares could more reliably be measured than
        the
        fair value of the services, the fair value of the shares was used to measure
        the
        transaction. In accordance with EITF 96-18, the measurement date was determined
        to be the date of the Agreement as there was no contract that specifically
        outlined the commitment date or the performance date for the shares issued
        for
        services. Further, in accordance with the guidance given in EITF 00-18, the
        shares were expensed on the date of the agreement as all shares vested
        immediately.
  6
  **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 As
        part
        of several agreements, the Company agreed to register the 1,242,400 shares
        of
        its common stock and the Warrants. The Company also agreed to register the
        2,000,000 shares of common stock that were to be issued for cash and the
        664,000
        shares of common stock that were held by the Company’s shareholders immediately
        prior to the Agreement.
 
 Because
        the shares issued by the Company to Shenghuo’s shareholders in the
        aforementioned transaction represented a controlling interest, the transaction
        has been accounted for as a recapitalization or reverse merger with Shenghuo
        being considered the acquirer. The accompanying consolidated financial
        statements have been restated on a retroactive basis to present the capital
        structure of Shenghuo as though it were the reporting entity.
 
 In
        October 1995, Shenghuo was formed under the laws of the PRC and subsequently
        acquired an 80% interest in both Kunming Shenghuo Medicine Co., Ltd.
        (“Medicine”) and Kunming Pharmaceutical Importation and Exportation Co., Ltd.
        (“Import/Export”), and a 98.18% interest in Kunming Shenghuo Cosmetics Co., Ltd.
        (“Cosmetic”). All of these entities were also formed in and operate within the
        PRC. Stockholder’s equity was represented by share capital and no shares were
        outstanding prior to August 31, 2006. Share capital of Shenghuo prior to
        the
        consummation of the Agreement was $2,660,760. On August 30, 2006, the minority
        shareholders of Medicine agreed to transfer 19% of their 20% interest to
        Shenghuo for $249,800. Also on August 30, 2006, the minority shareholders
        of
        Import/Export agreed to transfer 19% of their 20% interest to Shenghuo for
        $24,980. Subsequent to these transfers, Shenghuo owns 99% of the equity
        interests in Medicine and Import/Export.
 
 In
        September 2006, Shenghuo, which is the 93.75%-owned subsidiary of the Company,
        formed Kunming Beisheng Science and Technology Development Company, Ltd.
        (“Beisheng”), under the laws of the PRC as its partially owned subsidiary for
        the purpose of doing research and development on bio-tech products, health-care
        products and cosmetics, the importation and exportation of medicines and
        equipment and the development of pharmaceutical technologies. Upon formation,
        Shenghuo owned 70% of Beishing. In August 2007, Shenghuo established a new
        subsidiary named Pingbian Shenghuo Nanyao Development Co., LTD. (“Pingbian
        Shenghuo”). Pingbian Shenghuo was organized under the laws of the PRC, has a
        registered capital of RMB 1,000,000 and Shenghuo holds 100% of the equity
        interest of Pingbian Shenghuo. The scope of operation of Pingbian Shenghuo
        is to
        produce and refine the raw materials, such as Sanchi, that are needed to
        produce
        our products. There were no material operations for Beisheng or Pingbian
        Shenghuo for the three months ended March 31, 2008.
 
 **NOTE
        3 - SELECTED SIGNIFICANT ACCOUNTING POLICIES**
 
 ***Cash
        and Cash Equivalents*** - The
        Company’s cash and cash equivalents are maintained in bank deposit accounts. The
        Company has not experienced any losses with respect to these deposits. Cash
        and
        cash equivalents include interest bearing and non-interest bearing bank
        deposits, money market accounts, and short-term certificates of deposit with
        original maturities of three months or less. The Company did not enter into
        any
        hedge contracts during any of the periods presented.
  7
 **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 ***Accounts
        and Notes Receivable and Allowance for Doubtful
        Accounts*** - Trade
        receivables are carried at original invoiced amounts less an allowance for
        doubtful accounts. An allowance for uncollectible accounts receivable is
        established by charges to operations for amounts required to maintain an
        adequate allowance, in management’s judgment, to cover anticipated losses from
        customer accounts and sales returns. Such accounts are charged to the allowance
        when collection appears doubtful. Any subsequent recoveries are credited
        to the
        allowance account. The Company believes that the allowance for doubtful accounts
        is consistent with industry standards in the PRC based on the products that
        are
        being sold. Notes receivable
        represent bank drafts that are non-interest bearing and due within six months.
        Such bank drafts have been arranged with third-party financial institutions
        by
        certain customers to settle their purchases from
        us.
 
 ***Employee
        Advances*** -
        Employee advances are presented net of an estimated allowance for doubtful
        advances. As time passes from when advances are made to employees for travel
        and
        related expenses, the Company will create an allowance for these older
        receivables as the likelihood of collection from each particular employee
        decreases as their respective advances age. Long-term employee advances are
        not
        expected to be realized in the current operating period.
 
 ***Advances
        to Suppliers and Advances from Customers*** - As is
        customary in the PRC, the Company will often make advanced payments to suppliers
        for materials, which may include provisions that set the purchase price and
        delivery date of raw materials, or receive advance payments from
        customers.
 
 ***Basic
        and Diluted Earnings per Share*** - Basic
        and diluted earnings per share are calculated by dividing net earnings
        attributable to common stockholders by the weighted-average number of shares
        of
        common stock outstanding during the year. Diluted earnings per share are
        calculated to give effect to potentially issuable dilutive common shares.
        Potentially dilutive securities as of March 31, 2008 are comprised of warrants
        to purchase 40,000 shares of common stock at an exercise price of $4.20 and
        warrants to purchase 6,000 shares of common stock at an exercise price of
        $3.50.
        The effect of these warrants is excluded as the effect is antidilutive due
        to
        losses of the Company. Potentially dilutive securities as of March 31, 2007
        are
        comprised of warrants to purchase 100,000 shares of common stock at an exercise
        price of $2.50 per share. The effect of these warrants is excluded from the
        computation of diluted net income per share because the exercise price of
        the
        warrants is greater than the fair value of the underlying shares on March
        31,
        2007.
 
 ***Comprehensive
        Income (Loss)*** - Other
        comprehensive income (loss) presented in the condensed consolidated financial
        statements consists of cumulative foreign currency translation adjustments.
 
 ***Advertising
        Expense*** -
        The
        Company expenses advertising costs as incurred. Advertising costs for the
        three
        months ended March 31, 2008 and 2007 were $392,496 and $17,114,
        respectively.
 
 ***Business
        Condition and Liquidity*** -
        Although the Company
        has a history of positive income, working capital and retained earnings,
        the
        Company incurred losses during the three months ended March 31, 2008 of $852,660
        and significant increases in employee advances for the three months ended
        March
        31, 2008 which has resulted in a use of cash from operations of $391,880.
        The
        Company has expended significant efforts to expand its revenues by assisting
        it
        sales representatives and increasing its marketing in fiscal 2008. In addition,
        the Company has been forced to give significant attention to the internal
        investigation conducted by the Audit Committee and may have to address purported
        class action lawsuits that have been commenced due to the Company’s failure to
        file its second quarterly report with the Securities and Exchange Commission.
        The Company believes that it will remedy these matters and will be able to
        return to its normal operations in the near future, including being in full
        compliance with the Securities and Exchange Commission filing requirements
        and
        the rules of the American Stock Exchange, but the Company can not give any
        assurance that this will be the case.
  8
 **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 ***Recently
        Enacted Accounting Standards*** - In
        September 2006, the Financial Accounting Standards Board (FASB) issued
        SFAS No. 157, *Fair
        Value Measurements* ,
        which
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles and expands disclosures about fair
        value measurements. SFAS No. 157 is effective for fiscal years beginning
        after November 15, 2007, and interim periods within those fiscal years. In
        February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
        extended the effective date for certain nonfinancial assets and nonfinancial
        liabilities to fiscal years beginning after November 15, 2008. The adoption
        of
        the portions of SFAS No. 157 that were not postponed by (FSP FIN) No. 157-2
        did
        not have a material impact on our consolidated financial statements. The
        Company
        does not expect the adoption of the postponed portions of SFAS No. 157 to
        have a material impact on our consolidated financial statements.
 
 In
        December 2007, the FASB issued SFAS No. 141(R), *Business
        Combinations* ,
        and
        SFAS No. 160, *Noncontrolling
        Interests in Consolidated Financial Statements.* SFAS
        No. 141(R) requires an acquirer to measure the identifiable assets
        acquired, the liabilities assumed and any non-controlling interest in the
        acquiree at their fair values on the acquisition date, with goodwill being
        the
        excess value over the net identifiable assets acquired. SFAS No. 160
        clarifies that a non-controlling interest in a subsidiary should be reported
        as
        equity in the consolidated financial statements, consolidated net income
        shall
        be adjusted to include the net income attributed to the non-controlling interest
        and consolidated comprehensive income shall be adjusted to include the
        comprehensive income attributed to the non-controlling interest. The calculation
        of earnings per share will continue to be based on income amounts attributable
        to the Parent. SFAS No. 141(R) and SFAS No. 160 are effective for
        financial statements issued for fiscal years beginning after December 15,
        2008. Early adoption is prohibited. SFAS No. 141(R) and SFAS No. 160 are
        not
        expected to
        have a
        material impact on our results of operations or financial position.
 
 On
        January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities - Including an Amendment of FASB
        Statement No. 115” (“ FAS 159”). FAS 159
        permits entities to choose to measure many financial instruments and certain
        other items at fair value. Entities that elect the fair value option will
        report
        unrealized gains and losses in earnings at each subsequent reporting date.
        The
        fair value option may be elected on an instrument-by-instrument basis, with
        few
        exceptions. FAS 159
        also
        establishes presentation and disclosure requirements to facilitate comparisons
        between companies that choose different measurement attributes for similar
        assets and liabilities. The adoption of FAS 159
        did
        not have an effect on our financial condition or results of operations as
        we did
        not elect this fair value option, nor is it expected to have a material impact
        on future periods as the election of this option for our financial instruments
        is expected to be limited.
 
 9
 
 **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
  **NOTE
        4 - INVENTORY**
 
 Inventory
        is stated at weighted average cost and consisted of the following:
  **March
                    31,**
                
                **December
                    31,****2008**
                
                **2007**Raw
                    materials
                
                $
                951,597
                
                $
                871,425Work-in-process
                
                
                1,738,754
                
                
                1,797,379Finished
                    goods
                
                
                980,692
                
                
                786,235Product
                    on consignment
                
                
                938,211
                
                
                806,513Total
                    Inventory
                
                
                4,609,254
                
                
                4,261,552Less:
                    Provision for obsolescence
                
                
                (126,992
                )
                
                (136,359
                )Net
                    Inventory
                
                $
                4,482,262
                
                $
                4,125,193
  **NOTE
        5 - RELATED PARTY TRANSACTIONS**
 
 At
        March
        31, 2008 and December 31, 2007, the Company had payables due to related parties
        in the amount of $83,384 and $94,939, respectively. These amounts are due
        on
        demand and do not accrue interest.
  **NOTE
        6 - INCOME TAXES**
 
 The
        Company is not subject to any income taxes in the United States, but is subject
        to corporate income tax in the PRC. The Parent is located in a special region
        and has a 15% corporate income tax rate and has been granted a “tax holiday”
during which it will pay no income taxes through December 31, 2008. On March
        16,
        2007, the National People’s Congress of China passed the new Enterprise Income
        Tax Law, (“EIT Law”), and on December 6, 2007, the State Council of China issued
        the Implementation Regulations for the EIT Law which took effect on
        January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
        unified EIT of 25% on all domestic-invested enterprises and Foreign Invested
        Entities, or FIEs, unless they qualify under certain limited exceptions.
 
 As
        a
        result of the above change in the income tax laws, the Parent will continue
        to
        have a 15% rate with a tax holiday for 2008 and will have a favorable rate
        of
        50% of the tax rates in effect during fiscal 2009 through 2011 as determined
        by
        the PRC government and the regional tax authorities. Medicine, Import/Export,
        Cosmetics, Beisheng and Pingbian Shenghuo are taxed at the new 25% rate
        effective January 1, 2008.
 
 The
        Company recognizes deferred tax assets and liabilities for future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and the respective tax
        bases
        and any tax credit carry forwards available. Deferred tax assets and liabilities
        are measured using enacted tax rates expected to apply to taxable income
        in the
        years in which those temporary differences are expected to be recovered or
        settled. The effect on deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment date.
        The Company has established a valuation allowance for all deferred income
        tax
        assets of Cosmetics and Medicine due to the uncertainty of their realization.
        Income taxes payable are included in taxes and related payables on the
        accompanying balance sheets. Income taxes are not required to be paid to
        the PRC
        until after the end of the Company’s fiscal year.
  10
 **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 Undistributed
        earnings of the Company’s foreign subsidiaries since acquisition amounted to
        approximately $4.67 million at March 31, 2008. Those earnings, as well as
        the investment in the subsidiaries of approximately $6.1 million are considered
        to be indefinitely reinvested and, accordingly, no U.S. federal and state
        income
        taxes have been provided thereon. Upon distribution of those earnings in
        the
        form of dividends or otherwise, the Company would be subject to both U.S.
        income
        taxes (subject to an adjustment for foreign tax credits) and withholding
        taxes
        payable to the PRC. The Company has U.S. net operating loss carryforwards
        of
        approximately $1.9 million that, if unused begin to expire in 2026.
        Determination of the amount of unrecognized deferred U.S. income tax liability
        is not practical because of the complexities associated with its hypothetical
        calculation; however, unrecognized foreign tax credits may be available to
        reduce a portion of the U.S. tax liability.
  **NOTE
        7 - NOTES PAYABLE**
 
 The
        Company’s notes payable consist of short and long-term debt that is payable to
        banks, governmental financial bureaus, municipalities and a company. The
        following schedule summarizes the Company’s debt obligations and respective
        balances:
  **March
                    31,**
                
                **December
                    31,****2008**
                
                **2007**Short-term
                    note payable to a bank, interest at 6.12%, maturesMarch
                    2008, secured by land use rights
                
                $
                -
                
                $
                1,367,222Short-term
                    note payable to a municipality, interest at 1.8%,payable
                    on demand, unsecured
                
                
                71,202
                
                
                68,360Short-term
                    note payable to a finance bureau, interest at4.5%,
                    payable on demand, unsecured
                
                
                73,383
                
                
                70,455Short-term
                    note payable to a bank, interest at 6.39%, maturesMarch
                    2008, secured by property
                
                
                3,560,138
                
                
                3,418,056Short-term
                    note payable to a government development zoneinterest
                    at 2.43%, matured November 2007, secured by property
                
                
                427,217
                
                
                410,167Total
                    short-term notes payable
                
                $
                4,131,940
                
                $
                5,334,260
  11
  **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 **March
                    31,**
                
                **December
                    31,****2008**
                
                **2007**Long-term
                    note payable to a bank, interest at 7.72%, maturesAugust
                    2009, secured by shareholder
                
                $
                8,544,331
                
                $
                6,836,111Long-term
                    note payable to a bank, interest at 6.57%, maturesMarch
                    2010, secured by property
                
                
                2,848,110
                
                
                4,101,667Total
                    long-term debt
                
                
                11,392,441
                
                
                10,937,778Less
                    current maturities of long-term debt
                
                
                2,848,110
                
                
                4,101,667Long-term
                    notes payable, net of current portion
                
                $
                8,544,331
                
                $
                6,836,111Past
                    due notes payable
                
                $
                3,987,355
                
                $
                410,167
  **NOTE
        8 - COMMITMENTS AND CONTINGENCIES**
 
 ***Economic
        environment*** - Since
        all of the Company’s operations are conducted in the PRC, the Company is subject
        to special considerations and significant risks not typically associated
        with
        companies operating in the United States of America. These risks include,
        among
        others, the political, economic and legal environments and foreign currency
        exchange rate fluctuations. The Company’s operational results may be adversely
        affected by changes in the political and social conditions in the PRC, and
        by
        changes in governmental policies with respect to medical reforms, environmental
        reforms and other laws and regulations, anti-inflationary measures, currency
        conversion and remittance abroad, and rates and methods of taxation, among
        other
        things. In addition, all of the Company’s revenue is denominated in the PRC’s
        currency CNY, which must be converted into other currencies before remittance
        out of the PRC. Both the conversion of CNY into foreign currencies and the
        remittance of foreign currencies abroad require approval of the PRC
        government. Due to
        changes in current worldwide economic conditions, the Company’s ability to raise
        capital or borrow funds may be limited.
 
 ***Dependence
        on a single raw material*** - The
        primary ingredient in all of the Company’s products is Sanchi, an herb grown in
        two provinces of the PRC. The Company relies on its in-house purchasing
        department to acquire sufficient Sanchi at reasonable prices and may on occasion
        make advance payments to suppliers that include provisions setting the purchase
        price and delivery date. However, the Company is not reliant on a single
        source
        or supplier in order to obtain the Sanchi.
 
 ***Contingent
        Liability*** -
        The
        Company was sued by a former employee for violation of his contract and the
        courts entered a judgment in favor of the employee in 2003 for $128,978,
        which
        included litigation costs. The Company accrued the liability for this loss
        at
        December 31, 2003 and paid the amount of the judgment on April 27, 2004.
        In
        2006, the plaintiff asked the court to have the Company pay a penalty for
        not
        paying the judgment timely in the amount of $100,000. The court had frozen
        a
        bank account that had $105,284. During the fourth quarter of 2006, the court
        rejected the request for the penalty and released the funds back to the Company.
        The employee has now asserted claims for allegedly ruining the employee’s
        reputation and causing mental anguish. The lawsuit was settled in January
        of
        2008, which resulted in the payment of $65,136 by the Company.
  12
  **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 **NOTE
        9 - STOCKHOLDERS EQUITY**
 
 ***Statutory
        Reserves -*** **** According
        to the Articles of Association, the Company is required to transfer a certain
        portion of its net profits to Statutory Reserves, as determined under PRC
        accounting regulations, from net income to both the surplus reserve fund
        and the
        public welfare fund. Accordingly, the Company has recorded an aggregate of
        $147,023 in the Statutory Reserves account in the equity section of the
        accompanying balance sheet as of March 31, 2008 and December 31, 2007.
 
 The
        following summarizes the outstanding warrants as of March 31, 2008:
  **Weighted-Average****Exercise**
                
                **Warrants**
                
                **Remaining
                    Contractual**
                
                **Number****Price**
                
                **Outstanding**
                
                **Life
                    (Years)**
                
                **Exercisable**$3.50
                
                
                6,000
                
                
                4.5
                
                
                6,000$4.20
                
                
                40,000
                
                
                4.3
                
                
                40,00046,000
                
                
                
                
                
                46,000
  **NOTE
        10 - SUBSEQUENT EVENTS**
  In
        April,
        2008, the Company obtained a loan of $1,424,455 at an interest rate of 8.316%
        secured by property. A total of $248,811 is due on May 20, 2009 with the
        remaining balance of $1,139,244 due on March 31, 2010.
  Also
        in
        April, 2008 the Company obtained a loan of $3,560,138 at an interest rate
        of
        7.47% secured by property. The loan is due and payable April 2009.
  Proceeds
        from the above mentioned loans were used to retire existing loans that had
        matured.
 
 As
        a
        result of the investigation authorized by the Audit Committee of the Board
        of
        Directors of the errors in the accounting for accounts receivable and employee
        advances as discussed in Note 1, the Company failed to timely file its Quarterly
        report on Form 10-Q for the quarter ended June 30, 2008 with the Securities
        and
        Exchange Commission. On August 21, 2008 it received a deficiency letter from
        the
        American Stock Exchange (“AMEX”) stating that the Company was no longer in
        compliance with their listing standards. In order to maintain its AMEX listing,
        the Company had to submit a plan by September 12, 2008, outlining actions
        the
        Company had taken, or will take, to regain compliance with the continued
        listing
        standards of AMEX, including submission of all required Securities and Exchange
        Commission filings, by no later than November 19, 2008.
 
 Pursuant
        to the Deficiency Letter, if AMEX were to determine that the Company made
        a
        reasonable demonstration in the Plan of an ability to regain compliance with
        all
        applicable continued listing standards by November 19, 2008, AMEX would accept
        the Plan. The Plan was submitted by the Company and accepted by AMEX on November
        5, 2008. If the Company does not make adequate progress and complete the
        actions
        outlined in the Plan by November 19, 2008, AMEX will initiate delisting
        proceedings against the Company. The Company can provide no assurances that
        it
        will regain compliance with AMEX’s continued listing requirements, and its
        failure to do so could result in the delisting of the Company’s common stock
        from AMEX.
  13
  **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 ***Class
        Action Lawsuits -*** Putative
        class action lawsuits have been asserted against the Company and certain
        of its
        officers and directors in the United States District Court for the Southern
        District of New York (the “Court”). Only one complaint, Beni Varghese v. China
        Shenghuo Pharmaceutical Holdings, Inc., Gui Hua Lan, Qiong Hua Gao, Gene
        Michael
        Bennett, And Yunhong Guan, Index No. 08 CIV. 7422 (the “Varghese Action”) has
        been served on the Company thus far.
 
 The
        complaints allege, among other things, that certain of the Company’s SEC filings
        and other public statements contained false and misleading statements which
        resulted in damages to the plaintiffs and the members of the purported class
        when they purchased the Company’s securities. On the basis of those allegations,
        plaintiffs in each of the actions seek an unspecified amount of damages under
        Sections 10(b) and 20(a) of the Exchange Act.
 
 On
        October 20, 2008, the Company and counsel to the plaintiff in the Varghese
        Action filed a stipulation with the Court in which the parties agreed that
        the
        plaintiff may file a consolidated, amended complaint within 60 days after
        the
        entry of an order appointing and approving lead counsel, and that the Company’s
        time to answer that complaint is extended until 60 days after the filing
        of the
        consolidated complaint.
 
 The
        Company believes the allegations in the complaint are without merit, and
        intends
        to vigorously defend the lawsuits. The Company does not believe that the
        outcome
        of these suits will have a material, adverse effect on the Company.
 
 14




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




**Forward-Looking
      Statements**




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




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




**Overview**





We
      are
      primarily engaged in the research, development, manufacture, and marketing
      of
      pharmaceutical, nutritional supplement and cosmetic products. Almost all of
      our
      products are derived from the medicinal herb Panax notoginseng, also known
      as
      Sanqi, Sanchi or Tienchi. Panax notoginseng is the root of greyish-brown or
      greyish-yellow plant that only grows in a few geographic locations on Earth,
      among which is the Yunnan Province in southwest China, where we are located;
      this province accounts for 90% of the total global production. The main root
      of
      Panax notoginseng is cylindrical shaped and is most commonly one to
      six centimeters long and one to four centimeters in diameter. Panax notoginseng
      saponins (PNS), the active ingredients in Panax notoginseng, are extracted
      from
      the plant using high-tech equipment and in accord with Good Manufacturing
      Practice (GMP) standards. Our main product, Xuesaitong Soft Capsules, generally
      accounted for more than 70% of our sales in the quarter ended March 31,
      2008.




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




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





Xuesaitong
      Soft Capsules, which are subject to wholesale and retail price controls by
      the
      Chinese government, are primarily sold in China, but the product is also sold
      in
      various developing countries, including Malaysia, Indonesia and Kyrgyzstan.
      Sales of the product in China are regulated by the SFDA as a prescription drug
      and therefore must be sold to consumers through hospital pharmacies and cannot
      be advertised, thus limiting the ability of the Company to market the brand.
      Less than 5% of sales of Xuesaitong Soft Capsules are sold to military hospitals
      through China’s military procurement system, while over 95% of sales are made to
      non-military hospitals through distributors. Our three largest customers are
      Yunnan Province Pharmaceutical, LTD; Nanyang Jikang Medicine LTD; and Beijing
      Ai’xin Weiye Medicine, LTD; all of which accounted for approximately 6.6%, 6.4%
      and 6.2% of our sales, respectively, for the three months ended March 31,
      2008.




15




As
      of
      March 31, 2008, our marketing team maintained sales offices or agents in
      approximately 26 provinces throughout China. The sales network covers
      approximately 235 cities and is staffed by approximately 450 sales
      representatives. We intend to grow our internal marketing and sales function
      and
      increase our relationships with other national distributors to expand the
      distribution and presence of our non-prescription brands and
      cosmetics.




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




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




In
      September 2007, we expanded the geographic region in which our 12Ways cosmetic
      products were sold from our native Yunnan Province to a number of cities and
      provinces outside our local region. We have opened a number of retail specialty
      counters to offer our cosmetic products at pharmacies throughout Eastern China,
      eventually expanding our retail presence across China. As of March 31, 2008,
      we
      have opened about 234 retail specialty counters in Beijing, Shanghai, Hangzhou,
      Dongwan, Shengzhen and Shaoguang. **** In
      addition, we have opened two 12Ways Chinese Herbal Beauty Salons in Kunming
      that
      feature approximately ten traditional Chinese medicine practitioners and
      beauticians that provide a variety of services, including acupuncture, body
      massage, foot massage and other services. All products used in the salons will
      be supplied by us. Our management team hopes that the opening of these salons
      and the opening of retail counters will allow us to increase our brand
      recognition and strengthen marketing. Our ability to effectively open and
      operate new retail locations depends on several factors, including, among
      others, our ability to identify suitable counter locations, the availability
      of
      which is outside our control; prepare counters for opening within budget; hire,
      train and retain personnel; secure required governmental permits and approvals;
      contain payroll costs; and generate sufficient operating cash flows or secure
      adequate capital on commercially reasonable terms to fund our expansion
      plans.




**Critical
      Accounting Policies and Estimates**




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





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




***Cash
      and Cash Equivalents -*** Our
      cash
      and cash equivalents are maintained in bank deposit accounts. We have not
      experienced any losses with respect to these deposits. Cash and cash equivalents
      include interest bearing and non-interest bearing bank deposits, money market
      accounts and short-term certificates of deposit with original maturities of
      three months or less. We do not have any restricted cash as of March 31, 2008.
      We did not enter into any hedge contracts during any of the periods
      presented.




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




16




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




***Basic
      and Diluted Earnings per Share -*** Basic
      and
      diluted earnings per share are calculated by dividing net earnings attributable
      to common stockholders by the weighted-average number of shares of common stock
      outstanding during the year. Diluted earnings per share are calculated to give
      effect to potentially issuable dilutive common shares. Potentially dilutive
      securities as of March 31, 2008 are comprised of warrants to purchase 40,000
      shares of common stock at an exercise price of $4.20 and warrants to purchase
      6,000 shares of common stock at an exercise price of $3.50. The effect of these
      warrants is excluded as the effect is antidilutive due to losses to our company.
      Potentially dilutive securities as of March 31, 2007 are comprised of warrants
      to purchase 100,000 shares of common stock at an exercise price of $2.50 per
      share. The effect of these warrants is excluded from the computation of diluted
      net income per share because the exercise price of the warrants is greater
      than
      the fair value of the underlying shares on March 31, 2007.




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




***Advertising
      Expense -*** We
      expense advertising costs as incurred. Advertising costs for the three months
      ended March 31, 2008 and 2007 were $392,496 and $17,114, respectively.




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




***Recently
      Adopted Accounting Standards -*** On
      January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an Amendment of FASB
      Statement No. 115” (“ FAS 159”). FAS 159
      permits entities to choose to measure many financial instruments and certain
      other items at fair value. Entities that elect the fair value option will report
      unrealized gains and losses in earnings at each subsequent reporting date.
      The
      fair value option may be elected on an instrument-by-instrument basis, with
      few
      exceptions. FAS 159
      also
      establishes presentation and disclosure requirements to facilitate comparisons
      between companies that choose different measurement attributes for similar
      assets and liabilities. The adoption of FAS 159
      did
      not have an effect on our financial condition or results of operations as we
      did
      not elect this fair value option, nor is it expected to have a material impact
      on future periods as the election of this option for our financial instruments
      is expected to be limited.





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




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




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




17




**Results
      of Operations for the Fiscal Quarters Ended March 31, 2008 and 2007**




The
      following table sets forth our statements of operations for the three months
      ended March 31, 2008 and 2007 in U.S. dollars (unaudited):







**For
                the three months**
              **ended
                March 31,****2008**
            
            **2007**
            
            **Change
                ($)**
            
            **Variance
                (%)***(in
                thousand, except share and per share amounts)***Sale
                of Products**
            
            
            5,486
            
            
            4,327
            
            
            1,159
            
            
            26.79
            %**Cost
                of Products Sold**
            
            
            2,099
            
            
            1,142
            
            
            957
            
            
            83.80
            %**Gross
                Profit**
            
            
            3,387
            
            
            3,185
            
            
            202
            
            
            6.34
            %**Operating
                Expenses:**Selling
                expenses
            
            
            1,642
            
            
            1,603
            
            
            39
            
            
            2.43
            %General
                and administrative expenses
            
            
            2,468
            
            
            974
            
            
            1,494
            
            
            153.39
            %Research
                and development expenses
            
            
            118
            
            
            2
            
            
            116
            
            
            5800
            %**Total
                Operating Expenses**
            
            
            4,228
            
            
            2,579
            
            
            1,649
            
            
            63.94
            %**Income
                from Operations**
            
            
            (841
            )
            
            606
            
            
            (1,447
            )
            
            -238.78
            %**Other
                Income (Expenses):**Interest
                income
            
            
            3
            
            
            6
            
            
            (3
            )
            
            -50
            %Income
                from research and development activities
            
            
            263
            
            
            1
            
            
            262
            
            
            26,200
            %Interest
                expense
            
            
            (256
            )
            
            (180
            )
            
            (76
            )
            
            42.22
            %Non-operating
                expenses
            
            
            (73
            )
            
            -
            
            
            (73
            )
            
            -**Net
                Other Expense**
            
            
            (63
            )
            
            (173
            )
            
            110
            
            
            -63.58
            %**Income
                Before Income Taxes**
            
            
            (904
            )
            
            433
            
            
            (1,337
            )
            
            -308.78
            %Benefit
                from (provision for) income taxes
            
            
            (2
            )
            
            1,137
            
            
            (1,139
            )
            
            -100.18
            %Minority
                interest in income of subsidiaries
            
            
            53
            
            
            (98
            )
            
            151
            
            
            -154.08
            %**Net
                (Loss) Income**
            
            
            (853
            )
            
            1,472
            
            
            (2,325
            )
            
            -157.95
            %Foreign
                currency translation adjustments
            
            
            473
            
            
            86
            
            
            387
            
            
            450.00
            %**Comprehensive
                Income**$
            
            
            (380
            )
            
            1,558
            
            
            (1,938
            )
            
            -124.39
            %**Earnings
                (loss) Per Share**Basic $
            
            
            (0.04
            )
            
            0.08
            
            
            (0.12
            )
            
            -150
            %Diluted $
            
            
            (0.04
            )
            
            0.08
            
            
            (0.12
            )
            
            -150
            %**Weighted-Average
                Shares Outstanding**Basic
            
            
            19,679,400
            
            
            19,119,400
            
            
            560,000
            
            
            2.93
            %Diluted
            
            
            19,679,400
            
            
            19,119,400
            
            
            560,000
            
            
            2.93
            %





***Sale
      of products:*** Sale
      of
      products for the three months ended March 31, 2008 was approximately $5.49
      million, an increase of approximately $1.16 million, or 26.8%, from
      approximately $4.33 million for the three months ended March 31, 2007. Our
      sales
      of primary product, Xuesaitong Soft Capsule, decreased slightly, partially
      because of a decrease in sales volume as a result of an increase in selling
      price. The increase in total sales was primarily due to the selling of other
      brands’ non-prescription pharmaceuticals, cosmetic products and export.





***Cost
      of products sold:*** Our
      cost
      of products sold for the three months ended March 31, 2008 was approximately
      $2.10 million, an increase of approximately $0.96 million or 84.2%, from
      approximately $1.14 million for the three months ended March 31, 2007. The
      increase in cost of products sold was primarily due to the increase in sales
      volume of cosmetic products and export and other brands' non-prescription
      pharmaceuticals. The purchasing price of other brands’ non-prescription
      pharmaceuticals was high and close to selling price. As a result, our total
      cost
      of products sold increased at a rate higher than the increase in
      sales.




***Gross
      profit:*** Our
      gross
      profit for the three months ended March 31, 2008 was approximately $3.39 million
      as compared with approximately $3.19 million for the three months ended March
      31, 2007. Gross profit as a percentage of revenues was approximately 61.7%
      for
      the three months ended March 31, 2008, a decrease of approximately 12% from
      73.7% for the three months ended March 31, 2007. The decrease in gross margin
      percentage was primarily due to the portion of above-mentioned sales of other
      brand’s product which have a higher purchasing price and thus generated a
      smaller profit margin.




18




***Selling
      expense:*** Selling
      expenses were approximately $1.64 million for the three months ended March
      31,
      2008, an increase of approximately $0.4 million, or 2.5%, from approximately
      $1.60 million for the three months ended March 31, 2007. The primary reason
      for
      the increase in selling expenses was due to an increase in marketing and
      advertising of new products, particularly in our cosmetics line.





***General
      and administrative expense:*** General
      and administrative expenses were approximately $2.47 million for the three
      months ended March 31, 2008, an increase of approximately $1.5 million, or
      155%,
      from approximately $0.97 million for the three months ended March 31, 2007.
      The
      increase was primarily a result of an increase of $1.03 million in provision
      for
      bad debts aging over one to two years. Also, our expenses related to our status
      as a public company with its securities traded on a U.S. national exchange
      also
      increased by $0.28 million. These fees and expenses are related to professional
      fees, including auditing, legal, investor relations, as well as AMEX fees and
      the cost of compliance with federal securities laws.  The rest of the
      increase in general and administrative expenses was due to the increase in
      office utilities related with hiring more staff for business
      expansion.




***Research
      and development expense:*** Research
      and development expense for the three months ended March 31, 2008 was $118,976
      as compared to $2,877 for the three months ended March 31, 2007. The increase
      was primarily due to our ongoing efforts to enhance our product development,
      which we expect to continue over the next two years. We expended funds to
      enhance our production technology and manufacturing capabilities.




***Net
      other expense:*** Net
      other
      expense, which includes interest income, income from research and development
      activities, interest expense and non-operating expenses, was $62,925 for the
      three months ended March 31, 2008 as compared to $172,503 for the three months
      ended March 31, 2007, a decrease of $109,578, or 63.5%. The decrease in net
      other expense was primarily due to the increase in income from research and
      development activities, which was offset by an increase in non-operating
      expenses and an increase in interest expense due to an increase in bank
      loans.




***Benefits
      from (provision for) income taxes:*** Provision
      for income taxes was $2,176 for the three months ended March 31, 2008 as
      compared to a benefit from income tax of approximately $1.14 million for the
      three months ended March 31, 2007. On March 15, 2007, one of our majority owned
      subsidiaries was granted relief from income taxes for the years ended December
      31, 2006 and 2005. As a result, the subsidiary recognized an aggregate of $1.1
      million as a benefit in the three months ended March 31, 2007. In addition,
      as
      of January 1, 2008, the income tax rate for our subsidiaries was decreased
      from
      33% to 25%. We have a deferred income tax asset that was adjusted for this
      tax
      rate decrease, resulting in an increase in the provision for the correction
      of
      deferred income taxes. These two factors were the principle causes of the change
      from an income tax benefit for the first quarter of 2007 to an income tax
      provision for the first quarter of 2008.




***Net
      (loss) income:*** We
      incurred a net loss of $852,660 for the three months ended March 31, 2008 as
      compared to a net income of approximately $1.47 million for the three months
      ended March 31, 2007, a decrease in net income of approximately $2.3 million.
      Considering the foreign currency translation adjustments of $472,982 and
      $85,735, for the three months ended March 31, 2008 and 2007, respectively,
      comprehensive loss of $379,678, and comprehensive income of approximately $1.56
      million was realized for the three months ended March 31, 2008 and 2007,
      respectively.




**Liquidity
      and Capital Resources**




***General
      -*** As
      of
      March 31, 2008, we had cash and cash equivalents of $1,005,333. We have
      historically financed our business operations through bank loans, in addition
      to
      equity offerings. As of March 31, 2008, we had borrowed from banks and other
      institutions and had amounts of approximately $4.13 million in short-term notes
      payable. As of March 31, 2008, we had also borrowed approximately $2.85 million
      in our current portion of long-term debt. All loans are secured by land,
      buildings and machinery as collateral except the loan from the Agricultural
      Bank
      of China mentioned below which is secured by a pledge by Lan's International
      Medicine Investment Co Ltd. (“LIMI”) of its shareholding in China Shenghuo
      (KUN). For the three months ending March 31, 2008, the net decrease in cash
      and
      cash equivalents was approximately $1.8 million as compared to March 31, 2007.
      The gross proceeds that we received in June 2007 as a result of the sale of
      460,000 shares of our common stock in an initial public offering were offset
      primarily by increases in receivables from related parties and employee
      advances. In addition, we received gross proceeds of $250,000 in October 2007
      from an exercise of warrants by a warrant holder to purchase 100,000 shares
      of
      our common stock at a per share exercise price of $2.50.





Our
      notes
      payable consist of short and long-term debt that is payable to banks,
      governmental financial bureaus, municipalities and a company. The following
      schedule summarizes our debt obligations and respective balances:




**March 31,**
            
            **December 31,****2008**
            
            **2007**Short-term
                note payable to a bank, interest at 6.12%, matures March 2008, secured
                by
                land use rights
            
            $
            -
            
            $
            1,367,222Short-term
                note payable to a municipality, interest at 1.8%, payable on demand,
                unsecured
            
            
            71,202
            
            
            68,360Short-term
                note payable to a finance bureau, interest at 4.5%, payable on demand,
                unsecured
            
            
            73,383
            
            
            70,455Short-term
                note payable to a bank, interest at 6.39%, matures March 2008, secured
                by
                property
            
            
            3,560,138
            
            
            3,418,056Short-term
                note payable to a government development zone interest at 2.43%,
                matured
                November 2007, secured by property
            
            
            427,217
            
            
            410,167Total
                short-term notes payable
            
            $
            4,131,940
            
            $
            5,334,260






19




**March 31,**
            
            **December 31,****2008**
            
            **2007**Long-term
                note payable to a bank, interest at 7.72%, matures August 2009, secured
                by
                shareholder
            
            $
            8,544,331
            
            $
            6,836,111Long-term
                note payable to a bank, interest at 6.57%, matures March 2010, secured
                by
                property
            
            
            2,848,110
            
            
            4,101,667Total
                long-term debt
            
            
            11,392,441
            
            
            10,937,778Less
                current maturities of long-term debt
            
            
            2,848,110
            
            
            4,101,667Long-term
                notes payable, net of current portion
            
            $
            8,544,331
            
            $
            6,836,111Past
                due notes payable
            
            $
            3,987,355
            
            $
            410,167




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




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




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





In
      April
      2008, we obtained a loan of $1,424,455 from Shuang Long Branch of Agricultural
      Bank of China at an interest rate of 8.316% secured by property. A total of
      $248,811 is due on May 20, 2009 with the remaining balance of $1,139,244 due
      on
      March 31, 2010.




Also
      in
      April 2008, we obtained a loan of $3,560,138 from Heping Branch of Construction
      Bank of China at an interest rate of 7.47% secured by property. The loan is
      due
      and payable on April 3, 2009.




Proceeds
      from the above mentioned April 2008 loans were used to retire existing loans
      that had matured.




The
      following table provides summary information about net cash flow for the three
      months ended March 31, 2008 and 2007:




**Cash
      Flow**


**Three
      months ended March 31,**




**2008**
            
            **2007****(unaudited,
                in thousands)**Net
                cash provided by (used in) operating activities
            
            $
            (392
            )
            $
            (1,054
            )Net
                cash provided by (used in) investing activities
            
            
            (70
            )
            
            (250
            )Net
                cash provided by (used in) financing activities
            
            
            (1,409
            )
            
            (697
            )**Cash
                and Cash Equivalents at End of Period**
            
            $
            1,005
            
            $
            1,719




**Operating
      Activities:** Net cash
      used in operating activities for the three months ended March 31, 2008 was
      $391,880, as compared to cash used in operating activities of approximately
      $1.05 million for the three months ended March 31, 2007. These results are
      comprised of: (i) cash used in taxes and related payables, employee
      advances, advances to suppliers and accrued expenses; (ii) cash
      generated in accounts receivable, accounts payable and deposits from
      customers.




20




**Investing
      Activities:** Net
      cash
      used by investing activities was $70,177 for the three months ended March 31,
      2008, as compared to net cash used in the amount of $250,097 for the three
      months ended March 31, 2007. The decrease in net
      cash used by investing activities was primarily due to decrease in cash used
      for
      receivables from related parties.





**Financing
      Activities:** Net
      cash
      used by financing activities was approximately $1.41 million for the three
      months ended March 31, 2008 compared to net cash used in the amount of $696,624
      for the three months ended March 31, 2007. The increase in cash used was
      primarily due to a lack of proceeds from short and long-term loans while still
      making payments on short and long-term loans during the three months ended
      March
      31, 2008. In April 2008, we obtained additional loans to be used to retire
      existing loans that had matured.




***Working
      Capital***





As
      of
      March 31, 2008, our accounts receivable and notes receivable (less allowance
      for
      doubtful accounts of approximately $4.93 million) were approximately $9.66
      million, a decrease of approximately $0.9 million, or 8.6% from accounts
      receivable of approximately $10.57 million (net of allowance for doubtful
      accounts of $3.22 million) as of December 31, 2007. The collection period
      typically runs from nine months to one year, considering the relatively long
      collection period in our industry.





Our
      company normally requires one to two months to deliver products once the order
      is placed. Inventory increased during the three month period ended March 31,
      2008 by $357,069, an increase of 8.66% over inventory as of December 31, 2007.
      The increase in inventory was primarily due to the increase in work in progress.
      We purchased a significant amount of Sanchi, which is our main raw material
      for
      products. In order to avoid a risk of spoilage by storing the Sanchi in our
      warehouse, our production department purified the Sanchi into powder for
      storage. As a result, inventory increased. **** Moreover,
      our payment cycle is considerably shorter than our receivable cycle, since
      we
      typically pay our suppliers all or a portion of the purchase price in advance
      and for some suppliers we must maintain a deposit for future orders. We require
      our customers to pay a certain percentage of the sales price as deposit before
      we ship products to them. The percentage varies from customer to customer.
      During the course of business, we reduce the deposit requirement for some
      customers with good credit.





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




In
      addition, in the course of our business, we must make significant deposits
      to
      our suppliers when we place an order. As of March 31, 2008, our advance payments
      to our suppliers totaled approximately $1.28 million. We are confident that
      our
      available funds and cash generated from operations will provide us with
      sufficient capital for a sustainable operation; however, we may require
      additional capital for acquisitions or for the operation of the combined
      companies. We cannot assure that such funding will be available. As of the
      date
      of this report, we have no material commitments for capital
      expenditures.




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




Current
      and long-term employee advances (net of allowances for doubtful accounts) were
      approximately $10.19 million at March 31, 2008 and $8.76 million as of December
      31, 2007, an increase of approximately $1.43 million or 16%. The increase was
      due to us advancing more money to sales representatives to encourage them to
      expand their markets and increase sales. As of March 31, 2008, the gross amount
      of employee advances was approximately $12.68 million and as of December 31,
      2007 it was approximately $11.21 million, an increase of approximately $1.47
      million in that three-month period. Beginning in September 2006, we began to
      employ more sales representatives and, as a result, we made more advances to
      sales representatives in an attempt to encourage and assist sales
      representatives to expand into new selling markets and gain new customers.
      Because of the increase in the balance of employee advances, we, in compliance
      with our established policy to reserve an allowance for specific percentages
      of
      our aged receivables, accrued a larger allowance for the increased employee
      advances in order to consistently apply our established allowance
      policy.




21




The
      table
      below sets forth the outstanding gross and net amount of outstanding balances
      of
      current and long-term employee advances for the years ended December 31, 2007
      and 2006 and the three months ended March 31, 2008.




**For the year ended
                December 31, 2006**
            
            **For
                the year ended December 31, 2007**
            
            **For
                the three months ended March 31, 2008**Gross
                amount of employee accounts
            
            $
            4,559,471
            
            $
            11,210,921
            
            $
            12,677,032Allowance
                for doubtful accounts
            
            
            1,429,426
            
            
            2,447,073
            
            
            2,488,877Net
                amount
            
            $
            3,130,045
            
            $
            8,763,848
            
            $
            10,188,155





**Off-Balance
      Sheet Arrangements**




None.




**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




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




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




·
            our
                reliance on one product for over 72% of our revenues;·
            our
                reliance on a few suppliers for Sanchi, a scarce plant that is the
                primary
                ingredient in almost all of our products;·
            our
                ability to develop and market new
                products;


·
            our
                increasing employee advances;·
            our
                ability to establish and maintain a strong
                brand;


·
            costs
                and expenses related to expansion of retail distribution of
                products;·
            continued
                maintenance of certificates, permits and licenses required to conduct
                business in China;


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


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


·
            our
                ability to obtain all necessary government certifications and/or
                licenses
                to conduct our business;




22




·
            development
                of a public trading market for our
                securities;


·
            cost
                of complying with current and future governmental regulations and
                the
                impact of any changes in the regulations on our operations;·
            other
                factors referenced in this quarterly report, including, without
                limitation, under the section entitled “Management’s Discussion and
                Analysis of Financial Condition and Results of Operations”;
                and


·
            other
                factors listed from time to time in our filings with the Securities
                and
                Exchange Commission, including, without limitation, our Annual Report
                on
                Form 10-KSB for the year ended December 31, 2007, as amended, and
                subsequent reports on Form 8-K.





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




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




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





**ITEM
      3.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




Not
      Applicable.





**ITEM
      4T.**  **CONTROLS
      AND PROCEDURES**




***Evaluation
      of disclosure controls and procedures***




As
      of
      March 31, 2008, our Chief Executive Officer (CEO) and our Chief Financial
      Officer (CFO) performed an evaluation of the effectiveness of and the operation
      of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule
      15d-15(e) under the Exchange Act. Based on that evaluation, our CEO concluded
      that our disclosure controls and procedures as of March 31, 2008 had significant
      deficiencies that caused our controls and procedures to be ineffective. These
      deficiencies consisted of inadequate staffing and supervision that could lead
      to
      the untimely identification and resolution of accounting and disclosure matters
      and failure to perform timely and effective reviews. In addition, our CEO
      concluded that there are deficiencies in the recording and classification of
      accounting transactions and a lack of personnel with expertise in U.S. GAAP
      and
      Securities and Exchange Commission rules and regulations. Although our
      accounting staff is professional and experienced in accounting requirements
      and
      procedures generally accepted in the PRC, our CEO has determined that they
      require additional training and assistance in U.S. GAAP matters.





We
      are in
      the process of improving our controls and procedures in an effort to remediate
      these deficiencies through improving supervision, education and training of
      our
      accounting staff. In order to correct the foregoing material weaknesses, we
      have
      taken the following remediation measures: (1) we will maintain a separate,
      independent set of accounting records to record all U.S. GAAP audit adjustments
      along with the local GAAP accounting records so as to reconcile our records
      according to U.S. GAAP; (2) we have commenced necessary training and engaged
      external professional accounting and consultancy firms to assist us in the
      preparation of the U.S. GAAP accounts; and (3) we have recently established
      an
      internal audit function to strengthen the overall internal control environment
      and the current skill and experience mix of the internal audit staff. To ensure
      that the internal audit function becomes an effective monitoring component
      of
      our internal control framework, we have focused on preparing an internal audit
      manual, audit planning and the sufficient training and development of the
      internal audit team. Moreover, we have begun the recruitment process to
      strengthen the overall effectiveness of the team and to oversee the
      implementation of our internal controls over financial reporting.




23


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





We
      believe that the remedial steps that we take will address the conditions
      identified by our CEO as significant deficiencies in our disclosure controls
      and
      procedures. Our CEO believes that there are no material inaccuracies, or
      omissions of material facts necessary to make the statements not misleading
      in
      light of the circumstances in which they were made, in this Form 10-Q.




***Changes
      in internal control over financial reporting***




Except
      as
      described above, there were no changes in our internal controls over financial
      reporting during the first quarter of fiscal year 2008 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.




24




**PART
      II - OTHER INFORMATION**




**ITEM
      1.**  **LEGAL
      PROCEEDINGS**




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





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




Smaller
      reporting companies are not required to provide the information required by
      this
      Item.





**ITEM
      2.**  **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




None.





**ITEM
      3.**  **DEFAULTS
      UPON SENIOR SECURITIES**




None.





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




None.




**ITEM
      5.**  **OTHER
      INFORMATION**




In
      April
      2008, we obtained a loan of $1,424,455 from Shuang Long Branch of Agricultural
      Bank of China at an interest rate of 8.316% secured by property. A total of
      $248,811 is due on May 20, 2009 with the remaining balance of $1,139,244 due
      on
      March 31, 2010.




Also
      in
      April 2008, we obtained a loan of $3,560,138 from Heping Branch of Construction
      Bank of China at an interest rate of 7.47% secured by property. The loan is
      due
      and payable on April 3, 2009.




Proceeds
      from the above mentioned loans were used to retire existing loans that had
      matured.




**ITEM
      6.**  **EXHIBITS**




**Exhibit**
              **Number**
            
            **Description
                of Exhibit**31.1
            
            Certification
                of the Chief Executive Officer pursuant to Exchange Act Rule
                13a-14(a)31.2
            
            Certification
                of the Chief Financial Officer pursuant to Exchange Act Rule
                13a-14(a)32.1
            
            Certification
                pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes Oxley Act of 2002*









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





25




**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the registrant has duly
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.




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




26