**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**




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


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended September 30, 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**
            
            **20-2903562***(State
                or Other Jurisdiction of Incorporation*
              *or
                Organization)*
            
            *(IR.S.
                Employer Identification*
              *No.)***No.
                2**,**Jing
                You Road,**
              **Kunming
                National Economy**&
              **Technology
                Developing District**
              **People’s
                Republic of China 650217**
            
            **N/A***(Address
                of Principal Executive Offices)*
            
            *(Zip
                Code)*





**0086-871-728-2628**


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




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes x No  ̈




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




Large
      accelerated filer  ̈ Accelerated
      filer  ̈Non-accelerated
      filer  ̈ 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  ̈ No x




There
      were 19,679,400 shares outstanding of the issuer’s common stock, par value
      $.0001 per share, as of November 18, 2008.





**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**FORM
      10-Q QUARTERLY REPORT**





**TABLE
      OF CONTENTS**





**Page**PART
                I - FINANCIAL INFORMATION
            2ITEM
                1.
            FINANCIAL
                STATEMENTS
            2Condensed
                Consolidated Balance Sheets as of September 30, 2008 and December
                31, 2007
                (Unaudited)
            2Condensed
                Consolidated Statements of Operations and Comprehensive Income for
                the
                Three and Nine Months Ended September 30, 2008 and 2007
                (Unaudited)
            3Condensed
                Consolidated Statements of Cash Flows for the Nine Months Ended September
                30, 2008 and 2007 (Unaudited)
            4Notes
                to Condensed Consolidated Financial Statements (Unaudited)
            5ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            14ITEM
                3.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            29ITEM
                4T.
            CONTROLS
                AND PROCEDURES
            29PART
                II - OTHER INFORMATION
            30ITEM
                1.
            LEGAL
                PROCEEDINGS
            30ITEM
                1A.
            RISK
                FACTORS
            31ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            31ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            31ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            31ITEM
                5.
            OTHER
                INFORMATION
            31ITEM
                6.
            EXHIBITS
            31SIGNATURES
            
            33





**PART
      I - FINANCIAL INFORMATION**




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




**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(unaudited)**





**September 30,**
            
            **December 31,****2008**
            
            **2007****As Restated****ASSETS:****Current
                Assets:**Cash
                and cash equivalents
            
            $
            1,080,724
            
            $
            2,800,641Accounts
                and notes receivable, less allowance for doubtful accounts of $6,814,980
                and $3,218,661, respectively
            
            
            8,542,803
            
            
            10,567,672Employee
                advances, less allowance for doubtful accounts of $23,884 and $729,995,
                respectively
            
            
            10,302,878
            
            
            8,249,806Advances
                to suppliers
            
            
            776,438
            
            
            669,858Inventory,
                net of reserve for obsolescence of $130,088 and $136,359,
                respectively
            
            
            4,060,925
            
            
            4,125,193Receivable
                from related parties
            
            
            94,461
            
            
            27,555Other
                current assets
            
            
            17,500
            
            
            159,657**Total
                Current Assets**
            
            
            **24,875,729**
            
            
            **26,600,382**Property,
                plant and equipment, net of accumulated depreciation of $5,148,741
                and
                $4,247,993, respectively
            
            
            7,687,342
            
            
            7,573,204Intangible
                assets, net of accumulated amortization of $61,913 and $42,957,
                respectively
            
            
            675,406
            
            
            648,090Long-term
                employee advances, less allowance for doubtful accounts of $881,198
                and
                $1,717,078, respectively
            
            
            544,320
            
            
            514,042**TOTAL
                ASSETS**
            
            **$**
            **33,782,797**
            
            **$**
            **35,335,718****LIABILITIES
                AND STOCKHOLDERS' EQUITY:****Current
                Liabilities:**Accounts
                payable
            
            $
            1,465,178
            
            $
            745,514Accrued
                expenses
            
            
            1,649,091
            
            
            2,017,748Deposits
            
            
            3,623,968
            
            
            3,439,892Payable
                to related parties
            
            
            236,632
            
            
            94,939Short-term
                notes payable
            
            
            4,743,230
            
            
            5,334,260Advances
                from customers
            
            
            249,782
            
            
            119,287Taxes
                and related payables
            
            
            571,113
            
            
            855,084Current
                portion of long-term debt
            
            
            8,460,854
            
            
            4,101,667**Total
                Current Liabilities**
            
            
            **20,999,848**
            
            
            **16,708,391****Long-Term
                Debt**
            
            
            **2,625,782**
            
            
            **6,836,111****Total
                Liabilities**
            
            
            **23,625,630**
            
            
            **23,544,502****Minority
                Interest in Net Assets of Subsidiaries**
            
            
            **336,923**
            
            
            **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
            
            
            1,803,494
            
            
            4,039,337Accumulated
                other comprehensive income, foreign currency translation
            
            
            1,673,832
            
            
            929,643**Total
                Stockholders' Equity**
            
            
            **9,820,244**
            
            
            **11,311,898****TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **33,782,797**
            
            **$**
            **35,335,718**





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


2


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**AND
      COMPREHENSIVE INCOME (LOSS)**


**(unaudited)**




**Three Months Ended**
            
            **Nine Months Ended****September 30,**
            
            **September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Sale
                of Products**
            
            $
            7,281,384
            
            $
            4,201,613
            
            $
            21,359,149
            
            $
            14,884,955**Cost
                of Products Sold**
            
            
            1,973,865
            
            
            1,039,578
            
            
            7,061,446
            
            
            3,761,754**Gross
                Profit**
            
            
            5,307,519
            
            
            3,162,035
            
            
            14,297,703
            
            
            11,123,201**Operating
                Expenses:**Selling
                expense
            
            
            2,989,486
            
            
            1,545,554
            
            
            8,666,561
            
            
            5,179,968General
                and administrative expense
            
            
            1,819,573
            
            
            341,372
            
            
            7,001,410
            
            
            2,703,843Research
                and development expense
            
            
            66,052
            
            
            5,371
            
            
            255,241
            
            
            10,720**Total
                Operating Expenses**
            
            
            4,875,111
            
            
            1,892,297
            
            
            15,923,212
            
            
            7,894,531**Income
                (Loss) from Operations**
            
            
            432,408
            
            
            1,269,738
            
            
            (1,625,509
            )
            
            3,228,670**Other
                Income (Expense):**Interest
                income
            
            
            588
            
            
            5,446
            
            
            5,701
            
            
            14,712Income
                from research and development activities
            
            
            5,745
            
            
            384
            
            
            344,370
            
            
            81,388Interest
                expense
            
            
            (272,002
            )
            
            (275,514
            )
            
            (963,198
            )
            
            (665,155
            )Non-operating
                expenses
            
            
            (330
            )
            
            -
            
            
            (138,812
            )
            
            -**Net
                Other Expense**
            
            
            (265,999
            )
            
            (269,684
            )
            
            (751,939
            )
            
            (569,055
            )**Income
                (Loss) Before Income Taxes**
            
            
            166,409
            
            
            1,000,054
            
            
            (2,377,448
            )
            
            2,659,615Benefit
                from (provision for) income taxes
            
            
            (4,471
            )
            
            (86,861
            )
            
            (4,484
            )
            
            1,223,386Minority
                interest in income of subsidiaries
            
            
            (7,652
            )
            
            (45,552
            )
            
            146,089
            
            
            (224,348
            )**Net
                Income (Loss)**
            
            $
            154,286
            
            $
            867,641
            
            $
            (2,235,843
            )
            $
            3,658,653Foreign
                currency translation adjustment
            
            
            54,116
            
            
            174,392
            
            
            744,189
            
            
            449,189**Comprehensive
                Income (Loss)**
            
            $
            208,402
            
            $
            1,042,033
            
            $
            (1,491,654
            )
            $
            4,107,842**Earnings
                (Loss) Per Share****Basic**
            
            $
            0.01
            
            $
            0.04
            
            $
            (0.11
            )
            $
            0.19**Diluted**
            
            $
            0.01
            
            $
            0.04
            
            $
            (0.11
            )
            $
            0.19**Weighted-Average
                Shares Outstanding****Basic**
            
            
            19,679,400
            
            
            19,579,400
            
            
            19,679,400
            
            
            19,292,953**Diluted**
            
            
            19,679,400
            
            
            19,635,898
            
            
            19,679,400
            
            
            19,345,401





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


3


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(unaudited)**





**Nine Months Ended****September 30,****2008**
            
            **2007****Cash
                Flows from Operating Activities:**Net
                (loss) income
            
            $
            (2,235,843
            )
            $
            3,658,653Adjustments
                to reconcile net (loss) income to net cash from operating
                activities:Depreciation
                and amortization
            
            
            619,402
            
            
            503,559Deferred
                income taxes
            
            
            -
            
            
            (109,382
            )Minority
                interest in (loss) income of subsidiaries
            
            
            (146,089
            )
            
            224,348Warrants
                issued for services
            
            
            -
            
            
            19,968Change
                in current assets and liabilities:Accounts
                and notes receivable
            
            
            2,676,328
            
            
            (2,168,849
            )Employee
                advances
            
            
            (1,465,805
            )
            
            (3,472,425
            )Advances
                to suppliers
            
            
            (60,460
            )
            
            (347,767
            )Inventory
            
            
            333,486
            
            
            (1,684,096
            )Other
                current assets
            
            
            143,282
            
            
            (212,717
            )Accounts
                payable
            
            
            655,989
            
            
            550,162Accrued
                expenses and deposits
            
            
            (538,712
            )
            
            1,619,494Advances
                from customers
            
            
            119,991
            
            
            (160,826
            )Taxes
                and related payables
            
            
            (334,217
            )
            
            (2,344,511
            )**Net
                Cash Used in Operating Activities**
            
            
            (232,648
            )
            
            (3,924,389
            )**Cash
                Flows from Investing Activities:**Receivable
                from related parties
            
            
            (3,957
            )
            
            13,198Restricted
                cash
            
            
            -
            
            
            366,485Capital
                expenditures
            
            
            (218,780
            )
            
            (96,833
            )**Net
                Cash Provided by (Used in) Investing Activities**
            
            
            (222,737
            )
            
            282,850**Cash
                Flows from Financing Activities:**Payable
                to related parties
            
            
            87,385
            
            
            (324,450
            )Proceeds
                from short and long-term loans
            
            
            5,715,216
            
            
            17,978,676Payments
                on short and long-term loans
            
            
            (7,215,461
            )
            
            (15,350,496
            )Issuance
                of common stock for cash
            
            
            -
            
            
            1,094,381**Net
                Cash Provided by (Used in) Financing Activities**
            
            
            (1,412,860
            )
            
            3,398,111Effect
                of exchange rate changes on cash
            
            
            148,328
            
            
            136,927Net
                Change in Cash and Cash Equivalents
            
            
            (1,719,917
            )
            
            (106,501
            )Cash
                and Cash Equivalents at Beginning of Period
            
            
            2,800,641
            
            
            3,691,438**Cash
                and Cash Equivalents at End of Period**
            
            $
            1,080,724
            
            $
            3,584,937**Supplemental
                Information**Cash
                paid for interest
            
            $
            963,198
            
            $
            606,376





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


4


**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” or the “Parent” or the “Group”) 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, as amended.
  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 and nine months ended September 30, 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
        December 31, 2007 consolidated financial statements needed to be revised
        to
        correct certain errors related to accounts and notes receivable and advances
        to
        employees. The Audit Committee of the Board of Directors commenced an internal
        investigation which focused on the reported errors.
 
 As
        a
        result, the Company has restated its consolidated balance sheet for December
        31,
        2007 to correct the errors related to accounts and notes receivable and advances
        to employees. 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.
  5
  The
        effects of the restatement were as follows:
 
 **As Previously**
              
              **Effect of****Reported**
              
              **Restatement**
              
              **As Restated****Consolidated Balance
                  Sheet****As
                  of December 31, 2007**Accounts
                  and notes receivable, net
              
              $
              9,651,304
              
              $
              916,368
              
              $
              10,567,672Employee
                  advances, net
              
              
              10,147,415
              
              
              (1,897,609
              )
              
              8,249,806Total
                  Current Assets
              
              
              27,581,623
              
              
              (981,241
              )
              
              26,600,382Deferred
                  Income Taxes
              
              
              1,593,159
              
              
              (1,593,159
              )
              
              -TOTAL
                  ASSETS
              
              
              37,910,118
              
              
              (2,574,400
              )
              
              35,335,718Minority
                  Interest in Net Assets of Subsidiaries
              
              
              655,962
              
              
              (176,644
              )
              
              479,318Stockholders'
                  Equity:Retained
                  earnings
              
              
              6,335,590
              
              
              (2,296,253
              )
              
              4,039,337Accumulated
                  other comprehensive income,Foreign
                  currency translation
              
              
              1,031,146
              
              
              (101,503
              )
              
              929,643Total
                  Stockholders' Equity
              
              
              13,709,654
              
              
              (2,397,756
              )
              
              11,311,898TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              
              37,910,118
              
              
              (2,574,400
              )
              
              35,335,718
 
 **NOTE
        2 – ORGANIZATION AND NATURE OF OPERATIONS**
  ***Nature
        of Business*** –
The
        Company 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.
  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.
  6
  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 nine months ended September 30, 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.
 
 ***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.
  7
  ***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(Loss) per Share*** - Basic
        and diluted earnings (loss) per share are calculated by dividing net earnings
        attributable to common stockholders by the weighted-average number of shares
        of
        common stock outstanding during the year. Diluted earnings per share are
        calculated to give effect to potentially issuable dilutive common shares.
        Potentially dilutive securities as of September 30, 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 from the computation as of
        September 30, 2008 as the effect is antidilutive due to the exercise price
        exceeding the market price. Dilutive securities as of September 30, 2007
        are
        comprised of warrants to purchase 100,000 shares of common stock at an exercise
        price of $2.50 per share., 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.
 
 ***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
        nine
        months ended September 30, 2008 and 2007 were $1,442,095 and $22,538,
        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 nine months ended September 30, 2008 of
        $2,235,843 which has resulted in a use of cash from operations of $232,648.
        The
        Company has expended significant efforts to expand its revenues by assisting
        its
        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 class
        action lawsuits that have been commenced due to the Company’s restatement
        discussed above and the related delay in filing its Form 10-Q for the second
        quarter of 2008 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
        NYSE Alternext US LLC (formerly the American Stock Exchange) but the Company
        can
        not give any assurance that this will be the case.
 
 ***Recently
        Enacted Accounting Standards*** - In
        September 2006, the Financial Accounting Standards Board (FASB) issued
        SFAS No. 157, *Fair
        Value Measurements* ,
        which
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles and expands disclosures about fair
        value measurements. SFAS No. 157 is effective for fiscal years beginning
        after November 15, 2007, and interim periods within those fiscal years. In
        February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
        extended the effective date for certain nonfinancial assets and nonfinancial
        liabilities to fiscal years beginning after November 15, 2008. The 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.
  8
  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.
 
 In
        March
        2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
        and Hedging Activities", an amendment of SFAS No. 133. SFAS 161 applies to
        all
        derivative instruments and non-derivative instruments that are designated
        and
        qualify as hedging instruments pursuant to paragraphs 37 and 42 of SFAS 133
        and
        related hedged items accounted for under SFAS 133. SFAS 161 requires entities
        to
        provide greater transparency through additional disclosures about how and
        why an
        entity uses derivative instruments, how derivative instruments and related
        hedged items are accounted for under SFAS 133 and its related interpretations,
        and how derivative instruments and related hedged items affect an entity's
        financial position, results of operations, and cash flows. SFAS 161 is effective
        as of the beginning of an entity's first fiscal year that begins after November
        15, 2008. The Company does not expect SFAS 161 to have a material impact
        on its
        results of operations or financial position.
 
 In
        May
        2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
        Accounting Principles.” SFAS 162 will provide framework for selecting accounting
        principles to be used in preparing financial statements that are presented
        in
        conformity with U.S. generally accepted accounting principles (GAAP) for
        nongovernmental entities. SFAS 162 will be effective 60 days following the
        Securities and Exchange Commission’s approval of the Public Company Accounting
        Oversight Board (PCAOB) amendments to AU Section 411. The Company does not
        expect the adoption of SFAS 162 will have a material impact on its financial
        condition or results of operation.
  9
  **NOTE
        4 – INVENTORY**
 
 Inventory
        is stated at weighted average cost and consisted of the
        following:
  **September 30,**
              
              **December 31,****2008**
              
              **2007**Raw
                  materials
              
              $
              1,146,836
              
              $
              871,425Work-in-process
              
              
              1,300,734
              
              
              1,797,379Finished
                  goods
              
              
              709,358
              
              
              786,235Product
                  on consignment
              
              
              1,034,085
              
              
              806,513Total
                  Inventory
              
              
              4,191,013
              
              
              4,261,552Less:
                  Provision for obsolescence
              
              
              (130,088
              )
              
              (136,359
              )Net
                  Inventory
              
              $
              4,060,925
              
              $
              4,125,193
  **NOTE
        5 – RELATED PARTY TRANSACTIONS**
  At
        September 30, 2008 and December 31, 2007, the Company had payables due to
        related parties in the amount of $236,632 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
  Undistributed
        earnings of the Company’s foreign subsidiaries since acquisition amounted to
        approximately $3.2 million at September 30, 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 $2.4 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:
 
 **September 30,**
              
              **December 31,****2008**
              
              **2007**Short-term
                  note payable to a municipality, interest at 1.8%, due on demand,
                  unsecured
              
              $
              72,938
              
              $
              68,360Short-term
                  note payable to a finance bureau, interest at 4.5%, matured January
                  2003,
                  unsecured
              
              
              75,173
              
              
              70,455Short-term
                  note payable to a bank, interest at 7.47%, matures April 2009,
                  secured by
                  property
              
              
              3,646,920
              
              
              -Short-term
                  note payable to a bank, interest at 6.57%, matures November 2008,
                  secured
                  by property
              
              
              729,384
              
              
              -Short-term
                  note payable to a bank, interest at 6.12%, matured March 2008,
                  secured by
                  land use rights
              
              
              -
              
              
              1,367,222Short-term
                  note payable to a bank, interest at 6.39%, matures April 2009,
                  secured by
                  property
              
              
              -
              
              
              3,418,056Short-term
                  note payable to a government development zone interest at 2.43%,
                  matured
                  November 2007, secured by property
              
              
              218,815
              
              
              410,167Total
                  short-term notes payable
              
              $
              4,743,230
              
              $
              5,334,260
  11
  **September 30,**
              
              **December 31,****2008**
              
              **2007**Long-term
                  note payable to a bank, interest at 7.72%, matures August 2009,
                  secured by
                  shareholder
              
              $
              6,710,333
              
              $
              6,836,111Long-term
                  note payable to a bank, interest at 8.316%, matures April, 2010,
                  secured
                  by property
              
              
              1,458,768
              
              
              -Long-term
                  note payable to a bank, interest at 6.57%, matures March 2010,
                  secured by
                  property
              
              
              2,917,535
              
              
              4,101,667Total
                  long-term debt
              
              
              11,086,636
              
              
              10,937,778Less
                  current maturities of long-term debt
              
              
              8,460,854
              
              
              4,101,667Long-term
                  notes payable, net of current portion
              
              $
              2,625,782
              
              $
              6,836,111Past
                  due notes payable
              
              $
              293,988
              
              $
              480,622
  **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.
  **NOTE
        9 – STOCKHOLDERS EQUITY**
  ***Statutory
        Reserves -*** **** 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
        September 30, 2008 and December 31, 2007.
  12
  The
        following summarizes the outstanding warrants as of September 30,
        2008:
 
 **Weighted-Average****Exercise**
              
              **Warrants**
              
              **Remaining Contractual**
              
              **Number****Price**
              
              **Outstanding**
              
              **Life (Years)**
              
              **Exercisable**$    
                   3.50
              
              
              6,000
              
              
              4.0
              
              
              6,000$    
                   4.20
              
              
              40,000
              
              
              3.8
              
              
              40,00046,000
              
              
              
              
              
              46,000
 
 **NOTE
        10 – SUBSEQUENT EVENTS**
 
 As
        a
        result of the independent investigation by the Audit Committee of the Board
        of
        Directors of the errors in the accounting for accounts and notes 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 the Company received
        a
        deficiency letter from the American Stock Exchange (now the NYSE Alternext
        US
        LLC) (the “Exchange”) stating that the Company was no longer in compliance with
        their listing standards and suspending trading of the Company’s common stock on
        the Exchange. In order to maintain its Exchange 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 the
        Exchange, including submission of all required Securities and Exchange
        Commission filings, by no later than November 19, 2008. The Plan was timely
        submitted by the Company and accepted by the Exchange on November 5, 2008.
        If
        the Company did not make adequate progress and complete the actions outlined
        in
        the Plan by November 19, 2008, the Exchange would have initiated delisting
        proceedings against the Company.
 
 To
        date,
        and as required by the Plan, the Company has filed an amendment to its Annual
        Report on Form 10-KSB for the fiscal year ended December 31, 2007 and an
        amendment to its Quarterly Report on Form 10-Q for the fiscal quarter ended
        March 31, 2008 to reflect the correction of the accounting errors in those
        periods, and it has filed its Quarterly Report on Form 10-Q for the fiscal
        quarter ended June 30, 2008. The Company believes that the filing on November
        19, 2008 of this Quarterly Report on Form 10-Q for the fiscal quarter ended
        September 30, 2008 completes the Company’s actions required under the Plan. The
        Company is awaiting confirmation from the Exchange that it has
        regained compliance with the Exchange’s listing standards. The Company will
        request the Exchange to permit its common stock to resume trading as soon
        as
        possible. However, the Company can provide no assurances that it has regained
        compliance with the Exchange’s continued listing requirements, and its failure
        to do so could result in the suspension or delisting of the Company’s common
        stock from the Exchange.
 
 ***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.
  13
  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.
 
 **ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
  **Forward-Looking
        Statements**
 
 *The
        following discussion of our financial condition and results of operations
        should
        be read in conjunction with our financial statements and the related notes,
        and
        the other financial information included in this quarterly report.*
 
 *This
        filing contains forward-looking statements. The words “anticipated,” “believe,”
“expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and
        similar expressions are intended to identify forward-looking statements.
        These
        statements include, among others, information regarding future operations,
        future capital expenditures, and future net cash flow. Such statements reflect
        our management’s current views with respect to future events and financial
        performance and involve risks and uncertainties, including, without limitation,
        dependence on a single major product, reliance on a small number of suppliers
        of
        Sanchi, the possible removal of Xuesaitong Soft Capsules from China’s Insurance
        Catalogue, the possible need for and inability to raise additional capital,
        dependence on a few major customers, general economic and business conditions,
        changes in foreign, political, social, and economic conditions, regulatory
        initiatives and compliance with governmental regulations, the ability to
        achieve
        further market penetration and additional customers, and various other matters,
        many of which are beyond our control. Should one or more of these risks or
        uncertainties occur, or should underlying assumptions prove to be incorrect,
        actual results may vary materially and adversely from those anticipated,
        believed, estimated or otherwise indicated. Consequently, all of the
        forward-looking statements made in this quarterly report are qualified by
        these
        cautionary statements and there can be no assurance of the actual results
        or
        developments. Refer to the sections entitled “Risk Factors” in our Annual Report
        on Form 10-KSB for the year ended December 31, 2007, as amended, and “Risk
        Factors” and “Special Note Regarding Forward-Looking Statements” contained in
        this quarterly report on Form 10-Q.*
 
 **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 a 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 roots of Panax notoginseng are cylindrical shaped and are most commonly
        one
        to six centimeters long and one to four centimeters in diameter. Panax
        notoginseng saponins (PNS), the active ingredients in Panax notoginseng,
        are
        extracted from the plant using high-tech equipment and in accord with Good
        Manufacturing Practice (GMP) standards. Our main product, Xuesaitong Soft
        Capsules, accounted for more than 77% and 70% of our sales for the three
        and
        nine months ended September 30, 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.
  14
  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 State Food and Drug
        Administration of the People’s Republic of China 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.
        During
        the first nine months of 2008, less than 5% of our sales of Xuesaitong Soft
        Capsules were made to military hospitals through China’s military procurement
        system, while over 95% of sales were made to non-military hospitals through
        distributors. Our three largest distributors are Yunnan Province Pharmaceutical,
        LTD., Beijing Ai’xin Weiye Medicine, LTD, and Nanyang Jikang Medicine LTD, each
        of which accounted for between 5% and 7% of our sales for the three and
        nine months ended September 30, 2008.
 
 Our
        marketing team maintains sales offices or agents in approximately 20 provinces
        throughout China. The sales network covers approximately 186 cities and is
        staffed by approximately 410 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 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. We believe that large
        increases in medicine sales, even at an average lower price, will ensure
        the
        growth of general medical sales over the next few years.
 
 We
        do
        face certain challenges and risks, including our relatively high debt ratio,
        which is one of our main risks. If we fail to raise capital in overseas markets,
        we will encounter great difficulties as a result of the shortage of working
        capital. There is potential for growth in production and sales, due to the
        growth of new products and expansion of new channels into urban and rural
        communities. However, it will be uncertain which of our new products will
        pass
        the applicable tests and get clinical approval without difficulty because
        of the
        uncertainty of test results and clinical approvals, which relates only to
        our
        new products. Over the last three years, the price of the main raw material
        we
        use - sanchi - has stabilized and is declining slightly. We will benefit
        from
        this trend if it continues.
  15
  **Recent
        Events**
 
 During
        August 2008, the Company was informed by its auditing firm that the December
        31,
        2007 and 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 (the “Audit
        Committee”) commenced an internal investigation which focused on the reported
        errors.
  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 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. 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.
 
 As
        a
        result of the investigation by the Audit Committee of the errors in the
        accounting for accounts receivable and employee advances, 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, the
        Company received a deficiency letter from the American Stock Exchange (now
        the
        NYSE Alternext US LLC) (the “Exchange”) stating that the Company was no longer
        in compliance with their listing standards, and suspending trading of the
        Company’s common stock on the Exchange. In order to maintain its Exchange
        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 the Exchange, including submission of all
        required Securities and Exchange Commission filings, by no later than November
        19, 2008. The Plan was timely submitted by the Company and the Exchange accepted
        the Plan on November 5, 2008.  If
        the
        Company did not make adequate progress and complete the actions outlined
        in the
        Plan by November 19, 2008, the Exchange would have initiated delisting
        proceedings against the Company.
 
 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.
  16
  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 of the financial statements for the fiscal year ended December
        31, 2007 and the fiscal quarter ended March 31, 2008, see the Company’s Form
        10-KSB/A and Form 10-Q/A filed with the SEC on November 14, 2008.
 
 To
        date,
        and as required by the Plan, the Company has filed an amendment to its Annual
        Report on Form 10-KSB for the fiscal year ended December 31, 2007 and an
        amendment to its Quarterly Report on Form 10-Q for the fiscal quarter ended
        March 31, 2008 to reflect the correction of the accounting errors in those
        periods, and it has filed its Quarterly Report on Form 10-Q for the fiscal
        quarter ended June 30, 2008. The Company believes that the filing on November
        19, 2008 of this Quarterly Report on Form 10-Q for the fiscal quarter ended
        September 30, 2008 completes the Company’s actions required under the Plan. The
        Company is awaiting confirmation from the Exchange that it has
        regained compliance with the Exchange’s listing standards. The Company will
        request the Exchange to permit its common stock to resume trading as soon
        as
        possible. However, the Company can provide no assurances that it has regained
        compliance with the Exchange’s continued listing requirements, and its failure
        to do so could result in the suspension or delisting of the Company’s common
        stock from the Exchange.
 
 **Critical
        Accounting Policies and Estimates**
 
 The
        discussion and analysis of our financial condition and results of operations
        are
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with generally accepted accounting principles in the United States
        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 September
        30,
        2008. We did not enter into any hedge contracts during any of the periods
        presented.
 
 ***Accounts
        Receivable 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
        employee 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.
  17
  ***Advances
        to Suppliers and Advances from Customers*** -
        As is
        customary in the PRC, we will often make advanced payments to suppliers for
        materials, which may include provisions that set the purchase price and delivery
        date of raw materials, or receive advance payments from customers.
 
 ***Advertising
        Expense -*** We
        expense advertising costs as incurred.
  ***Research
        and Development Expense -*** We
        expense research and development expenses as incurred.
 
 ***Basic
        and Diluted Earnings (Loss) per Share -*** Basic
        and
        diluted earnings (loss) per share are calculated by dividing net earnings
        attributable to common stockholders by the weighted-average number of shares
        of
        common stock outstanding during the year. Diluted earnings per share are
        calculated to give effect to potentially issuable dilutive common shares.
        Potentially dilutive securities as of September 30, 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 the exercise price exceeding the market price. Dilutive securities
        as of
        September 30, 2007 are comprised of warrants to purchase 100,000 shares of
        common stock at an exercise price of $2.50 per share, 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.
 
 ***Comprehensive
        Income (Loss)*** -
        Other
        comprehensive income (loss) presented in the consolidated financial statements
        consists of cumulative foreign currency translation adjustments.
 
 ***Recently
        Adopted 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.
  18
  In
        March
        2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
        and Hedging Activities", an amendment of SFAS No. 133. SFAS 161 applies to
        all
        derivative instruments and non-derivative instruments that are designated
        and
        qualify as hedging instruments pursuant to paragraphs 37 and 42 of SFAS 133
        and
        related hedged items accounted for under SFAS 133. SFAS 161 requires entities
        to
        provide greater transparency through additional disclosures about how and
        why an
        entity uses derivative instruments, how derivative instruments and related
        hedged items are accounted for under SFAS 133 and its related interpretations,
        and how derivative instruments and related hedged items affect an entity's
        financial position, results of operations, and cash flows. SFAS 161 is effective
        as of the beginning of an entity's first fiscal year that begins after November
        15, 2008. The Company does not expect SFAS 161 to have a material impact
        on its
        results of operations or financial position.
 
 In
        May
        2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
        Accounting Principles.” SFAS 162 will provide the framework for selecting
        accounting principles to be used in preparing financial statements that are
        presented in conformity with U.S. generally accepted accounting principles
        (GAAP) for nongovernmental entities. SFAS 162 will be effective 60 days
        following the Securities and Exchange Commission’s approval of the Public
        Company Accounting Oversight Board (PCAOB) amendments to AU Section 411.
        The
        Company does not expect the adoption of SFAS 162 to have a material impact
        on
        its financial condition or results of operation.
 
 **Results
        of Operations**
 
 ***Three
        Months Ended September 30, 2008 and 2007***
  The
        following table sets forth our statements of operations for the three months
        ended September 30, 2008 and 2007 in U.S. dollars (unaudited):
 
 **For the three months**
              
              **Change**
              
              **Variance****ended September 30,****2008**
              
              **2007***(in thousands, except earnings per share and share amounts)***Sale
                  of Products**
              
              $
              7,281
              
              $
              4,202
              
              $
              3,079
              
              
              73.27
              %**Cost
                  of Products Sold**
              
              
              1,974
              
              
              1,040
              
              
              934
              
              
              89.81
              %**Gross
                  profit**
              
              
              5,307
              
              
              3,162
              
              
              2,145
              
              
              67.84
              %**Operating
                  Expenses:**Selling
                  expenses
              
              
              2,989
              
              
              1,546
              
              
              1,443
              
              
              93.34
              %General
                  and administrative expenses
              
              
              1,820
              
              
              341
              
              
              1,479
              
              
              434
              %Research
                  and development expenses
              
              
              66
              
              
              5
              
              
              61
              
              
              1,220
              %**Total
                  Operating Expenses**
              
              
              4,875
              
              
              1,892
              
              
              2,983
              
              
              158
              %**Income
                  (Loss) from operations**
              
              
              432
              
              
              1,270
              
              
              (838
              )
              
              -65.98
              %**Other
                  Income (expenses):**Interest
                  income
              
              
              1
              
              
              5
              
              
              (4
              )
              
              -80.00
              %Non-operating
                  income
              
              
              5
              
              
              0
              
              
              5
              
              
              N/AInterest
                  expense
              
              
              (272
              )
              
              (275
              )
              
              3
              
              
              -1.09
              %Non-operating
                  expenses
              
              
              0
              
              
              (0
              )
              
              0
              
              
              N/A**Net
                  Other Income (Expense)**
              
              
              (266
              )
              
              (270
              )
              
              4
              
              
              -1.48
              %**Income
                  (Loss) Before Income Taxes**
              
              
              166
              
              
              1,000
              
              
              (834
              )
              
              -83.40
              %Benefit
                  from (provision for) income taxes
              
              
              (4
              )
              
              (87
              )
              
              83
              
              
              -95.40
              %Minority
                  interest in income of subsidiaries
              
              
              (8
              )
              
              (45
              )
              
              37
              
              
              -82.22
              %**Net
                  Income (Loss)**
              
              
              154
              
              
              868
              
              
              (714
              )
              
              -82.26
              %Foreign
                  currency translation adjustments
              
              
              54
              
              
              174
              
              
              (120
              )
              
              -68.97
              %**Comprehensive
                  Income (Loss)**
              
              $
              208
              
              $
              1,042
              
              $
              (834
              )
              
              -80.04
              %**Earnings
                  (Loss) Per Share**Basic
              
              $
              0.01
              
              $
              0.04
              
              $
              (0.03
              )
              
              -75.00
              %Diluted
              
              $
              0.01
              
              $
              0.04
              
              
              (0.03
              )
              
              -75.00
              %**Weighted-average
                  Shares Outstanding**Basic
              
              
              19,679,400
              
              
              19,579,400
              
              
              100,000
              
              
              0.51
              %Diluted
              
              
              19,679,400
              
              
              19,635,898
              
              
              43,502
              
              
              0.22
              %
  19
  ***Sale
        of products:*** Sale
        of
        products for the three months ended September 30, 2008 was approximately
        $7.2
        million, an increase of approximately $3 million, or 73%, from $4.2 million
        for
        the three months ended September 30, 2007. The increase in sale of products
        was
        primarily due to the increase of $2.8 million in the sales of our primary
        product, Xusaitong Soft Capsules, augmented by $0.2 million of increased
        sales
        of our non-prescription pharmaceuticals, cosmetic products, and increased
        export of our products.
 
 ***Cost
        of products sold:*** Our
        costs
        of products sold for the three months ended September 30, 2008 was approximately
        $1.97 million, an increase of $0.93 million, or 89%, from approximately $1.04
        million for the three months ended September 30, 2007. The increase of cost
        of
        products sold is primarily due to the increase in the sales volume of our
        product and the increase in cost of the raw material, Sanqi, for our primary
        product, Xusaitong Soft Capsules.
  ***Gross
        profit:*** Our
        gross
        profit for the three months ended September 30, 2008 was approximately $5.31
        million as compared with approximately $3.16 million for the three months
        ended
        September 30, 2007. Gross profit as a percentage of revenues was approximately
        73% for the three months ended September 30, 2008, a decrease from 75% for
        the
        three months ended September 30, 2007. The decrease in gross margin percentage
        was primarily due to the increase in the cost of the raw material, Sanqi,
        for
        our primary product, Xusaitong Soft Capsules.
  20
  ***Selling
        expense:*** Selling expenses were approximately $2.99 million for the three months ended
        September 30, 2008, an increase of $1.44 million, or 93%, from $1.55 million
        for
        the three months ended September 30, 2007. The primary reasons for the increase
        were the increase
        in the commission paid to sales representatives due to increased sales of
        our
        primary product and the increase in marketing expenses for our cosmetic
        product.
 
 ***General
        and administrative expense:*** General
        and administrative expenses were approximately $1.82 million for the three
        months ended September 30, 2008, an increase of $1.48 million, or 434%, from
        approximately $0.34 million for the three months ended September 30, 2007.
        The
        increase was primarily due to the increase in expenses related to our status
        as
        a public company with its securities traded on a U.S. national exchange
        (including accounting and legal expenses in connection with the restatement
        of
        the Company’s financial statements for the fiscal year ended December 31, 2007
        and the fiscal quarter ended March 31, 2008), and the increase in expenses
        related to business expansion of cosmetic products.
  ***Research
        and development expense:*** Research
        and development expense for the three months ended September 30, 2008 was
        $66,052 as compared to $5,371 for the period ended September 30, 2007. The
        increase was primarily to enhance new product development.
 
 ***Net
        other expense:*** Net other expense, which includes interest income, income from research and
        development activities, interest expense and non-operating expenses, was
        $265,999 for the three months ended September 30, 2008 and $269,684 for the
        three months ended September 30, 2007. The decrease in net other expenses
        was
        primarily due to a decrease in interest income as a result of lower cash
        balances in the bank, offset by an increase in the income from research and
        development activities which partially offset other expenses.
 
 ***Net
        income:*** Net
        income decreased to $154,286 for the three months ended September 30, 2008
        as
        compared to net income of $867,641 for the three months ended September 30,
        2007. Considering the foreign currency translation adjustments of $54,116
        and
        $174,392, for the three months ended September 30, 2008 and 2007, respectively,
        comprehensive income of $208,402 and $1.04 million was realized for the three
        months ended September 30, 2008 and 2007, respectively.
  21
  ***Nine
        Months Ended September 30, 2008 and 2007***
 
 The
        following table sets forth our statements of operations for the nine months
        ended September 30, 2008 and 2007 in U.S. dollars (unaudited):
  **For the nine months**
              
              **Change**
              
              **Variance****ended September 30,****2008**
              
              **2007***(in thousands, except earnings per share and share amounts)***Sale
                  of Products**
              
              $
              21,359
              
              $
              14,885
              
              $
              6,474
              
              
              43.49
              %**Cost
                  of Products Sold**
              
              
              7,061
              
              
              3,762
              
              
              3,299
              
              
              87.69
              %**Gross
                  profit**
              
              
              14,298
              
              
              11,123
              
              
              3,175
              
              
              28.54
              %**Operating
                  Expenses:**Selling
                  expenses
              
              
              8,667
              
              
              5,180
              
              
              3,487
              
              
              67.32
              %General
                  and administrative expenses
              
              
              7,001
              
              
              2,703
              
              
              4,298
              
              
              159
              %Research
                  and development expenses
              
              
              255
              
              
              11
              
              
              244
              
              
              2,218
              %**Total
                  Operating Expenses**
              
              
              15,923
              
              
              7,894
              
              
              8,029
              
              
              102
              %**Income
                  (Loss) from operations**
              
              
              (1,625
              )
              
              3,229
              
              
              (4,854
              )
              
              -150
              %**Other
                  Income (expenses):**Interest
                  income
              
              
              6
              
              
              15
              
              
              (9
              )
              
              -60
              %Non-operating
                  income
              
              
              344
              
              
              81
              
              
              263
              
              
              325
              %Interest
                  expense
              
              
              (963
              )
              
              (665
              )
              
              (298
              )
              
              44.81
              %Non-operating
                  expenses
              
              
              (139
              )
              
              
              
              
              (139
              )
              
              N/A**Net
                  Other Income (Expense)**
              
              
              (752
              )
              
              (569
              )
              
              (183
              )
              
              32.16
              %**Income
                  (Loss) Before Income Taxes**
              
              
              (2,377
              )
              
              2,660
              
              
              (5,037
              )
              
              -189
              %Benefit
                  from (provision for) income taxes
              
              
              (5
              )
              
              1,223
              
              
              (1,228
              )
              
              -100
              %Minority
                  interest in income of subsidiaries
              
              
              146
              
              
              (224
              )
              
              370
              
              
              -165
              %**Net
                  Income**
              
              $
              (2,236
              )
              $
              3,659
              
              $
              (5,895
              )
              
              -161
              %Foreign
                  currency translation adjustments
              
              
              744
              
              
              449
              
              
              295
              
              
              65.70
              %**Comprehensive
                  Income (Loss)**
              
              $
              (1,492
              )
              $
              4,108
              
              $
              (5,600
              )
              
              -136
              %**Earnings
                  (Loss) Per Share**Basic
              
              $
              (0.11
              )
              $
              0.19
              
              $
              (0.30
              )
              
              -160
              %Diluted
              
              $
              (0.11
              )
              $
              0.19
              
              $
              (0.30
              )
              
              -160
              %**Weighted-average
                  Shares Outstanding**Basic
              
              
              19,679,400
              
              
              19,292,953
              
              
              386,447
              
              
              2.00
              %Diluted
              
              
              19,679,400
              
              
              19,345,401
              
              
              333,999
              
              
              1.73
              %
  ***Sale
        of products:*** Sale
        of
        products for the nine months ended September 30, 2008 was approximately $21.35
        million, an increase of approximately $6.47 million, or 43.49 %, from
        approximately $14.88 million for the nine months ended September 30, 2007.
        The
        increase in sale of products was primarily due to the increase of the sales
        of
        our primary  product,
        other brand’s non-prescription pharmaceuticals, and cosmetic products, and the
        increase in the export of our products.
 
 ***Cost
        of products sold:*** Our
        costs of products sold for the nine months ended September 30, 2008 was
        approximately $7.06 million, an increase of approximately $3.30 million,
        or
        87.69%, from approximately $3.76 million for the nine months ended September
        30,
        2007. The increase of cost of products sold is primarily due to the increase
        in
        the sales volume of our product and the increase in the purchasing price
        of the
        raw material, Sanqi, of our primary product, Xusaitong Soft Capsules. Moreover,
        the higher purchasing price of other brand’s non-prescription pharmaceuticals
        caused the total cost of products sold to increase at a rate higher than
        the
        increase in sales.
  22
  ***Gross
        profit:*** Our
        gross
        profit for the nine months ended September 30, 2008 was approximately $14.3
        million as compared with approximately $11.1 million for the nine months
        ended
        September 30, 2007. Gross profit as a percentage of revenues was approximately
        67% for the nine months ended September 30, 2008, a decrease from 75% for
        the
        nine months ended September 30, 2007. The decrease in gross margin percentage
        was primarily because in the first and second quarter of 2008, there were
        sales
        of other brand’s products which have a higher purchasing price and thus
        generated a smaller profit margin.
 
 ***Selling
        expense:*** Selling expenses were approximately $8.67 million for the nine months ended
        September 30, 2008, an increase of $3.49 million, or 67%, from approximately
        $5.18 million for the nine months ended September 30, 2007. The
        primary reasons for the increase were the increase
        in marketing and advertising of our cosmetic product and the increase in
        commission paid to sales representatives.
 
 ***General
        and administrative expense:*** General
        and administrative expenses were $7 million for the nine months ended September
        30, 2008, an increase of $4.3 million, or 159%, from approximately $2.7 million
        for the nine months ended September 30, 2007. The increase was primarily
        due to
        the increase of the expenses related to our status as a public company with
        its
        securities traded on a U.S. national exchange, the expenses relating to
        business expansion, and the allowance for doubtful accounts due to the
        increase of trade receivables aging over one to two years for the nine months
        ended September 30, 2008.
 
 ***Research
        and development expense:*** Research
        and development expense for the nine months ended September 30, 2008 was
        $255,241 as compared to $10,720 for the nine months ended September 30, 2007.
        The increase was primarily due to enhance new product development.
  ***Net
        other expense:*** Net other expense, which includes interest income, income from research and
        development activities, interest expense and non-operating expenses, was
        approximately $751,939 for the nine months ended September 30, 2008 as compared
        to approximately $569,055 for the nine months ended September 30, 2007. The
        increase in net other expense was primarily due to an increase in the interest
        expenses on the long term loans and an increase in non-operating expenses
        due to
        donations to hospitals and other parties and losses on damaged pharmaceuticals
        purchased from other brands, offset by increased income from research and
        development activities.
 
 ***Benefits
        from (Provision for) income taxes:*** There
        is
        $4,484 provision for income taxes for the nine months ended September 30,
        2008
        as compared to a benefit from income tax of approximately $1.2 million for
        the
        nine months ended September 30, 2007. On March 15, 2007, one of our major
        subsidiaries, Shenghuo Medicine Co., Ltd., was granted an approval of their
        application by the PRC government for relief of income taxes for the years
        ended
        December 31, 2006 and 2005. As a result, Shenghuo Medicine Co., Ltd. recognized
        an aggregate of $1,099,401 in income taxes that are no longer payable as
        of
        March 15, 2007. The amount has been recognized under the caption “Benefit from
        (provision for) income taxes” in the accompanying Condensed Consolidated
        Statement of Operations and Comprehensive Income for the nine months ended
        September 30, 2007.
 
 ***Net
        income (loss):*** Net
        loss
        was $2.24 million for the nine months ended September 30, 2008 as compared
        to
        approximately $3.66 million net income for the nine months ended September
        30,
        2007. Considering the foreign currency translation adjustments of $744,189
        and
        $449,189, for the nine months ended September 30, 2008 and 2007, respectively,
        comprehensive loss of $1.49 million and comprehensive income of $4.11
        million was realized for the nine months ended September 30, 2008 and 2007,
        respectively.
 
 **Liquidity
        and Capital Resources**
 
 ***General
        -*** As
        of
        September 30, 2008, we had cash and cash equivalents of $1.08 million. We
        have
        historically financed our business operations through bank loans. As of
        September 30, 2008, we had borrowed from banks and other institutions and
        had
        approximately $4.7 million in short-term notes payable outstanding. As of
        September 30, 2008, we had also borrowed $8.5 million which is reflected
        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
        nine months ending September 30, 2008, the net decrease in cash and cash
        equivalents was $1.72 million as compared to December 31, 2007.
  23
  Our
        notes
        payable consist of short and long-term debt that is payable to banks,
        governmental financial bureaus, municipalities and a company. If we are unable
        to repay or renegotiate our debt when due, we may default on our obligations.
        In
        view of the current credit market conditions, we may be unable to renegotiate
        our current obligations or obtain additional financing on favorable terms,
        if at
        all, which would have a material adverse effect on our financial condition.
        The
        following schedule summarizes our debt obligations and respective balances:
 
 **September 30,**
              
              **December 31,****2008**
              
              **2007**Short-term
                  note payable to a municipality, interest at 1.8%, due on demand,
                  unsecured
              
              $
              72,938
              
              $
              68,360Short-term
                  note payable to a finance bureau, interest at4.5%,
                  matured January 2003, unsecured
              
              
              75,173
              
              
              70,455Short-term
                  note payable to a bank, interest at 7.47%, maturesApril
                  2009, secured by property
              
              
              3,646,920
              
              
              -Short-term
                  note payable to a bank, interest at 6.57%, maturesNovember
                  2008, secured by property
              
              
              729,384
              
              
              -Short-term
                  note payable to a bank, interest at 6.12%, matured March 2008,
                  secured by
                  land use rights
              
              
              -
              
              
              1,367,222Short-term
                  note payable to a bank, interest at 6.39%, matures April 2009,
                  secured by
                  property
              
              
              -
              
              
              3,418,056Short-term
                  note payable to a government development zone interest at 2.43%,
                  matured
                  November 2007, secured by property
              
              
              218,815
              
              
              410,167Total
                  short-term notes payable
              
              $
              4,743,230
              
              $
              5,334,260
 
 **September 30,**
              
              **December 31,****2008**
              
              **2007**Long-term
                  note payable to a bank, interest at 7.72%, matures August 2009,
                  secured by
                  shareholder
              
              $
              6,710,333
              
              $
              6,836,111Long-term
                  note payable to a bank, interest at 8.316%, matures April, 2010,
                  secured
                  by property
              
              
              1,458,768
              
              
              -Long-term
                  note payable to a bank, interest at 6.57%, matures March 2010,
                  secured by
                  property
              
              
              2,917,535
              
              
              4,101,667Total
                  long-term debt
              
              
              11,086,636
              
              
              10,937,778Less
                  current maturities of long-term debt
              
              
              8,460,854
              
              
              4,101,667Long-term
                  notes payable, net of current portion
              
              $
              2,625,782
              
              $
              6,836,111Past
                  due notes payable
              
              $
              293,988
              
              $
              480,622
  24
 
 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
        nine
        months ended September 30, 2008 and 2007:
  **Cash Flow****Nine months ended**
                **September 30,****2008**
              
              **2007****(unaudited, in thousands)**Net
                  cash provided by (used in) operating activities
              
              $
              (233
              )
              $
              (3,924
              )Net
                  cash provided by (used in) investing activities
              
              
              (223
              )
              
              283Net
                  cash provided by (used in) financing activities
              
              
              (1,413
              )
              
              3,398**Cash
                  and Cash Equivalents at End of Period**
              
              $
              1,081
              
              $
              3,585
  **Operating
        Activities:** Net
        cash
        used in operating activities for the nine months ended September 30, 2008
        was
        $232,648, as compared to cash used in operating activities of $3,924,389
        for the
        nine months ended September 30, 2007. These results are mainly comprised
        of: (i)
        cash flow generated from a decrease in accounts and notes receivable and
        inventory, and an increase in accounts payable and advances from customers;
        (ii)
        a decrease in cash used in employee advances, accrued expenses and taxes
        and
        related payables; (iii) an increase in cash used because of net loss, excluding
        non-cash and other reconciling items, which include the add-back of depreciation
        and amortization, deferred income taxes, and other non-cash items (primarily
        the
        minority interest in (loss) income of subsidiaries).
  25
  **Investing
        Activities:** Net
        cash
        used in investing activities was $222,737 for the nine months ended September
        30, 2008, as compared to net cash provided of $282,850 for the nine months
        ended
        September 30, 2007. The increase in net cash used was primarily a result
        of
        increase in capital expenditure and a decrease in restricted cash.
 
 **Financing
        Activities:** Net
        cash
        used in financing activities was $1.41 million for the nine months ended
        September 30, 2008 compared to net cash $3.40 million provided by financing
        activities for the nine months ended September 30, 2007. The decrease in
        cash provided by financing activities was primarily due to decreased
        proceeds from short and long-term loans and issuance of common stock offset
        by
        lower payments on short and long-term loans during the nine months ended
        September 30, 2008.
 
 ***Working
        Capital***
 
 As
        of
        September 30, 2008, our accounts receivable were $ 8.54 million (net of
        allowance for doubtful accounts of $6.81 million), a decrease of $3.76 million,
        or 36% from accounts receivable of $10.57 million (net of allowance for doubtful
        accounts of $3.22 million) as of December 31, 2007. The collection period
        typically runs from six 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 has slightly decreased by $333,486 for the nine months
        ended September 30, 2008. 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 September 30, 2008, our advance
        payments to our suppliers totaled approximately $776,438. 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 September
        30, 2008, we had no material commitments for capital expenditures other than
        for
        those expenditures incurred in the ordinary course of business.
 
 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.
  26
  Current
        and long-term employee advances (net of allowances for doubtful accounts)
        were
        approximately $10.85 million at September 30, 2008 and $8.76 million as of
        December 31, 2007, an increase of approximately $2.09 million or 24%. The
        increase was due to us advancing more money to sales representatives to
        encourage them to expand their markets and increase sales. As of September
        30,
        2008, the gross amount of employee advances was approximately $11.75 million
        and
        as of December 31, 2007 it was approximately $11.21 million, an increase
        of
        approximately $0.54 million in that nine 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.
 
 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 nine months ended September 30, 2008.
 
 **For the year ended**
                **December 31, 2006**
              
              **For the year**
                **ended**
                **December 31,**
                **2007**
              
              **For the nine**
                **months ended**
                **September 30,**
                **2008**Gross
                  amount of employee accounts
              
              $
              4,559,471
              
              $
              11,210,921
              
              $
              11,752,280Allowance
                  for doubtful accounts
              
              
              1,429,426
              
              
              2,447,073
              
              
              905,082Net
                  amount
              
              $
              3,130,045
              
              $
              8,763,848
              
              $
              10,847,198
  **Off-Balance
        Sheet Arrangements**
 
 None.
 
 **Foreign
        Currency Risk**
 
 Since
        all
        of our operations are conducted in the PRC, we are subject to special
        considerations and significant risks not typically associated with companies
        operating in the United States of America. These risks include, among others,
        the political, economic and legal environments and foreign currency exchange
        rate fluctuations. Our operational results may be adversely affected by changes
        in the political and social conditions in the PRC, and by changes in
        governmental policies with respect to medical reforms and other laws and
        regulations, anti-inflationary measures, currency conversion and remittance
        abroad, and rates and methods of taxation, among other things. Exchange rate
        fluctuations may adversely affect the value, in U.S. dollar terms, of our
        net
        assets and income derived from its operations in the PRC. In addition, all
        of
        our revenue is denominated in the Chinese Yuan Renminbi (“CNY”), which must be
        converted into other currencies before remittance out of the PRC. Both the
        conversion of CNY into foreign currencies and the remittance of foreign
        currencies abroad require approval of the PRC government. The effect of the
        fluctuations of exchange rates is not considered to be material to our business
        operations.
  27
  **Interest
        Rate Risk**
 
 We
        do not
        have significant interest rate risk, as our debt obligations are primarily
        fixed
        interest rates.
 
 **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 70% 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;·
              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.
  28
  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**
  Smaller
        reporting companies are not required to provide the information required
        by this
        Item.
  **ITEM
        4T.**  **CONTROLS
        AND PROCEDURES**
  ***Evaluation
        of disclosure controls and procedures***
  As
        of
        September 30, 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 and CFO
        concluded that our disclosure controls and procedures as of September 30,
        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
        such
        as those deficiencies that resulted in the accounting errors for trade
        receivables and employee advances that caused us to restate our financial
        statements for the year ended December 31, 2007 and the quarter ended March
        31,
        2008. Although our accounting staff is basically 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,
        as
        previously reported, we have taken the following remediation measures prior
        to
        the beginning of the third quarter of 2008: (1) we now maintain a separate,
        independent set of accounting records for the parent company 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 financial statements; and (3)
        we
        have 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 are in the process
        of
        preparing an internal audit manual, and implementing enhanced 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 enhanced internal controls
        over financial reporting.
 
 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.
  29
  In
        this
        regard, during the third quarter of 2008, we have
        completed the draft of the updated policies and procedures for training and
        discussion at all involved levels. We plan to finalize these policies and
        procedures before the end of 2008.
 
 In
        addition, as a result of the Audit Committee’s independent investigation of the
        circumstances that led to the restatement of the Company’s financial statements
        for the fiscal year ended December 31, 2007 and the fiscal quarter ended
        March
        31, 2008, as described in Note 1 of Notes to the Condensed Consolidated
        Financial Statements contained herein, during the fourth quarter of 2008
        the
        Company began to implement the following remedial actions to enhance its
        internal controls over financial reporting: we are providing additional training
        in SOX 404 compliance 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; working with our
        external consultants to improve disclosure controls and procedures and internal
        controls over financial reporting, we have accelerated documentation of our
        policies and procedures and anticipate completing this effort by the end
        of 2008
        and implementing the new procedures in January 2009. In addition, Qiong Hua
        Gao,
        the Company’s former Chief Financial Officer, has been appointed Supervisor of
        Internal Audit to work closely with the Company’s financial department and
        external consultants on implementing policies and procedures to strengthen
        the
        Company’s internal controls over financial reporting. As part of its
        implementation, the Company has hired finance personnel more experienced
        in the
        application of U.S. GAAP and Wendy Fu has been appointed as the Company’s new
        Chief Financial Officer.
 
 We
        believe that the remedial steps that we have taken and intend to take will
        address the conditions identified by our CEO and CFO as significant deficiencies
        in our disclosure controls and procedures. Our CEO and CFO believe 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 third fiscal quarter of 2008 that have materially affected,
        or are reasonably likely to materially affect, our internal control over
        financial reporting.
 
 **PART
        II - OTHER INFORMATION**
  **ITEM
        1.**  **LEGAL
        PROCEEDINGS**
 
 ***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.
  30
  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.
 
 **ITEM
        1A.**  **RISK
        FACTORS**
  Except
        as
        reflected in this Form 10-Q, there have been no material changes from the
        risk
        factors previously disclosed in Item 1A of our Annual Report on Form 10-KSB,
        as
        amended, for the year ended December 31, 2007.
 
 **General
        economic conditions may affect our revenue and harm our business. We may
        become
        unable to repay or renegotiate our outstanding loans.**
 
 As
        widely
        reported, financial markets in the United States, Europe and Asia have been
        experiencing extreme disruption in recent months. Unfavorable changes in
        economic conditions, including declining consumer confidence, inflation,
        recession or other changes, may lead our customers to delay or reduce purchases
        of our products and our results of operations and financial condition could
        be
        adversely affected thereby. Challenging economic conditions also may impair
        the
        ability of our customers or distributors to pay for products they have
        purchased, and as a result, our reserves for doubtful accounts and write-offs
        of
        accounts receivable could increase. Our cash flows may be adversely affected
        by
        delayed payments or underpayments by our customers. As of September 30, 2008,
        we
        had cash and cash equivalents of $1.08 million. We have historically financed
        our business operations through bank loans. As of September 30, 2008, we
        had
        borrowed from banks and other institutions and had approximately $4.7 million
        in
        short-term notes payable outstanding. As of September 30, 2008, we had also
        borrowed $8.5 million which is reflected in our current portion of long-term
        debt. We have a relatively high debt ratio, and, in view of current credit
        market conditions, we may be unable to renegotiate the terms of our existing
        financing or secure additional financing on favorable terms, if at all. In
        the
        event that we are unable to repay or renegotiate our obligations as they
        become
        due, we may default on our obligations. The inability to secure additional
        financing could have a material adverse effect on our financial condition,
        and
        in the future we might cease to be able to operate as a going concern.
        Additional information regarding our debt obligations is contained in Note
        7 of
        the Notes to the Condensed Consolidated Financial Statements contained herein.
        We are unable to predict the duration and severity of the current disruption
        in
        financial markets and adverse economic conditions.
  **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**
 
 None.
  **ITEM
        6.**  **EXHIBITS**
  **Exhibit**
                **Number**
              
              **Description
                  of Exhibit**2.1
              
              Share
                  Exchange Agreement, dated as of June 30, 2006, by and among the
                  Company,
                  Kunming Shenghuo Pharmaceutical (Group) Co., Ltd., and Lan’s International
                  Medicine Investment Co., Limited (incorporated by referenced from
                  Exhibit
                  2.1 to the Quarterly Report on Form 10-QSB filed with the Securities
                  and
                  Exchange Commission on July 28,
                  2006).
  31
  
 2.1(a)
              
              Amendment
                  No. 1 to the Share Exchange Agreement, dated as of August 11, 2006,
                  by and
                  among the Company, Kunming Shenghuo Pharmaceutical (Group) Co.,
                  Ltd., and
                  Lan’s International Medicine Investment Co., Limited (incorporated
                  by
                  reference from Exhibit 2.1(a) to the Registration Statement on
                  Form SB-2
                  filed with the Securities and Exchange Commission on December 21,
                  2006).2.1(b)
              
              Amendment
                  No. 2 to the Share Exchange Agreement, dated as of August 28, 2006,
                  by and
                  among the Company, Kunming Shenghuo Pharmaceutical (Group) Co.,
                  Ltd., and
                  Lan’s International Medicine Investment Co., Limited (incorporated
                  by
                  reference from Exhibit 2.1(b) to Current Report on Form 8-K filed
                  with the
                  Securities and Exchange Commission on September 1,
                  2006).3.1
              
              Certificate
                  of Incorporation of the Company (incorporated by reference from
                  Exhibit
                  3.1 to Registration Statement on Form 10-SB filed with the Securities
                  and
                  Exchange Commission on August 3, 2005).3.2
              
              Bylaws
                  of the Company (incorporated by reference from Exhibit 3.2 to Registration
                  Statement on Form 10-SB filed with the Securities and Exchange
                  Commission
                  on August 3, 2005, and incorporated herein by
                  reference).3.3
              
              Articles
                  of Merger Effecting Name Change (incorporated by reference from
                  Exhibit
                  3.3 to Current Report on Form 8-K filed with the Securities and
                  Exchange
                  Commission on September 1, 2006).31.1
              
              Certification
                  of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)
                  or
                  15d-14(a).31.2
              
              Certification
                  of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)
                  or
                  15d-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.
  32
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
  **CHINA
                  SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**(Registrant)November
                  19, 2008
              By:
              /s/
                  Gui Hua LanGui
                  Hua LanChief
                  Executive Officer and Chairman of the
                  Board
  33
  **EXHIBIT
        INDEX**
 
 **Exhibit**
                **Number**
              
              **Description
                  of Exhibit**2.1
              
              Share
                  Exchange Agreement, dated as of June 30, 2006, by and among the
                  Company,
                  Kunming Shenghuo Pharmaceutical (Group) Co., Ltd., and Lan’s International
                  Medicine Investment Co., Limited (incorporated by referenced from
                  Exhibit
                  2.1 to the Quarterly Report on Form 10-QSB filed with the Securities
                  and
                  Exchange Commission on July 28, 2006).2.1(a)
              
              Amendment
                  No. 1 to the Share Exchange Agreement, dated as of August 11, 2006,
                  by and
                  among the Company, Kunming Shenghuo Pharmaceutical (Group) Co.,
                  Ltd., and
                  Lan’s International Medicine Investment Co., Limited (incorporated
                  by
                  reference from Exhibit 2.1(a) to the Registration Statement on
                  Form SB-2
                  filed with the Securities and Exchange Commission on December 21,
                  2006).2.1(b)
              
              Amendment
                  No. 2 to the Share Exchange Agreement, dated as of August 28, 2006,
                  by and
                  among the Company, Kunming Shenghuo Pharmaceutical (Group) Co.,
                  Ltd., and
                  Lan’s International Medicine Investment Co., Limited (incorporated
                  by
                  reference from Exhibit 2.1(b) to Current Report on Form 8-K filed
                  with the
                  Securities and Exchange Commission on September 1,
                  2006).3.1
              
              Certificate
                  of Incorporation of the Company (incorporated by reference from
                  Exhibit
                  3.1 to Registration Statement on Form 10-SB filed with the Securities
                  and
                  Exchange Commission on August 3, 2005).3.2
              
              Bylaws
                  of the Company (incorporated by reference from Exhibit 3.2 to Registration
                  Statement on Form 10-SB filed with the Securities and Exchange
                  Commission
                  on August 3, 2005, and incorporated herein by
                  reference).3.3
              
              Articles
                  of Merger Effecting Name Change (incorporated by reference from
                  Exhibit
                  3.3 to Current Report on Form 8-K filed with the Securities and
                  Exchange
                  Commission on September 1, 2006).31.1
              
              Certification
                  of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)
                  or
                  15d-14(a).31.2
              
              Certification
                  of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)
                  or
                  15d-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.
  34