|                                                                                            
|--------------------------------------------------------------------------------------------
|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, 2009                                           
|                                                                                            
|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 o                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                              
|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 o Accelerated
filer o Non-accelerated filer o Smaller Reporting Company x

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

There were 19,679,400 shares
outstanding of the issuers common stock, par value $.0001 per share, as of
August 14, 2009.

---



CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

|                                |  |                                                                                                                                                         |  |      | 
|------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|                                |  |                                                                                                                                                         |  | Page
|                                |  |                                                                                                                                                         |  |     
|                                |  |                                                                                                                                                         |  |     
|PART I -
 FINANCIAL INFORMATION |  |                                                                                                                                                        
|                                |  |                                                                                                                                                         |  |     
|ITEM 1.                         |  | FINANCIAL
 STATEMENTS                                                                                                                                   |  | 1   
|                                |  |                                                                                                                                                         |  |     
|                                |  | Consolidated
      Balance Sheets as of September 30, 2009 and December 31, 2008 (Unaudited)                                                            |  | 1   
|                                |  |                                                                                                                                                         |  |     
|                                |  | Consolidated
       Statements of Operations and Comprehensive Income for the Three and Nine
      Months Ended September 30, 2009 and 2008 (Unaudited) |  | 3   
|                                |  |                                                                                                                                                         |  |     
|                                |  | Consolidated
       Statements of Cash Flows for the Nine Months Ended September 30, 2009
      and 2008 (Unaudited)                                    |  | 4   
|                                |  |                                                                                                                                                         |  |     
|                                |  | Notes
      to Consolidated Financial Statements (Unaudited)                                                                                            |  | 5   
|                                |  |                                                                                                                                                         |  |     
|ITEM 2.                         |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
 CONDITION AND RESULTS OF OPERATIONS                                                                  |  | 19  
|                                |  |                                                                                                                                                         |  |     
|ITEM 3.                         |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
 RISK                                                                                             |  | 38  
|                                |  |                                                                                                                                                         |  |     
|ITEM 4T.                        |  | CONTROLS AND PROCEDURES                                                                                                                                 |  | 38  
|                                |  |                                                                                                                                                         |  |      | 
|PART II - OTHER INFORMATION     |  |                                                                                                                                                        
|                                |  |                                                                                                                                                         |  |      | 
|ITEM 1.                         |  | LEGAL PROCEEDINGS                                                                                                                                       |  | 40  
|                                |  |                                                                                                                                                         |  |      | 
|ITEM 1A.                        |  | RISK FACTORS                                                                                                                                            |  | 41  
|                                |  |                                                                                                                                                         |  |      | 
|ITEM 2.                         |  | UNREGISTERED SALES OF EQUITY
 SECURITIES AND USE OF PROCEEDS                                                                                            |  | 42  
|                                |  |                                                                                                                                                         |  |      | 
|ITEM 3.                         |  | DEFAULTS UPON SENIOR SECURITIES                                                                                                                         |  | 42  
|                                |  |                                                                                                                                                         |  |      | 
|ITEM 4.                         |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                                     |  | 42  
|                                |  |                                                                                                                                                         |  |      | 
|ITEM 5.                         |  | OTHER INFORMATION                                                                                                                                       |  | 42  
|                                |  |                                                                                                                                                         |  |      | 
|ITEM 6.                         |  | EXHIBITS                                                                                                                                                |  | 42  
|                                |  |                                                                                                                                                         |  |      | 
|SIGNATURES                      |  |                                                                                                                                                         |  |     

---



PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS

|                                                                                                                                   |  |                      |            |                     |   |            | 
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ---------- | ------------------- | - | ---------- | 
|                                                                                                                                   |  | September 30, 
 2009 |            | December 31, 
 2008 |  
|                                                                                                                                   |  |                      |            |                     |  
|                                                                                                                                   |  | Unaudited            |            | Audited             |  
|Assets:                                                                                                                            |  |                      |            |                     |   |            | 
|Current Assets:                                                                                                                    |  |                      |            |                     |   |            | 
|Cash and cash equivalents                                                                                                          |  | $                    | 2,723,716  |                     | $ | 1,612,054  | 
|Accounts and notes receivable, less allowance for doubtful accounts
 of $1,650,774 and $4,834,745, for 2009 and 2008, respectively |  |                      | 13,721,541 |                     |   | 9,108,703  | 
|Other receivables, less allowance for doubtful accounts of $2,495,914
 and $2,955,516, respectively                                |  |                      | 7,212,920  |                     |   | 8,637,653  | 
|Advances to suppliers                                                                                                              |  |                      | 271,132    |                     |   | 446,168    | 
|Inventories, net of allowance for obsolescence of $148,335 and
 $147,978, respectively                                             |  |                      | 3,485,225  |                     |   | 4,287,462  | 
|Receivables from related parties                                                                                                   |  |                      | 164,044    |                     |   |           | 
|Other current assets                                                                                                               |  |                      | 10,543     |                     |   | 41,177     | 
|                                                                                                                                   |  |                      |            |                     |   |            | 
|Total Current Assets                                                                                                               |  |                      | 27,589,121 |                     |   | 24,133,217 | 
|                                                                                                                                   |  |                      |            |                     |   |            | 
|Property, plant and equipment, net of accumulated depreciation of
 $5,761,407 and $5,341,933, respectively                         |  |                      | 7,345,163  |                     |   | 7,581,664  | 
|Intangible assets, net of accumulated amortization of $186,951 and
 $71,456, respectively                                          |  |                      | 1,134,697  |                     |   | 665,959    | 
|Deferred tax assets                                                                                                                |  |                      | 401,300    |                     |   |           | 
|Long-term other
     receivables, less allowance for doubtful accounts of nil and $664,532, respectively                           |  |                      |           |                     |   | 663,433    | 
|                                                                                                                                  
|                                                                                                                                   |  |                      |            |                     |   |            | 
|                                                                                                                                   |  | $                    | 36,470,281 |                     | $ | 33,044,273 | 
|                                                                                                                                   |  |                      |            |                     |   |            | 

See notes to consolidated financial statements.

- 1 -

---



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

|                                                                                                             |  |                      |            |                     |   |            |  
|------------------------------------------------------------------------------------------------------------ |  | -------------------- | ---------- | ------------------- | - | ---------- | -
|                                                                                                             |  | September 30, 
 2009 |            | December 31, 
 2008 |  
|                                                                                                             |  |                      |            |                     |  
|                                                                                                             |  | Unaudited            |            | Audited             |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                        |  |                      |            |                     |   |            |  
|Current Liabilities:                                                                                         |  |                      |            |                     |   |            |  
|Accounts payable                                                                                             |  | $                    | 3,228,171  |                     | $ | 1,293,460  |  
|Other payables and accrued expenses                                                                          |  |                      | 8,143,224  |                     |   | 2,721,082  |  
|Deposits                                                                                                     |  |                      | 6,379,811  |                     |   | 5,550,502  |  
|Payables to related parties                                                                                  |  |                      |           |                     |   | 148,575    |  
|Short-term notes payable                                                                                     |  |                      | 5,337,043  |                     |   | 9,850,211  |  
|Advances from customers                                                                                      |  |                      | 1,304,861  |                     |   | 222,609    |  
|Taxes and related payables                                                                                   |  |                      | 1,440,571  |                     |   | 1,236,574  |  
|Current portion of long-term notes payable                                                                   |  |                      | 3,802,504  |                     |   | 3,245,685  |  
|                                                                                                             |  |                      |            |                     |   |            |  
|Total Current Liabilities                                                                                    |  |                      | 29,636,185 |                     |   | 24,268,698 |  
|                                                                                                             |  |                      |            |                     |   |            |  
|Long-term notes payable                                                                                      |  |                      | 6,435,006  |                     |   | 1,131,193  |  
|                                                                                                             |  |                      |            |                     |   |            |  
|                                                                                                             |  |                      |            |                     |   |            |  
|Total Liabilities                                                                                            |  |                      | 36,071,191 |                     |   | 25,399,891 |  
|                                                                                                             |  |                      |            |                     |   |            |  
|                                                                                                             |  |                      |            |                     |   |            |  
|Equity:                                                                                                      |  |                      |            |                     |   |            |  
|Common stock, par value $0.0001; 100,000,000 shares authorized;
 19,679,400 shares outstanding, both periods |  |                      | 1,968      |                     |   | 1,968      |  
|Additional paid-in capital                                                                                   |  |                      | 6,193,927  |                     |   | 6,193,927  |  
|Statutory reserves                                                                                           |  |                      | 147,023    |                     |   | 147,023    |  
|Accumulated deficit                                                                                          |  |                      | (7,372,543 | )                   |   | (603,572   | )
|Accumulated other comprehensive income                                                                       |  |                      | 1,587,438  |                     |   | 1,656,812  |  
|                                                                                                             |  |                      |            |                     |   |            |  
|Total shareholders equity                                                                                   |  |                      | 557,813    |                     |   | 7,396,158  |  
|Noncontrolling interest                                                                                      |  |                      | (158,723   | )                   |   | 248,224    |  
|Total equity                                                                                                 |  |                      | 399,090    |                     |   | 7,644,382  |  
|                                                                                                             |  |                      |            |                     |   |            |  
|                                                                                                             |  |                      |            |                     |   |            |  
|                                                                                                             |  | $                    | 36,470,281 |                     | $ | 33,044,273 |  
|                                                                                                             |  |                      |            |                     |   |            |  

See notes to consolidated financial statements.

- 2 -

---



CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME/(LOSS)

|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|--------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | ------------------------------- | - | ---------- | - | --------- | ---------- | - | - | ---------- | -
|                                                                                        |  | Three months ended September 30, |            | Nine months ended September 30, |  
|                                                                                        |  |                                  |            |                                 |  
|                                                                                        |  | 2009                             |            | 2008                            |   | 2009       |   | 2008      |           
|                                                                                        |  |                                  |            |                                 |   |            |   |           |           
|                                                                                        |  | Unaudited                        |            | Unaudited                       |   | Unaudited  |   | Unaudited |           
|Sales                                                                                   |  | $                                | 10,558,218 |                                 | $ | 7,281,384  |   | $         | 25,459,077 |   | $ | 21,359,149 |  
|Cost of
 Sales                                                                          |  |                                  | 2,947,511  |                                 |   | 1,973,865  |   |           | 7,643,566  |   |   | 7,061,446  |  
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Gross
 Margin                                                                           |  |                                  | 7,610,707  |                                 |   | 5,307,519  |   |           | 17,815,511 |   |   | 14,297,703 |  
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Operating
 Expenses:                                                                    |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Selling expenses                                                                        |  |                                  | 6,988,017  |                                 |   | 2,989,486  |   |           | 19,604,857 |   |   | 8,666,561  |  
|General and administrative expenses                                                     |  |                                  | 1,063,981  |                                 |   | 1,819,573  |   |           | 5,230,722  |   |   | 7,001,410  |  
|Research and development expenses                                                       |  |                                  | 10,534     |                                 |   | 66,052     |   |           | 24,455     |   |   | 255,241    |  
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|                                                                                        |  |                                  | 8,062,532  |                                 |   | 4,875,111  |   |           | 24,860,034 |   |   | 15,923,212 |  
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|(Loss)
 / Income from Operations                                                        |  |                                  | (451,825   | )                               |   | 432,408    |   |           | (7,044,523 | ) |   | (1,625,509 | )
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Other Income
 / (Expense):                                                              |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Interest income                                                                         |  |                                  | 1,349      |                                 |   | 588        |   |           | 2,661      |   |   | 5,701      |  
|Income from research and development activities                                         |  |                                  | 49,723     |                                 |   | 5,745      |   |           | 194,902    |   |   | 344,370    |  
|Interest expense                                                                        |  |                                  | (184,228   | )                               |   | (272,002   | ) |           | (704,242   | ) |   | (963,198   | )
|Non-operating expenses                                                                  |  |                                  | (2,847     | )                               |   | (330       | ) |           | (22,038    | ) |   | (138,812   | )
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|                                                                                        |  |                                  | (136,003   | )                               |   | (265,999   | ) |           | (528,717   | ) |   | (751,939   | )
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|(Loss) /
       Income Before Income Tax (Expense) Benefit and Non-controlling Interest |  |                                  | (587,828   | )                               |   | 166,409    |   |           | (7,573,240 | ) |   | (2,377,448 | )
|Income
 tax  benefit / (expense)                                                        |  |                                  | 401,012    |                                 |   | (4,471     | ) |           | 401,012    |   |   | (4,484     | )
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Net
 (Loss) / Income                                                                    |  |                                  | (186,816   | )                               |   | 161,938    |   |           | (7,172,228 | ) |   | (2,381,932 | )
|Net loss / (income)
     attributable to noncontrolling interest                        |  |                                  | 154,892    |                                 |   | (7,652     | ) |           | 403,257    |   |   | 146,089    |  
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Net (Loss)
       / Income Attributable to Shareholders                                 |  | $                                | (31,924    | )                               | $ | 154,286    |   | $         | (6,768,971 | ) | $ | (2,235,843 | )
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Basic and
       Diluted Earnings / (Loss) per Share                                    |  | $                                | (0.00      | )                               | $ | 0.01       |   | $         | (0.34      | ) | $ | (0.11      | )
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Weighted-average
       Number of Shares Outstanding - Basic and Diluted                |  |                                  | 19,679,400 |                                 |   | 19,679,400 |   |           | 19,679,400 |   |   | 19,679,400 |  
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Comprehensive
 (Loss) / Income:                                                         |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Net
 (Loss) / Income                                                                    |  |                                  | (186,816   | )                               |   | 161,938    |   |           | (7,172,228 | ) |   | (2,381,932 | )
|Foreign currency translation adjustment                                                 |  |                                  | (76,185    | )                               |   | 54,116     |   |           | (73,064    | ) |   | 744,189    |  
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Comprehensive
 (Loss) / Income                                                          |  | $                                | (263,001   | )                               | $ | 216,054    |   | $         | (7,245,292 | ) | $ | (1,637,743 | )
|Comprehensive
     (Loss) / Income attributable to noncontrolling interest              |  | $                                | 158,739    |                                 | $ | (10,385    | ) | $         | 406,947    |   | $ | 108,507    |  
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  
|Comprehensive
       (Loss) Income Attributable to Shareholders                         |  | $                                | (104,262   | )                               | $ | 205,669    |   | $         | (6,838,345 | ) | $ | (1,529,236 | )
|                                                                                        |  |                                  |            |                                 |   |            |   |           |            |   |   |            |  

See notes to consolidated financial statements.

- 3 -

---



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

|                                                                                           |  |                                 |             |           |   |            |  
|------------------------------------------------------------------------------------------ |  | ------------------------------- | ----------- | --------- | - | ---------- | -
|                                                                                           |  | Nine months ended September 30, |            
|                                                                                           |  |                                 |            
|                                                                                           |  | 2009                            |             | 2008      |  
|                                                                                           |  |                                 |             |           |  
|                                                                                           |  | Unaudited                       |             | Unaudited |  
|Cash Flows from Operating Activities:                                                      |  |                                 |             |           |   |            |  
|Net loss                                                                                   |  | $                               | (6,768,971  | )         | $ | (2,235,843 | )
|Adjustments to reconcile net loss to net cash provided by (used in)
 operating activities: |  |                                 |             |           |   |            |  
|Depreciation and amortization                                                              |  |                                 | 542,040     |           |   | 619,402    |  
|Deferred income taxes                                                                      |  |                                 | (401,012    | )         |   |           |  
|Non-controlling interest in loss of subsidiaries                                           |  |                                 | (403,257    | )         |   | (146,089   | )
|Allowance
         for doubtful accounts                                                   |  |                                 | 1,454,131   |           |   | 3,596,319  |  
|Change in current assets and liabilities:                                                  |  |                                 |             |           |   |            |  
|Accounts and notes receivable                                                              |  |                                 | (5,749,846  | )         |   | (919,991   | )
|Other receivables                                                                          |  |                                 | 1,783,691   |           |   | (1,465,805 | )
|Advances to suppliers                                                                      |  |                                 | 175,993     |           |   | (60,460    | )
|Inventories                                                                                |  |                                 | 812,063     |           |   | 333,486    |  
|Other current assets                                                                       |  |                                 | 30,709      |           |   | 143,282    |  
|Accounts payable                                                                           |  |                                 | 1,930,185   |           |   | 655,989    |  
|Accrued expenses and deposits                                                              |  |                                 | 6,191,182   |           |   | (538,712   | )
|Advances from customers                                                                    |  |                                 | 1,080,935   |           |   | 119,991    |  
|Taxes and related payables                                                                 |  |                                 | 200,851     |           |   | (334,217   | )
|                                                                                           |  |                                 |             |           |   |            |  
|                                                                                           |  |                                 |             |           |   |            |  
|Net Cash Provided by (Used in) Operating Activities                                        |  |                                 | 878,694     |           |   | (232,648   | )
|                                                                                           |  |                                 |             |           |   |            |  
|                                                                                           |  |                                 |             |           |   |            |  
|Cash Flows from Investing Activities:                                                      |  |                                 |             |           |   |            |  
|Capital expenditures                                                                       |  |                                 | (738,350    | )         |   | (218,780   | )
|Receivables from related parties                                                           |  |                                 | (163,926    | )         |   | (3,957     | )
|                                                                                           |  |                                 |             |           |   |            |  
|                                                                                           |  |                                 |             |           |   |            |  
|Net Cash Used in Investing Activities                                                      |  |                                 | (902,276    | )         |   | (222,737   | )
|                                                                                           |  |                                 |             |           |   |            |  
|                                                                                           |  |                                 |             |           |   |            |  
|Cash Flows from Financing Activities:                                                      |  |                                 |             |           |   |            |  
|Payables to related parties                                                                |  |                                 | (181,445    | )         |   | 87,385     |  
|Proceeds from short and long-term notes payable                                            |  |                                 | 21,227,417  |           |   | 5,715,216  |  
|Payments on short and long-term notes payable                                              |  |                                 | (19,915,434 | )         |   | (7,215,461 | )
|                                                                                           |  |                                 |             |           |   |            |  
|                                                                                          
|Net Cash Provided by (Used in) Financing Activities                                        |  |                                 | 1,130,538   |           |   | (1,412,860 | )
|                                                                                           |  |                                 |             |           |   |            |  
|                                                                                           |  |                                 |             |           |   |            |  
|Effect of foreign currency exchange rate fluctuation on Cash and Cash
 Equivalents         |  |                                 | 4,706       |           |   | 148,328    |  
|                                                                                           |  |                                 |             |           |   |            |  
|Net Change in Cash and Cash Equivalents                                                    |  |                                 | 1,111,662   |           |   | (1,719,917 | )
|Cash and Cash Equivalents at Beginning of Period                                           |  |                                 | 1,612,054   |           |   | 2,800,641  |  
|                                                                                           |  |                                 |             |           |   |            |  
|Cash and Cash Equivalents at End of Period                                                 |  | $                               | 2,723,716   |           | $ | 1,080,724  |  
|                                                                                           |  |                                 |             |           |   |            |  
|                                                                                           |  |                                 |             |           |   |            |  
|Supplemental Information                                                                   |  |                                 |             |           |   |            |  
|Cash paid for interest                                                                     |  | $                               | 704,242     |           | $ | 963,198    |  
|Cash paid for income taxes                                                                 |  | $                               |            |           | $ |           |  

See notes to consolidated financial statements.

- 4 -

---



NOTE 1  BASIS OF
PRESENTATION

The
accompanying consolidated financial statements of China Shenghuo Pharmaceutical
Holdings, Inc., (the Company or the Parent or the Group)
were prepared by the Company pursuant to the rules and regulations of the United
States Securities and Exchange Commission without audit. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with Generally Accepted Accounting Principles (GAAP)  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 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-K for the year ended December
31, 2008, as amended. Amounts as of December 31, 2008 are derived from those
audited consolidated financial statements.

These
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 nine months
ended September 30, 2009 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 2009.

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 (RMB) and the
functional currency of the Parent is USD; however, the condensed consolidated
financial statements have been expressed in United States Dollars (USD). The
accompanying consolidated balance sheets have been translated into USD at the
exchange rates prevailing at each balance sheet date. The consolidated
statements of operations have been translated using the weighted average
exchange rates prevailing during the operating periods of each statement.

NOTE 2  ORGANIZATION AND NATURE OF
OPERATIONS

Nature of Business
 The Company, incorporated in Delaware, United States of America, through its
subsidiaries, designs, develops, markets, sells and exports 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 owns a 94.95% equity interest in Kunming Shenghuo Pharmaceuticals
Co., Ltd. (Shenghuo). Shenghuo owns a 99% equity interest in Kunming
Shenghuo Medicine Co., Ltd. (Medicine), a 99% equity interest in
Kunming Pharmaceutical Importation and Exportation Co., Ltd. (Import/Export),
a 98.18% interest in Kunming Shenghuo Cosmetics Co., Ltd. (Cosmetic),
and a 70% interest in Kunming Beisheng Science and Technology Development Co.,
Ltd (Beisheng).
On April 30, 2009 the Company formed Shi Ling Shenghuo Co., Ltd. (Shi Ling)
as a wholly owned subsidiary. Shi Ling was formed for the purpose of purchasing
or leasing land suitable for cultivating the medicinal herb Panax notoginseng
for use in the production of the Companys medicinal products. All of these
entities are formed in and operate within the PRC.

- 5 -

---



NOTE 3  SELECTED SIGNIFICANT ACCOUNTING
POLICIES

Principles of Consolidation
 The accompanying consolidated financial statements present the operations of
the Company and its majority owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation.

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

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

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

Accounts and Notes
Receivable and Allowance for Doubtful Accounts 
Trade receivables are carried at original invoiced amounts less an allowance
for doubtful accounts. An allowance for doubtful accounts receivable is
established by charges to operations for amounts required to maintain an
adequate allowance, based on the Managements review of credit risk of
customers and aging of the ending balance, 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 adequate and consistent with industry standards in the PRC based
on the products that are being sold.. Deductions from the allowance are recorded
when specific accounts receivable are written off as uncollectible. For the three
and nine months ended September 30, 2009, accounts receivable amounting to $4,235,109, which had aging of more than 2 years
and for which full allowance had been provided, were written off since
thay were deemed uncollectible after Management had implemented every possible
collection procedure.

Notes receivable
included with accounts receivable were $414,678 and $750,877 as of September
30, 2009 and December 31, 2008, respectively. The notes represent bank drafts
that have been arranged with third-party financial institutions by certain
customers to settle their purchases from us. These bank drafts are non-interest
bearing and are collectible within six months. Such sales and purchasing
arrangements are consistent with industry practices in the PRC.

Other Receivables
 Other receivables are presented net of an estimated allowance for doubtful
accounts. Other receivables include sales representative advances for market
development, employee advances and sales office advances for facilities of
sales activities. As time passes from when advances are made to sales
representatives for travel and related expenses, the Company will provide
allowance for these older receivables based on review of collectability risk
from each particular sales representative and aging of the ending balance.
For the three and nine months ended September 30, 2009, other receivables
amounting to $1,458,698, which had aging of more than 2 years and
 for which full allowance had been provided for, were written off since
they were deemed uncollectible after Management had implemented every
possible collection procedure.

- 6 -

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Inventories
 Inventories consist principally of pharmaceutical products and are stated at
the lower of cost or net realizable value. Cost is determined on a
weighted-average cost method. When market value of the inventory products is
lower than the weighted average cost, inventory is reduced to its net
realizable value. The Company also holds inventory on consignment.

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

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

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

Accrued Expenses and
Other Payables  Accrued expenses and other
payables primarily consist of accrued commission expense, accrued legal expense
and accrued payroll expense, etc.

Deposits
Deposits consist of funds paid in advance by the sales representatives to
obtain the Companys products to sell. The Company retains these deposits
during the time the sales representatives provide services to the Company. When
the Company receives full payment from the customer or sales representatives
terminate sales services, the deposits are returned to the sales
representatives. The Company records deposits from sales representatives when
payments are received.

Advances to
Suppliers and Advances from Customers  The
Company will often make advanced payments to suppliers for materials, or
receive advance payments from customers in the normal course of business.
Advances to suppliers were $271,132 and $446,168 as of September 30, 2009 and
December 31, 2008, respectively. Advances to suppliers are recorded when
payment is made by the Company and relieved against inventory when goods are
received. The advance payments to suppliers may include provisions that set the
purchase price and delivery date of raw materials. Advances from customers were
$1,304,861 and $222,609 as of September 30, 2009 and December 31, 2008,
respectively and are recognized in revenue when delivery has occurred.

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

In general, the Company
does not allow wholesale companies to return products unless there are
defects in manufacturing or workmanship. Sales returns need to go through a strict
process and have

- 7 -

---



to be
authorized by Management. Sales
returns are netted against sales when incurred. Historically, the amounts of
    sales return were immaterial.

Cost of Sales
 The cost of sales are the direct expenses incurred in producing the
pharmaceuticals and cosmetics, which include materials, direct labor, handling
charges, and a portion of overhead expenses associated with the manufacture of
products.

Selling Expense Selling expense mainly consists
    of sales commission, salesmens salaries, travelling expense, advertising
    and shipping and handling cost, etc. All advertising costs are changed to
    selling expenses when incurred or when advertising first takes place.

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

Basic and Diluted
Earnings per Share  The computation of basic and
diluted earnings per share is based on the weighted-average number of shares
outstanding during the periods presented. Potentially dilutive securities for
the three and nine months ended September 30, 2009 and 2008 include 246,000
warrants that were anti-dilutive due to losses of the Company.

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

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

Credit Risk
 The carrying amounts of accounts receivable and sales representative advances
included in the balance sheets represent the Companys major exposure to credit
risk in relation to its financial assets. No other financial assets carry a
significant exposure to credit risk. The Company performs ongoing credit
evaluations of each customers financial condition. It maintains an allowance
for doubtful accounts. Management believes the Companys current allowance is
adequate.

The Company
has its cash in bank deposits and money market funds primarily in the PRC.
Historically, deposits in Chinese banks have been secure due to the state
policy on protecting depositors interests. China promulgated a new Bankruptcy
Law in August 2006, which came into effect on June 1, 2007, which, together
with more specific, complementary regulations to be issued in the future, shall
provide the implementation for the bankruptcy of Chinese banks. In the event
that bankruptcy laws are enacted for banks in the PRC, the Companys deposits
may be at a higher risk of loss. The Company has maintained its funds in
quality financial institutions to mitigate the risk.

Concentration
 For the nine months ended September 30, 2009, the Company had concentrations
of purchases from one vendor accounting for 29.86% of total purchases.

Business Condition
and Liquidity  Although the Company had a history
prior to 2008 of positive net income, working capital and retained earnings,
the Company has incurred a net loss for the nine months ended September 30,
2009 of $6,768,971 and had net cash provided by operating activities of
$878,694 and proceeds from financing activities of $1,130,538. In addition, the
Company had an accumulated deficit of $7,372,543 as of September 30, 2009,
primarily due to the losses in the nine months ended September 30, 2009 and the
loss of $4.6 million for fiscal 2008. As discussed in Note 8, the Company has
$9,139,547in short term loans that mature in the next twelve months.

On August 6,
2009, the Company entered into a one-year term loan facility with the Yunnan
Shuang Long Branch of Agricultural Bank of China (Agricultural Bank)
amounting to  RMB 110 million (approximately $16 million) based on the Agricultural
Banks assessment of the Companys operations and unencumbered assets.
As of September 30, 2009, the Company has drawn RMB 50 million (approximately
$7 million) under the term loan. Additionally, and the remaining unused loan
facility was RMB 60 million (approximately $9 million). In addition, in July,
2009, the Company signed a factoring agreement with Heping Branch of China Construction
Bank (the Heping
Bank).
Heping Bank has agreed to act as an

- 8 -

---



additional
source of capital for the Company based on the Companys accounts receivable
balance from time to time. Under this factoring agreement the Company has drawn
bank loans amounting to approximately RMB 9 million.

The Company
has expended significant efforts to expand its revenues by assisting its sales
representatives and increasing its marketing efforts during the nine months
ended September 30, 2009 and during fiscal 2008. The net loss for the nine
months ended September 30, 2009 was caused primarily by increased selling
expenses, legal, auditing, sales representative assistance and marketing
expenses. The increase in the selling expense in 2009 was mainly due to the
fact that beginning in March 2009, in order to develop a better channel for
selling our products and to increase our revenue in the fierce industry
competition, we began to build relationships with high quality agents and
terminated our relationships with agents with poor historical performance.
Moreover, we believe it is in our -long-term best interest to grow our
operations through the over-the-counter (OTC) market, which will produce
higher profit margins. Accordingly, we began developing the OTC market in
2009.We believes that after expending funds to develop new agents in 2009, we
will be able to decrease selling and sales representative assistance expenses
in the near future as the daily operations between new agents and the Company
becomes more efficient. In addition, the Company may be forced to give
significant attention to the class action lawsuits discussed in Note 11.

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

Recently Enacted
Accounting Standards  In June 2009, the FASB
issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting
Principles (ASC Topic 105) which establishes the FASB Accounting Standards
Codification (the Codification or ASC) as the official
single source of authoritative U.S. GAAP. All
existing accounting standards are superseded. All other accounting guidance not
included in the Codification will be considered non-authoritative. The
Codification also includes all relevant Securities and Exchange Commission
(SEC) guidance organized using the same topical structure in separate
sections within the Codification.

Following the
Codification, the Board will not issue new standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will
issue Accounting Standards Updates (ASU) which will serve to update the
Codification, provide background information about the guidance and provide the
basis for conclusions on the changes to the Codification.

The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, we are providing the Codification
cross-reference alongside the references to the standards issued and adopted
prior to the adoption of the Codification.

Fair Value Accounting

In 2006, the
FASB issued SFAS No. 157, Fair Value Measurements (ASC Topic 820)
which defines fair value, establishes a market-based framework or hierarchy for
measuring fair value and expands disclosures about fair value measurements.
This guidance is applicable whenever another accounting pronouncement requires
or permits assets and liabilities to be measured at fair value. It does not
expand or require any new fair value measures; however the application of this
statement may change current practice. We adopted this guidance for financial
assets and liabilities effective January 1, 2008 and for non financial assets
and liabilities effective January 1, 2009. The adoption did not have a material
effect on our financial condition or results of operations.

- 9 -

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In April 2009, the FASB issued FAS 107-1
 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments
 (ASC Topic 320-10-65). This update requires fair value disclosures for
 financial instruments that are not currently reflected on the balance sheet
 at fair value on a quarterly basis. We adopted these updates effective June 30,
2009 and the adoption did not have a material effect on our financial condition
or results of operations.

Business Combinations and Noncontrolling
Interests

In 2007, the
FASB issued SFAS No. 141 (revised 2007), Business Combinations (ASC
Topic 805). This guidance requires the acquiring entity in a business combination
to recognize the full fair value of assets acquired and liabilities assumed in
the transaction (whether a full or partial acquisition); establishes the
acquisition date fair value as the measurement objective for all assets
acquired and liabilities assumed; requires expensing of most transaction and
restructuring costs; and requires the acquirer to disclose the information
necessary to evaluate and understand the nature and financial effect of the
business combination. We adopted this guidance effective January 1, 2009 and
will apply it to all business combinations prospectively from that date. The
impact of ASC 805 on our consolidated financial statements will depend upon the
nature, terms and size of the acquisitions we consummate in the future.

In April 2009,
the FASB issued Staff Position No. 141(R)-1, Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies (ASC Topic 805-20). This updated guidance amended the accounting
treatment for assets and liabilities arising from contingencies in a business
combination and requires that pre-acquisition contingencies be recognized at
fair value, if fair value can be reasonably determined. If fair value cannot
be reasonably determined, measurement should be based on the best estimate in
accordance with SFAS No. 5, Accounting for Contingencies (ASC Topic
405). This updated guidance was effective January 1, 2009 and the adoption did
not have a material effect on our financial condition or results of operations.

- 10 -

---



In 2007, the
FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of Accounting Research Bulletin No. 51, (ASC Topic
810-10-65). This guidance requires companies to present noncontrolling
(minority) interests as equity (as opposed to a liability) and provided
guidance on the accounting for transactions between an entity and
noncontrolling interests. In addition, it requires companies to report a
consolidated net income (loss) measure that includes the amount attributable to
such noncontrolling interests. We adopted this guidance effective January 1,
2009, and have applied it to noncontrolling interests prospectively from that
date. The presentation and disclosure requirements we applied retrospectively
for all periods presented. As a result of this adoption, we reclassified
noncontrolling interests in the amount of $248,224 from Minority Interest in
Net Assets of Subsidiaries to Equity in the December 31, 2008 balance sheet.

Other Accounting Changes

In June 2009,
the FASB issued the following standards:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SFAS No.
 167, Amendments to FASB Interpretation No. 46(R), Consolidation of Variable
 Interest Entities (ASC Topic 810-10). This updated guidance requires an
 analysis to determine whether a variable interest gives the entity a
 controlling financial interest in a variable interest entity. It also
 requires an ongoing reassessment and eliminates the quantitative approach
 previously required for determining whether an entity is the primary
 beneficiary. This update is effective for our fiscal year beginning January
 1, 2010 and we are currently evaluating the impact of adopting this update on
 our consolidated financial statements.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | SFAS No.
 166, Accounting for Transfers of Financial Assets, (ASC Topic 810). This
 updated guidance removed the concept of a qualifying special-purpose entity
 and removed the exception from applying consolidation guidance to these
 entities. This update also clarified the requirements for isolation and
 limitations on portions of financial assets that are eligible for sale
 accounting. ASC Topic 810 is effective for our fiscal year beginning on
 January 1, 2010. We are currently evaluating the impact of adopting this
 update on our consolidated financial statements.                                                                  

In May 2009,
the FASB issued SFAS No. 165, Subsequent Events (ASC Topic 855). This
guidance is intended to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. It requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting this date, that is, whether this date represents
the date the financial statements were issued or were available to be issued.
This guidance was effective for our second quarter ended June 30, 2009.

- 11 -

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NOTE 4  INVENTORIES

Inventories
consisted of the following:

|                                  |  |                    |           |                   |   |           | 
|--------------------------------- |  | ------------------ | --------- | ----------------- | - | --------- | 
|                                  |  | September 30, 2009 |           | December 31, 2008 |  
|                                  |  |                    |           |                   |  
|                                  |  |                    |           |                   |  
|Raw
 materials                    |  | $                  | 1,428,959 |                   | $ | 1,061,465 | 
|                                  |  |                    |           |                   |   |           | 
|Work-in-process                   |  |                    | 1,660,370 |                   |   | 2,003,825 | 
|                                  |  |                    |           |                   |   |           | 
|Finished
 goods                   |  |                    | 544,231   |                   |   | 1,370,150 | 
|                                  |  |                    |           |                   |   |           | 
|Total
 Inventories                |  |                    | 3,633,560 |                   |   | 4,435,440 | 
|                                  |  |                    |           |                   |   |           | 
|Less:
 Provision for obsolescence |  |                    | 148,335   |                   |   | 147,978   | 
|                                  |  |                    |           |                   |   |           | 
|Net Inventories                   |  | $                  | 3,485,225 |                   | $ | 4,287,462 | 
|                                  |  |                    |           |                   |   |           | 

NOTE 5  PROPERTY, PLANT AND EQUIPMENT, NET

Property and
equipment consisted of the following:

|                               |  |                    |            |                   |   |            | 
|------------------------------ |  | ------------------ | ---------- | ----------------- | - | ---------- | 
|                               |  | September 30, 2009 |            | December 31, 2008 |  
|                               |  |                    |            |                   |  
|                               |  |                    |            |                   |   |            | 
|Buildings                      |  | $                  | 5,798,558  |                   | $ | 6,130,852  | 
|Machinery                      |  |                    | 5,766,820  |                   |   | 5,724,217  | 
|Other
 equipment               |  |                    | 276,149    |                   |   | 477,315    | 
|Vehicles                       |  |                    | 540,968    |                   |   | 445,166    | 
|                               |  |                    |            |                   |   |            | 
|                               |  |                    | 12,382,495 |                   |   | 12,777,550 | 
|                               |  |                    |            |                   |   |            | 
|Less
 accumulated depreciation |  |                    | 5,761,407  |                   |   | 5,341,933  | 
|                               |  |                    |            |                   |   |            | 
|                               |  |                    | 6,621,088  |                   |   | 7,435,617  | 
|                               |  |                    |            |                   |   |            | 
|Construction
 in progress      |  |                    | 724,075    |                   |   | 146,047    | 
|                               |  |                    |            |                   |   |            | 
|                               |  | $                  | 7,345,163  |                   | $ | 7,581,664  | 
|                               |  |                    |            |                   |   |            | 

- 12 -

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

|                 |  |               | 
|---------------- |  | ------------- | 
|Asset            |  | Life
 (years)
|                 |  |              
|Buildings        |  | 30 - 50       | 
|Machinery        |  | 3 - 20        | 
|Other
 equipment |  | 3 - 10        | 
|Vehicles         |  | 3 - 10        | 

Depreciation
and amortization expense was $542,040 and $619,402 for the nine months ended
September 30, 2009 and 2008, respectively.

NOTE 6  INTANGIBLE ASSETS

At September
30, 2009 the Companys intangible assets mainly consist of land use rights and
are amortized using the straight-line method over the remainder of their
50-year life.

|                                  |  |                    |           |                   |   |         | 
|--------------------------------- |  | ------------------ | --------- | ----------------- | - | ------- | 
|                                  |  | September 30, 2009 |           | December 31, 2008 |  
|                                  |  |                    |           |                   |  
|                                  |  |                    |           |                   |   |         | 
|Land use
 right used for CIP      |  | $                  | 739,205   |                   | $ | 737,415 | 
|land use right
 used for property |  |                    | 582,443   |                   |   |        | 
|                                  |  |                    |           |                   |   |         | 
|                                  |  |                    | 1,321,648 |                   |   | 737,415 | 
|                                  |  |                    |           |                   |   |         | 
|Less
 accumulated amortization    |  |                    | 186,951   |                   |   | 71,456  | 
|                                  |  |                    |           |                   |   |         | 
|                                  |  | $                  | 1,134,697 |                   | $ | 665,959 | 
|                                  |  |                    |           |                   |   |         | 

NOTE 7  RELATED PARTY TRANSACTIONS

Receivables
from related parties as of September 30 2009 mainly consist of receivables from
Kun Ming Dianjiao Nutritional Supplements Co., Ltd, which is under common
control with the Company and accounts due from officers for daily purchases,
amounting to $126,953 and $37,091, respectively. These amounts are due on
demand and do not accrue interest.

During 2007,
the Company entered into a loan agreement with a bank which is secured by
shares of the Company owned by the Companys principal shareholder. See Note 8.

- 13 -

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NOTE 8  NOTES PAYABLE

The Companys
notes payable consist of short-term debt that is payable to banks, governmental
financial bureaus, municipalities and a company. The following schedule
summarizes the Companys debt obligations and respective balances at September
30, 2009 and December 31, 2008:

|                                                                                                                              |  |                    |           |                   |   |           | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ----------------- | - | --------- | 
|                                                                                                                              |  | September 30, 2009 |           | December 31, 2008 |  
|                                                                                                                              |  |                    |           |                   |  
|Short-term
 note payable to a municipality, interest at 1.8%, due on demand, unsecured                                        |  | $                  | 73,124    |                   | $ | 72,948    | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term
 note payable to a finance bureau, interest at 4.5%, due on demand, unsecured                                      |  |                    | 75,365    |                   |   | 75,182    | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term
 note payable to a bank, interest at 5.31%, matures April 2010, secured by
 property (note a)                      |  |                    | 3,656,254 |                   |   |          | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term
 note payable to a bank, interest at 7.47%, matured April 2009, secured by
 property (note a)                      |  |                    |          |                   |   | 3,647,399 | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term
 note payable to a bank secured by insurance company, interest at
 approximately 5.31%, matures within four months |  |                    | 1,321,329 |                   |   |          | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term
 note payable to a government development zone interest at 2.43%, due on
 demand, secured by property              |  |                    |          |                   |   | 218,844   | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term
 note payable to a bank, interest at 7.72%, matures August 2009, secured by
 shareholder                           |  |                    |          |                   |   | 5,835,838 | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Discount
 bills with recourse, matures within six months                                                                      |  |                    | 210,971   |                   |   |          | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Total
 short-term notes payable                                                                                               |  | $                  | 5,337,043 |                   | $ | 9,850,211 | 
|                                                                                                                              |  |                    |           |                   |   |           | 

- 14 -

---



|                                                                                                                                       |  |                    |            |                   |   |           | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- | - | --------- | 
|                                                                                                                                       |  | September 30, 2009 |            | December 31, 2008 |  
|                                                                                                                                       |  |                    |            |                   |  
|Long-term
 note payable to a bank, interest at 5.4%, matures March 2010, secured by
 property, equipment and land use right            |  |                    | 1,462,501  |                   |   | 1,458,959 | 
|Long-term
 note payable to a bank, interest at 5.84%, matures before March 2010, secured
 by property and land use right               |  |                    | 1,462,501  |                   |   | 2,917,919 | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Long-term
 note payable to a bank, interest at 5.4%, matures before June 2010, secured
 by the Companys shares in Shenghuo (note b)   |  |                    | 877,502    |                   |   |          | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Long-term
 note payable to a bank, interest at 5.4%, matures before August 2011, secured
 by the Companys shares in Shenghuo (note b) |  |                    | 6,435,006  |                   |   |          | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Total
 long-term notes payable                                                                                                         |  |                    | 10,237,510 |                   |   | 4,376,878 | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Less current
 maturities of long- term notes payable                                                                                   |  |                    | 3,802,504  |                   |   | 3,245,685 | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Long-term
 notes payable, net of current portion                                                                                       |  | $                  | 6,435,006  |                   | $ | 1,131,193 | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Past due
 notes payable (note c)                                                                                                       |  | $                  | 292,500    |                   | $ | 294,026   | 
|                                                                                                                                       |  |                    |            |                   |   |           | 

(a) In April
2009, a note payable with an interest rate of 7.47% and a balance of $3,647,399
as of December 31, 2008 was refinanced. The new note payable is due in one year
and has an interest rate of 5.31%.

(b) On August
24, 2009, the Company drew down $7,312,508(approximately 50 million RMB) from
the bank facility with Shuang Long Branch of Agricultural Bank of China
executed on August 6 2009, This proportion of the loan has a term of two years,
with repayment of $438,751 before December 2009, repayment of $438,751 before
June 2010, repayment of $585,001 before December 2010, repayment of $731,251
before April 2011 and repayment of the remainder before August 2011. This
drawdown of the loan bears interest at a rate of 5.40% which is due quarterly.
The loan was for working capital and is secured by the Companys 94.95% shares
in Shenghuo.

(c) Of the aggregate amount $1,462,501
borrowed from Agricultural Bank of China, $292,500 matured in May 2009, which
was past due as of September 30. 2009, However, based on the Companys good
historical credit record, the Company reached an oral agreement with the lender
to extend the maturity date for this portion of the loan to March 2010. Therefore
the Company did not repay the amount of the loan originally due in May 2009.

(d) All long term notes payable
mature during the years ended September 30, 2011 and December 31, 2010,
respectively.

- 15 -

---



NOTE 9  STOCKHOLDERS EQUITY

Statutory Reserves
- According to the Articles
of Association, the Company is required to transfer a certain portion of its
net profits to Statutory Reserves, as determined under PRC accounting
regulations, from net income to both the surplus reserve fund. 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,
2009 and December 31, 2008.

Warrants - The following
summarizes the outstanding warrants as of September 30, 2009:

|                  |  |                 |     |                       |  |                                                        |  |                     |  |  |  |         | 
|----------------- |  | --------------- | --- | --------------------- |  | ------------------------------------------------------ |  | ------------------- |  |  |  | ------- | 
|Exercisable
 Date |  | Exercise
 Price |     | Warrants
 Outstanding |  | Weighted-Average
 Remaining
 Contractual
 Life (Years) |  | Number
 Exercisable | 
|                  |  |                 |     |                       |  |                                                        |  |                     | 
|June 2007         |  | $               | 3.5 |                       |  | 6,000                                                  |  | 3                   |  |  |  | 6,000   | 
|June 2007         |  | $               | 4.2 |                       |  | 40,000                                                 |  | 2.8                 |  |  |  | 40,000  | 
|June 2007         |  | $               | 3.5 |                       |  | 200,000                                                |  | 1.5                 |  |  |  | 200,000 | 
|                 
|                  |  |                 |     |                       |  |                                                        |  |                     |  |  |  |         | 
|                  |  |                 |     |                       |  | 246,000                                                |  |                     |  |  |  | 246,000 | 
|                  |  |                 |     |                       |  |                                                        |  |                     |  |  |  |         | 

Exercise
prices are significantly higher than the Companys current stock price which is
approximately $1. Management believes that it is unlikely that these warrants
will be exercised.

NOTE 10  INCOME AND OTHER TAXES

The Company
accounts for its income taxes in accordance with SFAS No. 109, which requires
recognition of deferred tax assets and liabilities and their respective tax
bases and any tax credit carry forwards available. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company has established a valuation allowance for all
deferred income tax assets due to the uncertainty of their realization. Income
taxes payable are included in taxes and related payables on the accompanying
balance sheets. Income taxes are not required to be paid to the PRC until after
the end of the Companys fiscal year.

The principle
of group consolidation for tax purposes does not exist in China. Each legal
entity files its own individual tax return in the PRC. This means that the
Company pays tax on all profits realized by each subsidiary, and that losses
can only be carried forward and utilized in the same legal entity.

The Company is
not subject to any income taxes in the United States, but was subject to
corporate income tax in the PRC at a combined rate of 25% for 2008. However,
because Shenghuo is located in a special region, it has a 15% corporate income
tax rate and has been granted a tax holiday of two years tax-exemption
beginning from the year of 2007 and followed by 50% reduction on the applicable
income tax rate for three years.

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 phase-in income tax rate for
Shenghuo is 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011, 25% for
2012 and after, and it will continue to enjoy the tax holiday mentioned above.

- 16 -

---



Medicine,
Import/Export, Cosmetics, Beisheng and Shilin are taxed at the new 25% rate
effective January 1, 2008 for the year of 2009.

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

As of September 30, 2009, a deferred tax asset amount to $0.4 million was
recognized by the Company, mainly due to a temporary difference in accrued
expenes amounting to approximately $4 million, which Management believes will be
deductible in future years.

Three of the Companys subsidiaries in PRC, including
Medicine, Import/Export and Cosmetic, have an aggregate of approximate $4.6
    million of tax loss carry forwards available. These tax loss carry forwards,
    if unused by the offset of future income of the individual subsidiary, begin
    to expire in 2011. The table below summarizes the expiration dates
of the tax loss carry forwards.

|                                   |  |                
|---------------------------------- |  | ---------------
|Tax loss carry forwards in million |  | Expiration Year
|                                   |  |                
|$   0.7                            |  | 2011           
|0.5                                |  | 2012           
|0.3                                |  | 2013           
|1.8                                |  | 2014           
|1.3                                |  | 2015           
|$   4.6                            |  |                

Management believes that it is unlikely that the Company will
    be able to deduct these amounts in future years, therefore no deferred tax
assets were recognized with respect to the tax loss of these subsidiaries.

The Company
had no undistributed earnings of the Companys foreign subsidiaries since
acquisition at June 30, 2009. The investment in subsidiaries of approximately
$8.73 million is considered to be indefinitely reinvested and, accordingly, no
U.S. federal and state income taxes have been provided thereon. The Company has
U.S. net operating loss carry forwards of approximately $2.86 million that, if
unused begin to expire in 2026. Determination of the amount of unrecognized
deferred U.S. income tax liability is not practical because of the complexities
associated with its hypothetical calculation; however, unrecognized foreign tax
credits may be available to reduce a portion of the U.S. tax liability.

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

NOTE 11  COMMITMENTS AND CONTINGENCIES

Operating Lease
Commitment
Future minimum lease payments under non-cancellable operating leases as of
September 30, 2009 are as follows:

|                               |  |                    |            | 
|------------------------------ |  | ------------------ | ---------- | 
|                               |  | September 30, 2009 |           
|                               |  |                    |           
|                              
|Within 1
 year                 |  | $                  | 263,250    | 
|Within 2
 years                |  |                    | 308,880    | 
|Within 3
 years                |  |                    | 429,975    | 
|Within 4
 years                |  |                    | 623,026    | 
|Within 5
 years and thereafter |  |                    | 14,040,014 | 
|                               |  |                    |            | 
|                               |  | $                  | 15,665,145 | 
|                               |  |                    |            | 

Capital CommitmentCapital commitments under a construction
contract entered into to construct a new building as of September 30, 2009 were
$6,213,810, which will be settled within one year.

Class Action
LawsuitsIn
2008, putative class action lawsuits were asserted against the Company and
certain other parties in the United States District Court for the Southern
District of New York (the Court) by several public shareholders. On February
12, 2009, an amended complaint was served on the Company by new lead counsel
for the class, consolidating the

- 17 -

---



putative class
actions and bearing the caption Beni Varghese, Individually and on Behalf of
All Other Similarly Situated v. China Shenghuo Pharmaceutical Holdings, Inc.,
et al., Index No. 1:08 CIV. 7422. The defendants include the Company, the
Companys controlling shareholders, Lans International Medicine Investment
Co., Limited, the Companys chief executive officer, Gui Hua Lan, the Companys
former chief financial officer, Qiong Hua Gao, and the Companys former
independent registered public accounting firm, Hansen, Barnett & Maxwell,
P.C. During the second quarter of 2009, the Company and the accounting firm
filed motions to dismiss the complaint and the plaintiffs filed a memorandum in
opposition to those motions. On August 31, 2009, the Company filed a reply
brief in further support of its motion, and no further information regarding
the progress of the lawsuit is available as of at the latest practical date of
the report.

The amended
consolidated complaint alleges that the Company failed to take adequate steps
to ensure its financial reporting comported with U.S. Generally Accepted
Accounting Principles (GAAP) and, as a result, the Company was required to
restate what are alleged to be materially false and misleading financials for
accounting periods during the alleged class period from August 2007 through
August 20, 2008. The amended consolidated complaint further alleges, among
other things, that certain of the Companys SEC filings and other public
statements contained false and misleading statements that 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, and Rule 10b-5 promulgated thereunder.

The Company
believes the allegations in the amended consolidated complaint are without
merit, and intends to vigorously defend the class action lawsuits. The Company
does not believe the outcome of this suit will have a material adverse effect
on the Company. However, the Company is unable at this time to predict the
outcome of this litigation or whether the Company will incur any liability
associated with the litigation, or to estimate the effect such outcome would
have on the financial condition, results of operations, or cash flows of the
Company based on the opinion of the counsel.

Other
litigation has arisen in the normal course of the Companys business, none of
which is deemed to be material.

Dependence on a
single raw material  The primary ingredient in
all of the Companys products is Sanchi, an herb grown in two provinces of the
PRC. The Company relies on its in-house purchasing department to acquire
sufficient Sanchi at reasonable prices and may on occasion make advance
payments to suppliers that include provisions for setting the purchase price
and delivery date. However, the Company is not reliant on a single source or
supplier for Sanchi. With the development of its new investment in Shilin, the
Company can reduce its reliance on suppliers and self-provide Sanchi with lower
cost.

NOTE 12  SUBSEQUENT EVENTS

As of November
16 2009, no significant subsequent events have occurred.

- 18 -

---



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

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 93% of our revenues;                                                                            
| |   |                                                                                                                                       
| |  | our reliance
 on limited suppliers for Sanchi, a scarce plant that is the primary
 ingredient in almost all of our products;          
| |   |                                                                                                                                       
| |  | replacement
 of our primary product by other medicines or the removal of our primary
 product from Chinas Insurance Catalogue;       
| |   |                                                                                                                                       
| |  | our ability
 to raise additional capital needed for working capital, future operations and
 research and development;                 
| |   |                                                                                                                                       
| |  | our ability
 to collect on advances to sales representatives;                                                                         
| |   |                                                                                                                                       
| |  | our reliance
 on our three largest customers for a significant percentage of our sales;                                               
| |   |                                                                                                                                       
| |  | our ability
 to effectively grow management;                                                                                          
| |   |                                                                                                                                       
| |  | our
 dependence on key personnel;                                                                                                     
| |   |                                                                                                                                       
| |  | our ability
 to establish and maintain a strong brand;                                                                                
| |   |                                                                                                                                       
| |  | the ability
 of our products to effectively compete with those of our competitors;                                                    
| |   |                                                                                                                                       
| |  | continued
 receipt and maintenance of regulatory approvals, certificates, permits and
 licenses required to conduct business in China;
| |   |                                                                                                                                       
| |  | our ability
 to collect on trade receivables;                                                                                         
| |   |                                                                                                                                       
| |  | our ability
 to develop and market new products, including those with high profit margins;                                            
| |   |                                                                                                                                       
| |  | subjection
 of additional products to price controls by the Chinese government;                                                       
| |   |                                                                                                                                       
| |  | our ability
 to obtain all necessary government certifications and/or licenses to conduct
 our business;                              
| |   |                                                                                                                                       
| |  | protection
 of our intellectual property rights;                                                                                      
| |   |                                                                                                                                       
| |  | loss of
 certain tax concessions;                                                                                                     

- 19 -

---



| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our lack of
 insurance to cover losses due to fire, casualty or theft;                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                            
| |  | changes in
 the laws of the PRC that affect our operations;                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                            
| |  | changes in
 the foreign currency exchange rate between U.S. dollars and RMB;                                                                                                                                                               
| |   |                                                                                                                                                                                                                                            
| |  | cost of
 complying with current and future governmental regulations and the impact of
 any changes in the regulations on our operations;                                                                                                   
| |   |                                                                                                                                                                                                                                            
| |  | the effect
 on our operations of costs associated with the Restatement, including
 litigation costs;                                                                                                                                       
| |   |                                                                                                                                                                                                                                            
| |  | a downturn
 in the economy of the PRC or inflation in the PRC;                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                            
| |  | our ability
 to establish and maintain adequate management, legal and financial controls,
 including effective internal controls over financial reporting;                                                                                 
| |   |                                                                                                                                                                                                                                            
| |  | volatility
 of the market for our common stock;                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                            
| |  | the
 possibility of substantial sales of our common stock;                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                            
| |  | influence of
 our principal stockholder;                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                            
| |  | cooperation
 of the minority shareholder of our principal operating subsidiary;                                                                                                                                                            
| |   |                                                                                                                                                                                                                                            
| |  | The pledge
 of the stock of our operating subsidiaries to secure the bank loan entered
 into in August 2009; 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-K for the year ended December 31, 2008 and subsequent reports on Form 8-K.

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

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

- 20 -

---



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, including
Yunnan Province in southwest China where we are located. Yunnan Province
accounts for 90% of the global production of Panax notoginseng. The main root
of Panax notoginseng is cylindrically shaped and is most commonly one-to-six
centimeters long and one-to-four centimeters in diameter. Panax notoginseng
saponins (PNS), the active ingredients in Panax notoginseng, are extracted from
the plant using high-tech equipment and in accord with Good Manufacturing
Practice (GMP) standards. Our main product, Xuesaitong Soft Capsules, accounted
for more than 93% of our sales for the nine months ended September 30, 2009.

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, as well as to improve existing products to enhance their
efficacy.

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

Xuesaitong
Soft Capsules, which have been listed in the National Insurance Catalogue and
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 (SFDA)
as a prescription drug and therefore must be sold to consumers through hospital
pharmacies and cannot be advertised, thus limiting the ability of the Company
to market the brand. We sell Xuesaitong
Soft Capsules to wholesale companies who resell them to hospital pharmacies.
Our three main customers are Yunnan Medicine Co., Ltd, Guangzhou Medicine
Co., Ltd and Beijing Ai Xin Wei Ye Medicine Co., Ltd. The three wholesale companies sales
account for 6.83%, 6.82% and 5.39% of our sales respectively for the nine months
ended September 30, 2009.

As of
September 30, 2009, our medicine marketing team maintains sales offices or
agents in approximately 31 provinces throughout China. The sales network covers
approximately 210 cities and is staffed by approximately 600 sales
representatives. We intend to grow our internal marketing and sales function
and increase our relationships with other national wholesale companies 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.

Our business
is capital intensive, and these research and development, marketing, sales
network expansion and cosmetic product expansion initiatives will require us to
expend significant cash resources, which could adversely affect our
profitability and liquidity. We do face certain challenges and risks, including
our relatively high debt ratio, which is one of our main risks. We also
regularly incur significant expenses in our efforts to maintain the continued listing
status of the Company on an exchange. We have encountered a shortage of working
capital and are exploring possible ways to address our short and long term cash
needs.

We believe
that among the most important economic or industry-wide factors relevant to our
growth in the short term are the 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 previously applied for the designation of Xuesaitong Soft Capsules as a
medicine with good quality worthy of high price, which designation we
received in February 2007. Currently, the Chinese government supports the
medical system in urban and rural communities, which we believe will lead to a
sustained increase in the sales of prescription medicines in the future.

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According to
data from the Southern Medicine Economy Research Institute, the pharmaceutical
industry in China grew about 27% on a year-over-year basis in 2008. This growth
was driven by a number of favorable factors including improving standards of
living from an increase in disposable income, an aging population, the
improving access and higher participation in the State Basic Medical Insurance
System, and the increase in government spending on public health care.

On January 21,
2009, the Chinese government announced a healthcare reform plan pursuant to
which the government would spend upward of RMB 850 billion over the next three
years to make medical services and products more affordable and accessible to
the entire population. We believe the successful implementation of the policies
outlined in the plan will have a significant impact on the domestic
pharmaceutical sector. There are five key tasks the healthcare reforms are
aiming to address: 1) expanding medical insurance coverage and increasing
participation rates, 2) initiating a national basic drug system, 3)
establishing an extensive public health system, 4) increasing the efficiency and
improving the quality of basic medical services, especially in the rural areas,
and 5) reforming state-owned hospitals.

Traditional
Chinese Medicine (TCM), including prescription and over-the-counter
pharmaceuticals, has been widely used in China for many years and is an
important part of the overall Chinese culture. The recently announced
healthcare reform plan contains measures and policies that we believe will help
support and promote the growth and development of the domestic TCM market. TCM
drug manufacturers are likely to benefit from this reform as we believe the
government will add more TCM-related drugs to the national medicine catalogue.
In addition, we expect the government will focus on disease prevention as it
rolls out the nationwide medical insurance coverage. The TCM market is a
vibrant and growing industry despite the challenging economic environment and
it will remain a part of mainstream medicine in China.

We hope to
stabilize the sales channel into hospitals and widen the reach of sales in
urban and rural communities at the same time. Large increases in medicine sales
at an average lower price will ensure the growth of general medicinal sales
over the next few years. Also, we are focusing our efforts on developing better
channels for selling our products to expand our revenue and to counter in
fierce market competition,. To that extend, we began to build relationships
with new high-quality sales agents and terminate our relationships with sales
agent with poor historical performances during 2009. We believe that this shift
will provide a sound foundation for our operation going forward.

Our 12 WaysTM
Chinese Traditional Medicine Beauty Salon Series (12 Ways) cosmetic products
are sold in a number of cities and provinces outside our local region. We have
opened a number of retail specialty counters to offer our cosmetic products at
pharmacies throughout Eastern China, eventually expanding our retail presence
across China. As of September 30, 2009, we have opened approximately 618 retail
specialty counters in more than 30 cities throughout China. In addition, we
opened a 12 Ways Chinese Herbal Beauty Salon in Kunming that will feature
approximately ten traditional Chinese medicine practitioners and beauticians
that provide a variety of services, including acupuncture, body massage, foot
massage and other services. All products used in the salon will be supplied by
us. Management hopes that the opening of this salon and the opening of retail
counters will allow us to increase our brand recognition and strengthen
marketing. Our ability to effectively open and operate new retail locations
depends on several factors, including, among others, our ability to identify
suitable counter locations, the availability of which is outside our control; our
ability to prepare counters for opening within budget; our ability to hire,
train and retain personnel; our ability to secure required governmental permits
and approvals; our ability to contain payroll costs; and our ability to
generate sufficient operating cash flows or secure adequate capital on
commercially reasonable terms to fund short term cash needs and our expansion
plans.

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
receive clinical approval without difficulty because of the uncertainty of test
results and clinical approvals. Over the last three years, the price of the
main raw material we use - Sanchi - has risen. We expect this trend to continue
and will likely increase our cost of product sold. In addition, our expected
increased expenses for research and development, marketing and sales may have a
short-term adverse affect on future profit levels and available cash resources.

Critical Accounting Policies and Estimates

The discussion
and analysis of our financial condition and results of operations are based
upon our condensed 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.

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Basis of Preparation
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 (RMB) and
the functional currency of the Parent is USD;
however, the condensed consolidated financial statements have been expressed
in United States Dollars (USD). The accompanying consolidated balance
sheets have been translated into USD at the exchange rates prevailing at each
balance sheet date. The consolidated statements of operations have been translated
using the weighted average exchange rates prevailing during the operating periods
of each statement.

Principles of
Consolidation The accompanying consolidated
financial statements present the operations of the Company and its majority
owned subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation.

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

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

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

Accounts and Notes
Receivable and Allowance for Doubtful Accounts
Trade receivables are carried at original invoiced amounts less an allowance
for doubtful accounts. An allowance for doubtful accounts receivable is
established by charges to operations for amounts required to maintain an
adequate allowance, based on the Managements review of credit risk of
customers and aging of the ending balance, 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 adequate and consistent with industry standards in the PRC based on the
products that are being sold. Deductions from the allowance are recorded when
specific accounts receivable are written off as uncollectible. For the three and nine
months ended September 30, 2009, accounts receivable amounting to $4,235,109, which
had aging of more than 2 years and for which full allowance had been provided,
were written off since they were deemed uncollectable after Management
had implemented every possible collection procedure.

Notes
receivable included with accounts receivable were $414,678 and $750,877 as of
September 30, 2009 and December 31, 2008, respectively. The notes represent
bank drafts that have been arranged with third-party financial institutions by
certain customers to settle their purchases from us. These bank drafts are
non-interest bearing and are collectible within six months. Such sales and purchasing
arrangements are consistent with industry practices in the PRC.

Other Receivables
 Other receivables are presented net of an estimated allowance for
doubtful accounts. Other receivables include sales representative advances for
market development, employee advances and sales office advances for facilities
of sales activities. As time passes from when advances are made to sales
representatives for travel and related expenses, the Company will provide
allowance for these older receivables based on review of collectability risk
from each particular sales representative and aging of the ending balance.
For the three and nine months ended September 30, 2009, other receivables amounting
to $1,458,698, which had aging of more than 2 years and for which full allowance
had been provided, were written off since they were deemed uncollectible after
Management had implemented every possible collection procedure.

- 23 -

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Inventories
 Inventories consist principally of pharmaceutical products and are stated
at the lower of cost or net realizable value. Cost is determined on a
weighted-average cost method. When market value of the inventory products is
lower than the weighted average cost, inventory is reduced to its net realizable
value. The Company also holds inventory on consignment.

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

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

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

Accrued Expenses and
Other Payables Accrued expenses and other
payables primarily consist of accrued commission expense, accrued legal expense
and accrued payroll expense, etc.

Deposits
Deposits consist of funds paid in advance by the sales representatives to
obtain the Companys products to sell. The Company retains these deposits
during the time the sales representatives provide services to the Company. When
the Company receives full payment from the customer or sales representatives
terminate sales services, the deposits are returned to the sales
representatives. The Company records deposits from sales representatives when
payments are received.

Advances to
Suppliers and Advances from Customers The
Company will often make advanced payments to suppliers for materials, or receive
advance payments from customers in the normal course of business. Advances to
suppliers were $271,132 and $446,168 as of September 30, 2009 and December 31,
2008, respectively. Advances to suppliers are recorded when payment is made by
the Company and relieved against inventory when goods are received. The advance
payments to suppliers may include provisions that set the purchase price and
delivery date of raw materials. Advances from customers were $1,304,861 and
$222,609 as of September 30, 2009 and December 31, 2008, respectively and are
recognized in revenue when delivery has occurred.

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

In general,
the Company does not allow wholesale companies to return products unless there
    are defects in manufacturing or workmanship. Sales returns need to go through
    a strict process and have

- 24 -

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to be
authorized by Management. Sales
returns are netted against sales when incurred. Historically, the amounts of
    actual returns were immaterial.

Cost of Sales
 The cost of sales are the direct expenses incurred in producing the
pharmaceuticals and cosmetics, which include materials, direct labor, handling
charges, and a portion of overhead expenses associated with the manufacture of
products.

Selling Expense
Selling expense mainly consists of sales commission, salesmens salaries,
travelling expense, advertising and shipping and handling cost, etc. All
advertising costs are changed to selling expenses when incurred or when advertising first takes place.

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

Basic and Diluted
Earnings per Share The computation of basic and
diluted earnings per share is based on the weighted-average number of shares
outstanding during the periods presented. Potentially dilutive securities for
the three and nine months ended September 30, 2009 and 2008 include 246,000
warrants that were anti-dilutive due to losses of the Company.

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

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

Credit Risk
 The carrying amounts of accounts receivable and sales representative
advances included in the balance sheets represent the Companys major exposure
to credit risk in relation to its financial assets. No other financial assets
carry a significant exposure to credit risk. The Company performs ongoing
credit evaluations of each customers financial condition. It maintains an
allowance for doubtful accounts. Management believes the Companys current
allowance is adequate.

The Company
has its cash in bank deposits and money market funds primarily in the PRC.
Historically, deposits in Chinese banks have been secure due to the state
policy on protecting depositors interests. China promulgated a new Bankruptcy
Law in August 2006, which came into effect on June 1, 2007, which, together
with more specific, complementary regulations to be issued in the future, shall
provide the implementation for the bankruptcy of Chinese banks. In the event
that bankruptcy laws are enacted for banks in the PRC, the Companys deposits
may be at a higher risk of loss. The Company has maintained its funds in
quality financial institutions to mitigate the risk.

Concentration
 For the nine months ended September 30, 2009, the Company had
concentrations of purchases from one vendor accounting for 29.86% of total purchases.

Business Condition
and Liquidity Although the Company has had a
history prior to 2008 of positive net income, working capital and retained
earnings, the Company has incurred a net loss for the nine months ended
September 30, 2009 of $6,768,971 and had net cash provided by operating
activities of $878,694 and proceeds from financing activities of $1,130,538. In
addition, the Company had an accumulated deficit of $7,372,543 as of September
30, 2009, primarily due to the losses in the nine months ended September 30,
2009 and the loss of $4.6 million for fiscal 2008. As discussed in Note 8, the
Company has $9,139,547in short term loans that mature in the next twelve
months.

On August 6,
2009, the Company entered into a one-year term loan facility with the Yunnan
Shuang Long Branch of Agricultural Bank of China (Agricultural Bank)
 amounting to RMB 110 million (approximately $16 million) based on the Agricultural
Banks assessment of the Companys operations and unencumbered assets.
As of September 30, 2009, the Company has drawn RMB 50 million (approximately
$7 million) under the term loan and the remaining unused loan facility was RMB
60 million (approximately
$9 million). In addition, in July, 2009, the Company signed a factoring agreement
with Heping Branch of China Construction Bank (the Heping
Bank).
Heping Bank has agreed to act as an

- 25 -

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additional
source of capital for the Company based on the Companys accounts receivable
balance from time to time. Under this factoring agreement the Company has drawn
bank loans amounting to approximately RMB 9 million.

The Company
has expended significant efforts to expand its revenues by assisting its sales
representatives and increasing its marketing efforts during the nine months
ended September 30, 2009 and during fiscal 2008. The net loss for the nine
months ended September 30, 2009 was caused primarily by increased selling expenses,
legal, auditing, sales representative assistance and marketing expenses. The
increase in the selling expense in 2009 was mainly due to the fact that
beginning in March 2009, in order to develop a better channel for selling our
products and to increase our revenue in the fierce industry competition, we
began to build relationships with high quality agents and terminated our
relationships with agents with poor historical performance. Moreover, we
believe it is in our -long-term best interest to grow our operations through
the over-the-counter (OTC) market, which will produce higher profit
margins, Accordingly we began developing the OTC market in 2009.We believes that
after expending funds to develop new agents in 2009, we will be able to decrease
selling and sales representative assistance expenses in the near future as the
daily operations between new agents and the Company becomes more efficient. In
addition, the Company may be forced to give significant attention to the class
action lawsuits discussed above.

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

Recently Enacted
Accounting Standards In June 2009, the FASB
issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting
Principles (ASC Topic 105) which establishes the FASB Accounting Standards
Codification (the Codification or ASC) as the official
single source of authoritative U.S. GAAP. All
existing accounting standards are superseded. All other accounting guidance not
included in the Codification will be considered non-authoritative. The
Codification also includes all relevant Securities and Exchange Commission (SEC)
guidance organized using the same topical structure in separate sections within
the Codification.

Following the
Codification, the Board will not issue new standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will
issue Accounting Standards Updates (ASU) which will serve to update the
Codification, provide background information about the guidance and provide the
basis for conclusions on the changes to the Codification.

The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, we are providing the Codification
cross-reference alongside the references to the standards issued and adopted
prior to the adoption of the Codification.

Fair Value Accounting

In 2006, the
FASB issued SFAS No. 157, Fair Value Measurements (ASC Topic 820)
which defines fair value, establishes a market-based framework or hierarchy for
measuring fair value and expands disclosures about fair value measurements.
This guidance is applicable whenever another accounting pronouncement requires
or permits assets and liabilities to be measured at fair value. It does not
expand or require any new fair value measures; however the application of this
statement may change current practice. We adopted this guidance for financial
assets and liabilities effective January 1, 2008 and for non financial assets
and liabilities effective January 1, 2009. The adoption did not have a material
effect on our financial condition or results of operations.

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In April 2009, the FASB issued FAS 107-1
 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments
 (ASC Topic 320-10-65). This update requires fair value disclosures for
 financial instruments that are not currently reflected on the balance sheet
 at fair value on a quarterly basis. We adopted these updates effective June
 30, 2009 and the adoption did not have a material effect on our financial condition
 or results of operations.

Business Combinations and Noncontrolling
Interests

In 2007, the
FASB issued SFAS No. 141 (revised 2007), Business Combinations (ASC
Topic 805). This guidance requires the acquiring entity in a business combination
to recognize the full fair value of assets acquired and liabilities assumed in
the transaction (whether a full or partial acquisition); establishes the
acquisition date fair value as the measurement objective for all assets
acquired and liabilities assumed; requires expensing of most transaction and
restructuring costs; and requires the acquirer to disclose the information
necessary to evaluate and understand the nature and financial effect of the
business combination. We adopted this guidance effective January 1, 2009 and
will apply it to all business combinations prospectively from that date. The
impact of ASC 805 on our consolidated financial statements will depend upon the
nature, terms and size of the acquisitions we consummate in the future.

In April 2009, the FASB issued
Staff Position No. 141(R)-1, Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies (ASC Topic
805-20). This updated guidance amended the accounting treatment for assets and
liabilities arising from contingencies in a business combination and requires
that pre-acquisition contingencies be recognized at fair value, if fair value
can be reasonably determined. If fair value cannot be reasonably determined,
measurement should be based on the best estimate in accordance with SFAS No.
5,
Accounting for Contingencies (ASC Topic 405). This updated guidance
was effective January 1, 2009 and the adoption did not have a material effect
on our financial condition or results of operations.

- 27 -

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In 2007, the
FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of Accounting Research Bulletin No. 51, (ASC Topic
810-10-65). This guidance requires companies to present noncontrolling
(minority) interests as equity (as opposed to a liability) and provided
guidance on the accounting for transactions between an entity and
noncontrolling interests. In addition, it requires companies to report a
consolidated net income (loss) measure that includes the amount attributable to
such noncontrolling interests. We adopted this guidance effective January 1,
2009, and have applied it to noncontrolling interests prospectively from that
date. The presentation and disclosure requirements we applied retrospectively
for all periods presented. As a result of this adoption, we reclassified
noncontrolling interests in the amount of $248,224 from Minority Interest in
Net Assets of Subsidiaries to Equity in the December 31, 2008 balance sheet.

Other Accounting
Changes

In June 2009,
the FASB issued the following standards:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SFAS No.
 167, Amendments to FASB Interpretation No. 46(R), Consolidation of Variable
 Interest Entities (ASC Topic 810-10). This updated guidance requires an
 analysis to determine whether a variable interest gives the entity a
 controlling financial interest in a variable interest entity. It also
 requires an ongoing reassessment and eliminates the quantitative approach
 previously required for determining whether an entity is the primary
 beneficiary. This update is effective for our fiscal year beginning January
 1, 2010 and we are currently evaluating the impact of adopting this update on
 our consolidated financial statements.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | SFAS No.
 166, Accounting for Transfers of Financial Assets, (ASC Topic 810). This
 updated guidance removed the concept of a qualifying special-purpose entity
 and removed the exception from applying consolidation guidance to these
 entities. This update also clarified the requirements for isolation and
 limitations on portions of financial assets that are eligible for sale
 accounting. ASC Topic 810 is effective for our fiscal year beginning on
 January 1, 2010. We are currently evaluating the impact of adopting this
 update on our consolidated financial statements.                                                                  

In May 2009,
the FASB issued SFAS No. 165, Subsequent Events (ASC Topic 855). This
guidance is intended to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. It requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting this date, that is, whether this date represents
the date the financial statements were issued or were available to be issued.
This guidance was effective for our second quarter ended June 30, 2009.

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Results of Operations

Three
Months Ended September 30, 2009 and 2008

The following
table sets forth our statements of operations for the three months ended
September 30, 2009 and 2008 in U.S. dollars (unaudited):

|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | --------- | - | ---------- | - | ------------ | --------- | - |  | ----- | --
|                                                                                |  | Three months ended September 30, |            |           |   |            |  
|                                                                                |  |                                  |            |           |   |            |  
|                                                                                |  | 2009                             |            | 2008      |   | Change ($) |   | Variance (%) |          
|                                                                                |  |                                  |            |           |   |            |   |              |          
|                                                                                |  | Unaudited                        |            | Unaudited |   |            |   |              |           |   | 
|Sales                                                                           |  | $                                | 10,558,218 |           | $ | 7,281,384  |   |              | 3,276,834 |   |  | 45    | % 
|Cost of Sales                                                                   |  |                                  | 2,947,511  |           |   | 1,973,865  |   |              | 973,646   |   |  | 49    | % 
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|Gross Margin                                                                    |  |                                  | 7,610,707  |           |   | 5,307,519  |   |              | 2,303,188 |   |  | 43    | % 
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|Operating Expenses:                                                             |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|Selling expenses                                                                |  |                                  | 6,988,017  |           |   | 2,989,486  |   |              | 3,998,531 |   |  | 134   | % 
|General and administrative expenses                                             |  |                                  | 1,063,981  |           |   | 1,819,573  |   |              | (755,592  | ) |  | (42   | %)
|Research and development expenses                                               |  |                                  | 10,534     |           |   | 66,052     |   |              | (55,518   | ) |  | (84   | %)
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|                                                                                |  |                                  | 8,062,532  |           |   | 4,875,111  |   |              | 3,187,421 |   |  | 65    | % 
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|(Loss) Income from Operations                                                   |  |                                  | (451,825   | )         |   | 432,408    |   |              | (884,233  | ) |  | (204  | %)
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|Other Income (Expense):                                                         |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|Interest income                                                                 |  |                                  | 1,349      |           |   | 588        |   |              | 761       |   |  | 129   | % 
|Income from research and development
 activities                                |  |                                  | 49,723     |           |   | 5,745      |   |              | 43,978    |   |  | 766   | % 
|Interest expense                                                                |  |                                  | (184,228   | )         |   | (272,002   | ) |              | 87,774    |   |  | (32   | %)
|Non-operating expenses                                                          |  |                                  | (2,847     | )         |   | (330       | ) |              | (2,517    | ) |  | 763   | % 
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|                                                                                |  |                                  | (136,003   | )         |   | (265,999   | ) |              | 129,996   |   |  | (49   | %)
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|(Loss) Income Before Income Tax (expense)
 benefit and non-controlling interest |  |                                  | (587,828   | )         |   | 166,409    |   |              | (754,237  | ) |  | (453  | %)
|Income tax (expense) benefit                                                    |  |                                  | 401,012    |           |   | (4,471     | ) |              | 405,483   |   |  | (9096 | %)
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|Net (Loss) Income                                                               |  |                                  | (186,816   | )         |   | 161,938    |   |              | (348,754  | ) |  | (215  | %)
|Net loss (income)
     attributable to noncontrolling interest                  |  |                                  | 154,892    |           |   | (7,652     | ) |              | 162,544   |   |  | (2124 | %)
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|Net (Loss) Income attributable to
 shareholders                                 |  | $                                | (31,924    | )         | $ | 154,286    |   |              | (186,210  | ) |  | (121  | %)
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|Basic and
       diluted earnings (loss) per share                              |  | $                                | 0          |           | $ | 0.01       |   |              | (0.01     | ) |  | (100  | %)
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   
|Weighted-average number of shares
 outstanding-basic and diluted                |  |                                  | 19,679,400 |           |   | 19,679,400 |   |              |          |   |  |      |   
|                                                                                |  |                                  |            |           |   |            |   |              |           |   |  |       |   

Sales:Sales
for the three months ended September 30, 2009 was approximately $10.56 million,
an increase of approximately $3.28 million, or 45.00 %, from $7.28 million for
the three months ended September 30, 2008. The increase in sales was primarily
due to the Companys implementation of a new sales policy that has stimulated
the enthusiasm of sales representatives, resulted in the increased sales of
products.

- 29 -

---



Cost of sales:Our
cost of sales for the three months ended September 30, 2009 was approximately
$2.94 million, an increase of $0.97 million, or 49.29%, from approximately
$1.97 million for the three months ended September 30, 2008. The increase in
cost of sales was primarily due to the increase of sales.

Gross margin:Our
gross margin for the three months ended September 30, 2009 was approximately
$7.61 million as compared with approximately $5.30 million for the three months
ended September 30, 2008, an increase of $2.31 million, or 43.41%. Gross margin
as a percentage of revenues was approximately 72.09% for the three months ended
September 30, 2009, a decrease of 0.80 % from 72.89% for the three months ended
September 30, 2008. The decrease in gross margin percentage was primarily due
to the increasing price of raw material.

Selling expense: Selling
expenses were approximately $6.99 million for the three months ended September
30, 2009, an increase of $4 million, or 133.79%, from $2.99 million for the
three months ended September 30, 2008. The primary reason for the increase in
selling expenses was the change in our marketing policy. Our main product has
been sold to patients through hospitals, which customer relationships were
cultivated by sales representatives. However, we believe it is in our long-term
best interest to grow our operations through the over-the-counter (OTC)
market, which will produce higher profit margins. Accordingly, we began
developing the OTC market in 2009 and as of September 30, 2009, revenue from
the OTC market comprises approximately 10% of the total sales revenue for
Medicine. As of September 30, 2009, we estimate that our expenditures for
developing the Companys presence in the OTC market through such in 2009 are
approximately RMB 10 million and that we will have to dedicate significant
funds in the future to continue to develop in the OTC market.. Although we are
focusing our operations on the OTC market, we have adopted a policy to absorb a
significantly higher percentage of costs incurred by our sales representatives
than in the past in order to foster their cooperation in developing the OTC
market. The costs being borne by us with respect to developing the OTC market
are being accrued in selling expenses.

The Company
reimburses the sales representatives their selling and marketing expenses when
they submit the appropriate documentation to be reimbursed and their sales are
collected. The accrued selling expenses are due within one to six months. The
Company reimburses the sales representatives their accrued selling expenses
when related accounts receivable are collected.

General and
administrative expense: General and administrative
expenses were approximately $1.06 million for the three months ended September
30, 2009, a decrease of $0.76 million, or 41.54%, from approximately $1.82
million for the three months ended September 30, 2008. The decrease was
primarily due to (i) reduction of the professional service fees relating to
maintain our status as a public company with its securities traded on a U.S.
national exchange; and (ii)) our strengthened budget control over expense
disbursements to reduce unnecessary expense.

Research and
development expense:Research and development
expense for the three months ended September 30, 2009 was $10,534 as compared
to $66,052 for the period ended September 30, 2008, a decrease of approximately
$55,000. The decrease was primarily due to our focus on a few innovative
pharmaceuticals instead of on a number of generic drugs.

Net (Loss) Income
attributable to shareholders:Net loss decreased
to $31,924 for the three months ended September 30, 2009 as compared to net
profit of $154,286 for the three months ended September 30, 2008. The increase
in net loss was primarily due to the sharp increase of $4 million in selling
expense for the three months ended September 30, 2009.

- 30 -

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Nine Months Ended September 30, 2009 and 2008

The following
table sets forth our statements of operations for the nine months ended
September 30, 2009 and 2008 in U.S. dollars (unaudited):

|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | --------- | - | ---------- | - | ------------ | - | ----- | --
|                                                                                |  | Nine months ended September 30, |            |           |   |            |  
|                                                                                |  |                                 |            |           |   |            |  
|                                                                                |  | 2009                            |            | 2008      |   | Change ($) |   | Variance (%) |  
|                                                                                |  |                                 |            |           |   |            |   |              |  
|                                                                                |  | Unaudited                       |            | Unaudited |   |            |   |              |  
|Sales                                                                           |  | $                               | 25,459,077 |           | $ | 21,359,149 |   | 4,099,928    |   | 19    | % 
|Cost of Sales                                                                   |  |                                 | 7,643,566  |           |   | 7,061,446  |   | 582,120      |   | 8     | % 
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|Gross Margin                                                                    |  |                                 | 17,815,511 |           |   | 14,297,703 |   | 3,517,808    |   | 25    | % 
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|Operating Expenses:                                                             |  |                                 |            |           |   |            |   |              |   |       |   
|Selling expenses                                                                |  |                                 | 19,604,857 |           |   | 8,666,561  |   | 10,938,296   |   | 126   | % 
|General and administrative expenses                                             |  |                                 | 5,230,722  |           |   | 7,001,410  |   | (1,770,688   | ) | (25   | %)
|Research and development expenses                                               |  |                                 | 24,455     |           |   | 255,241    |   | (230,786     | ) | (90   | %)
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|                                                                                |  |                                 | 24,860,034 |           |   | 15,923,212 |   | 8,936,822    |   | 56    | % 
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|(Loss) Income from Operations                                                   |  |                                 | (7,044,523 | )         |   | (1,625,509 | ) | (7,044,523   | ) | 433   | % 
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|Other Income (Expense):                                                         |  |                                 |            |           |   |            |   |              |   |       |   
|Interest income                                                                 |  |                                 | 2,661      |           |   | 5,701      |   | (3,040       | ) | (53   | %)
|Income from research and development
 activities                                |  |                                 | 194,902    |           |   | 344,370    |   | (149,468     | ) | (43   | %)
|Interest expense                                                                |  |                                 | (704,242   | )         |   | (963,198   | ) | 258,956      |   | (27   | %)
|Non-operating expenses                                                          |  |                                 | (22,038    | )         |   | (138,812   | ) | 116,774      |   | (84   | %)
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|                                                                                |  |                                 | (528,717   | )         |   | (751,939   | ) | 223,222      |   | (30   | %)
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|(Loss) Income Before Income Tax (expense)
 benefit and non-controlling interest |  |                                 | (7,573,240 | )         |   | (2,377,448 | ) | (5,195,792   | ) | 219   | % 
|Income tax (expense) benefit                                                    |  |                                 | 401,012    |           |   | (4,484     | ) | 405,496      |   | (9043 | %)
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|Net (Loss) Income                                                               |  |                                 | (7,172,228 | )         |   | (2,381,932 | ) | (4,790,296   | ) | 201   | % 
|Net loss (income)
     attributable to noncontrolling interest                  |  |                                 | 403,257    |           |   | 146,089    |   | 257,168      |   | 176   | % 
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|Net (Loss) Income attributable to
 shareholders                                 |  | $                               | (6,768,971 | )         | $ | (2,235,843 | ) | (4,533,128   | ) | 203   | % 
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|Basic and
       diluted earnings (loss) per share                              |  | $                               | (0.34      | )         | $ | (0.11      | ) | (0.23        | ) | 209   | % 
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   
|Weighted-average number of shares
 outstanding-basic and diluted                |  |                                 | 19,679,400 |           |   | 19,679,400 |   |             |   |      |   
|                                                                                |  |                                 |            |           |   |            |   |              |   |       |   

Sales: Sales for the nine months ended September
30, 2009 was approximately $25.46 million, an increase of approximately $4.1
million, or 19.20%, from approximately $21.36 million for the nine months ended
September 30, 2008. The increase in sales is due to the increase in sales of
our primary product, Xuesaitong Soft Capsules, by $ 4.12 million and an
increase in our sales of cosmetic products by $ 0.4 million. The increase in
sales was partially offset by the decrease in exports of $ 0. 42 million
attributable to the general condition of the global economy.

- 31 -

---



Cost of sales: Our cost of sales for the nine months
ended September 30, 2009 was approximately $7.64 million, an increase of $0.58
million, or 8.26%, from approximately $7.06 million for the nine months ended
September 30, 2008. The increase in cost of sales was due primarily to (i)
sales volume increased and (ii) increased in the price of raw materials has
increased in 2009.

Gross margin: Our gross margin for the nine months
ended September 30, 2009 was approximately $17.81 million as compared with
approximately $14.30 million for the nine months ended September 30, 2008.
Gross margin as a percentage of revenues was approximately 69.98% for the nine
months ended September 30, 2009, up from 66.94% for the nine months ended
September 30, 2008. The increase was primarily due to the strict implementation
of expenditure control over manufacturing expense and labor cost in accordance
with our budget. As a result, manufacturing expense was reduced by 12%.

Selling expense: Selling expenses were approximately
$19.60 million for the nine months ended September 30, 2009, an increase of
approximately $10.93 million, or 126.20%, from approximately $8.67 million for
the nine months ended September 30, 2008. The increase in selling expense in
2009 was mainly due to two facts. First, beginning in March 2009, in order to
develop a better channel for selling our products and to increase our revenue in
the face of fierce industry competition, we began to build relationships with
new high-quality agents and terminated our relationships with agents with poor
historical performance, as a result of which we were required to pay greater
commissions, travelling and entertainment expenses to establish good
relationships with the new high-quality agents. Second, we believe it is in our
long-term best interest to grow our operations through the over-the-counter
(OTC) market, which will produce higher profit margins. Accordingly, we began
developing the OTC market in 2009 and as of September 30, 2009, revenue from
the OTC market comprises approximately 10% of the total sales revenue for
Medicine. As of September 30, 2009, we estimate that our expenditures for
developing the Companys presence in the OTC market through such in 2009 are
approximately RMB 10 million and that we will have to dedicate significant
funds in the future to continue to develop in the OTC market. As we are
focusing our operations on the OTC market, we have adopted a policy to absorb a
significantly higher percentage of costs incurred by our sales representatives
than in the past in order to foster their cooperation in developing the OTC
market. The costs being borne by us with respect to developing the OTC market
are being accrued in selling expenses

The Company
reimburses the sales representatives their selling and marketing expenses when
they submit the appropriate documentation to be reimbursed and their sales are
collected. The accrued sales expenses are due within one to six months. The
Company reimburses the sales representatives their accrued selling expenses
when related accounts receivable are collected.

General
and administrative expense: General and
administrative expenses were approximately $5.23 million for the nine months
ended September 30, 2009, a decrease of approximately $1.77 million, or 25.28%,
from approximately $7 million for the nine months ended September 30, 2008. The
decrease was primarily due to (i) a decrease in the provision for doubtful
accounts and (ii) our strengthened budget control over expense disbursements to
reduce unnecessary expense.

Research and
development expense: Research and development expense for the nine months ended
September 30, 2009 was $24,455 as compared to $255,241 for the nine months
ended September 30, 2008. The decrease was primarily due to our focus on a few
innovative pharmaceuticals instead of on a number of generic drugs.

Net other expense: Net other expense, which includes
interest income, income from research and development activities, interest
expense and non-operating expenses, was 0.53 million for the nine months ended
September 30, 2009 as compared to $0.75 million for the nine months ended
September 30, 2008, a decrease of $0.22 million, or 29.79%. The decrease in net
other expense was primarily due to a decrease in the interest expense on
long-term loans.

Benefits from
(provision for) income taxes: Benefit from income taxes was $0.4million
for the nine months ended September 30, 2009 as compared to a provision for
income tax of approximately $4,000 for the nine months ended September 30,
2008. In China, each of our subsidiary entities files its own individual tax
return in the PRC. The Company pays tax on all profits realized by each
subsidiary, and any losses generated by a subsidiary can only be carried
forward and utilized by the same legal entity, which is subject to approval by
the tax bureau. Benefits from income tax were generated from losses carried
forward.

- 32 -

---



Net (Loss) Income
attributable to shareholders: We incurred a net loss of $6.77 million
for the nine months ended September 30, 2009 as compared to a net loss of $2.24
million for the nine months ended September 30, 2008, an increase in net loss
of approximately $4.53 million. The increase in net loss was primarily due to
(i) an increase in selling expense of $10.9 million and ii) an offset
resulting from the decrease in provision for doubtful accounts of $2.14 million
and (iii) in increase in gross margin of $3.5 million.

Liquidity and Capital Resources

GeneralAs of September 30, 2009, we had cash
and cash equivalents of $ 2,723,716. We have historically financed our business
operations through bank loans, in addition to equity offerings. As of September
30, 2009, we had borrowed short-term loans in the amount of $5,337,043 and
long-term loans in the amount of $10,237,510 from banks and other institutions.
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
land, buildings and machinery, as well as the stock ownership of Kunming
Shenghuo Pharmaceuticals Co., Ltd held by the Company as collateral.

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

:

|                                                                                                                              |  |                    |           |                   |   |           | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ----------------- | - | --------- | 
|                                                                                                                              |  | September 30, 2009 |           | December 31, 2008 |  
|                                                                                                                              |  |                    |           |                   |  
|Short-term note payable to a municipality,
 interest at 1.8%, due on demand, unsecured                                        |  | $                  | 73,124    |                   | $ | 72,948    | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term note payable to a finance
 bureau, interest at 4.5%, due on demand, unsecured                                      |  |                    | 75,365    |                   |   | 75,182    | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term note payable to a bank, interest
 at 5.31%, matures April 2010, secured by property(note a)                        |  |                    | 3,656,254 |                   |   |          | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term note payable to a bank, interest
 at 7.47%, matured April 2009, secured by property (note a)                       |  |                    |          |                   |   | 3,647,399 | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term note payable to a bank secured
 by insurance company, interest at approximately 5.31%, matures within four
 months |  |                    | 1,321,329 |                   |   |          | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term note payable to a government
 development zone interest at 2.43%, due on demand, secured by property               |  |                    |          |                   |   | 218,844   | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Short-term note payable to a bank, interest
 at 7.72%, matures August 2009, secured by shareholder                            |  |                    |          |                   |   | 5,835,838 | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Discount bills with recourse, matures
 within six months                                                                      |  |                    | 210,971   |                   |   |          | 
|                                                                                                                              |  |                    |           |                   |   |           | 
|Total short-term notes payable                                                                                                |  | $                  | 5,337,043 |                   | $ | 9,850,211 | 
|                                                                                                                              |  |                    |           |                   |   |           | 

- 33 -

---



|                                                                                                                                       |  |                    |            |                   |   |           | 
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- | - | --------- | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|                                                                                                                                       |  | September 30, 2009 |            | December 31, 2008 |  
|                                                                                                                                       |  |                    |            |                   |  
|Long-term note payable to a bank, interest
 at 5.4%, matures March 2010, secured by property, equipment and land use
 right            |  |                    | 1,462,501  |                   |   | 1,458,959 | 
|Long-term note payable to a bank, interest
 at 5.84%, matures before March 2010, secured by property and land use right                |  |                    | 1,462,501  |                   |   | 2,917,919 | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Long-term note payable to a bank, interest
 at 5.4%, matures before June 2010, secured by the Companys shares in
 Shenghuo (note b)   |  |                    | 877,502    |                   |   |          | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Long-term note payable to a bank, interest
 at 5.4%, matures before August 2011, secured by the Companys shares in
 Shenghuo (note b) |  |                    | 6,435,006  |                   |   |          | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Total long-term notes payable                                                                                                          |  |                    | 10,237,510 |                   |   | 4,376,878 | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Less current maturities of long- term notes
 payable                                                                                   |  |                    | 3,802,504  |                   |   | 3,245,685 | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Long-term notes payable, net of current
 portion                                                                                       |  | $                  | 6,435,006  |                   | $ | 1,131,193 | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|                                                                                                                                       |  |                    |            |                   |   |           | 
|Past due notes payable (note c)                                                                                                        |  | $                  | 292,500    |                   | $ | 294,026   | 
|                                                                                                                                       |  |                    |            |                   |   |           | 

(a) In April
2009, a note payable with an interest rate of 7.47% and a balance of $3,647,399
as of December 31, 2008 was refinanced. The new note payable is due in one year
and has an interest rate of 5.31%.

(b) On August 24, 2009, the
Company drew down $7,312,508(approximately 50 million RMB) from the bank
facility with Shuang Long Branch of Agricultural Bank of China executed on
August 6 2009, This proportion of the loan has a term of two years, with
repayment of $438,751 before December 2009, repayment of $438,751 before June
2010, repayment of $585,001 before December 2010, repayment of $731,251 before
April 2011 and repayment of the remainder before August 2011. This drawdown of
the loan bears interest at a rate of 5.40% which is due quarterly. The loan was
for working capital and is secured by the Companys 94.95% shares in Shenghuo.

(c) Of the
aggregate amount $1,462,501 borrowed from Agricultural Bank of China, $292,500
matured in May 2009, which was past due as of September 30. 2009, However,
based on the Companys good historical credit record, the Company reached an
oral agreement with the lender to extend the maturity date for this portion of
the loan to March 2010. Therefore the Company did not repay the amount of the loan
originally due in May 2009.

(d) All long term notes payable
mature during the years ended September 30, 2011 and December 31, 2010,
respectively.

- 34 -

---



The following
table provides summary information about net cash flow for the nine months
ended September 30, 2009 and 2008:

Cash Flow 
Nine months ended September 30,

|                                                     |  |                          |       |         |   |        |  
|---------------------------------------------------- |  | ------------------------ | ----- | ------- | - | ------ | -
|                                                     |  | 2009                     |       | 2008    |  
|                                                     |  |                          |       |         |  
|                                                     |  | (unaudited
in
thousands) |       | audited |  
|                                                     |  |                          |       |         |  
|Net cash
 provided by (used in) operating activities |  | $                        | 879   |         | $ | (233   | )
|Net cash
 used in investing activities               |  |                          | (902  | )       |   | (223   | )
|Net cash
 provided by (used in) financing activities |  |                          | 1,131 |         |   | (1,413 | )
|Cash and Cash Equivalents at End of Period           |  | $                        | 2,724 |         | $ | 1,081  |  

Operating Activities:
Net cash provided from operating activities for the nine months ended September
30, 2009 was $0.88million, as compared to net cash used in operating activities
of $0.23 million for the nine months ended September 30, 2008. These results reflect
the impacts of (i) a decrease of approximately $3.25 million in cash used in
other receivables and an increase of $0.96 million in cash provided by advances
from customers as a result of the Companys more effective implementation of
collection policy; (ii) an increase of approximately $1.27 million in cash
provided by accounts payable as a result of increasing purchase volume; and
(iii) partially offset by an increase of approximately $4.8 million of cash
used in notes and accounts receivables due to increasing sales.

Investing Activities:
Net cash used by investing activities was $0.9 million or the nine months ended
September 30, 2009, as compared to net cash used in the amount of $0.22 million
for the nine months ended September 30, 2008. The increase in net cash used by
investing activities was primarily due to increases in capital expenditures,
specifically, the construction of Shenghuo Plaza.

Financing Activities:
Net cash provided by financing activities was approximately $1.13 million for the
nine months ended September 30, 2009 compared to net cash used in the amount of
$1.41 million for the nine months ended September 30, 2008. The increase in
cash provided was primarily due to the increase of loans borrowed from bank.

Working Capital Deficiency

As of
September 30, 2009, our accounts receivable and notes receivable (less
allowance for doubtful accounts of approximately $5.98 million) were
approximately $13.72 million, a increase of approximately $4.61 million, from
accounts receivable of approximately $9.11 million (net of allowance for
doubtful accounts of $4.83 million) as of December 31, 2008. The increase of
notes and accounts receivables is attributed primarily to the increasing sales.

Our company
normally requires one to two months to deliver products once an order is placed
with our workshop. Inventory decreased for the nine months ended September 30,
2009 by $0.8 million, a decrease of 18.65% over inventory as of December 31,
2008. The decrease in inventory was primarily due to the increased sales volume
stimulated by the newly implemented sales policy.

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. The
deposit increased approximately $0.83 million for the nine months ended
September 30, 2009.

To the extent
that we cannot satisfy our cash needs, whether from operations or from a
financing source, our business may 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

- 35 -

---



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 wholesale companies.

In addition,
in the course of our business, we make significant deposits to our suppliers
when we place an order. As of September 30, 2009, our advance payments to our
suppliers totalled approximately $0.27 million. We are confident that our
available funds and cash generated from operations will provide us with
sufficient capital for a sustainable operation; however, we may require
additional capital for acquisitions, for expanding business to related fields,
or for the operation of the combined companies. We cannot assure that such
funding will be available.

Before 2009,
we made 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 to develop new customers. We believed that the sales
representatives would be better able to expand into new markets and to secure
new customers if they were advanced funds for their travel, meals and other
incidental expenses that arose in connection with their sales activities. 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 sales representative advances. Nonetheless, there are some sales
representative 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. Pursuant to the
policies adopted at the beginning of 2009, instead of advancing sales
representatives money to sustain or develop markets, we reimburse sales
representatives their selling and marketing expenses when they present expense
vouchers. Management considers this a better way to manage the potential for
bad debts on the advances to sales representatives. We pay the accrued selling
expenses only when the Company collects an account receivable for which a sales
representative has presented his expense receipts. Because we offer a grace
period of one-to-six months to our clients for remitting payments due, the
accrued sales expenses may remain outstanding for however long it takes to collect
the corresponding accounts receivable.

Current and
long-term sales representatives and employee advances (net of allowances for
doubtful accounts) were approximately $6.55 million at September 30, 2009 and
$9.3 million as of December 31, 2008, a decrease of approximately $2.75 million
or 29.56%. The decrease was due to the decrease in advances to employees as a
result of the Companys tight cash flow.

The table
below sets forth the outstanding gross and net amount of outstanding balances
of current and long-term sales representatives and employee advances as of
December 31, 2008 and September 30, 2009.

|                                                             |  |                           |            |                          |   |            | 
|------------------------------------------------------------ |  | ------------------------- | ---------- | ------------------------ | - | ---------- | 
|                                                             |  | As of
 September 30, 2009 |            | As of
 December 31, 2008 |  
|                                                             |  |                           |            |                          |  
|                                                             |  |                           |            |                          |   |            | 
|Gross amount
 of sales representatives and employee accounts |  | $                         | 10,503,723 |                          | $ | 12,921,134 | 
|                                                             |  |                           |            |                          |   |            | 
|Allowance
 for doubtful accounts                             |  |                           | 3,954,612  |                          |   | 3,620,048  | 
|                                                             |  |                           |            |                          |   |            | 
|Net amount                                                   |  | $                         | 6,549,111  |                          | $ | 9,301,086  | 

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

- 36 -

---



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 (RMB), which must be
converted into other currencies before remittance out of the PRC. Both the
conversion of RMB into foreign currencies and the remittance of foreign currencies
abroad require approval of the PRC government. The effect of the fluctuations
of exchange rates is not considered to be material to our business operations.

Interest Rate Risk

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

- 37 -

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Our
 management, with the participation of our chief executive officer and chief
 financial officer, Messrs. Gui Hua Lan and Mr. Chuanxiang Huang respectively,
 evaluated the effectiveness of our disclosure controls and procedures. The
 term disclosure controls and procedures, as defined in Rules 13a-15(e) and
 15d-15(e) under the Exchange Act, means controls and other procedures of a
 company that are designed to ensure that information required to be disclosed
 by a company in the reports, such as this report, that it files or submits
 under the Exchange Act is recorded, processed, summarized and reported,
 within the time periods specified in the SECs rules and forms. Disclosure
 controls and procedures include, without limitation, controls and procedures
 designed to ensure that information required to be disclosed by a company in
 the reports that it files or submits under the Exchange Act is accumulated
 and communicated to the Companys management, including its principal
 executive and principal financial officers, as appropriate to allow timely
 decisions regarding required disclosure. Management recognizes that any
 controls and procedures, no matter how well designed and operated, can
 provide only reasonable assurance of achieving their objectives and
 management necessarily applies its judgment in evaluating the cost-benefit
 relationship of possible controls and procedures. Based on that evaluation,
 Mr. Lan and Mr. Huang concluded that despite improvements in areas of
 previously identified weakness in internal control over financial reporting
 identified (described below), our disclosure controls and procedures were not
 effective as of September 30, 2009.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Changes in Internal Controls over Financial
 Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The
 Companys management is focused on compliance with the requirements under
 Section 404 of the Sarbanes-Oxley Act of 2002. The relevant section of the
 Act requires the management of smaller reporting companies with equity
 securities listing in the U.S. securities market to issue report and
 representations as to the internal control over financial reporting. The
 Company anticipates that it will be fully compliant with Section 404 of the
 Sarbanes-Oxley Act of 2002 by the required date for smaller reporting
 companies and it is currently in the process of improving and rectifying its
 internal control systems in order to be compliant with Section 404 of the
 Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Company
 has continuously refined the policies and standards for the control
 environment based on the risk control framework established in the Internal
 Control Integrated Framework issued by the Committee of Sponsoring
 Organizations of the Treadway Commission (the COSO). In the past few
 months, the Company has: standardized control procedures for monitoring the
 financial reporting and period end financial closing procedures at the
 subsidiary and group level and upgraded the business performance review
 processes and controls; expanded accounting manuals to clearly document key
 controls and processes for preparing consolidated financial statements in
 accordance with applicable accounting standards; hired additional accounting
 professionals with experience in financial reporting and familiarity with
 international accounting practices and increased technical training for the
 finance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- 38 -

---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | and
 accounting personnel in respect of relevant accounting standards; established
 and implemented the code of ethics for senior officers and employees,
 company-wide anti-fraud policies and whistle blowing mechanisms; enhanced
 internal controls over subsidiaries by assessing the effectiveness of
 internal controls at subsidiary-level based on our enterprise risk assessment
 results and preliminarily formulated long term implementation plan on
 internal control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | The
 Companys management, including the CEO and CFO, is responsible for
 establishing and maintaining adequate internal control over financial
 reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
 Our management is also required to evaluate and report on the effectiveness
 of our internal control over financial reporting in accordance with Section
 404 of the Sarbanes-Oxley Act of 2002 and to file an annual report pursuant
 to section 13(a) of the Exchange Act. The CEO and CFO have evaluated several
 changes to our internal control over financial reporting as of September 30,
 2009 that will or are reasonably likely to materially affect our internal
 control over financial reporting, and based on that evaluation, Management
 has concluded that our internal control over financial reporting was not
 effective as of September 30, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | The
 information below shows the changes to the internal control over financial
 reporting that were evaluated and the status of our other material weakness
 remediation to date:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Lack of U.S.
 GAAP expertise, which is a material weakness. Despite substantial efforts to
 improve the Companys controls and procedures, as previously reported by the
 Company, our current accounting staff is relatively new and inexperienced,
 and needs substantial additional training to meet the higher demands of being
 qualified accountants of a U.S. public company. The accounting skills and
 understanding necessary to fulfill the requirements of U.S. GAAP-based
 reporting, including the skills of U.S. GAAP-based period end closing,
 consolidation of financial statements and U.S. GAAP conversion are inadequate
 and were inadequately supervised. The lack of adequate U.S. GAAP review
 resulted in some material adjustments for the year ended December 31, 2008,
 which were not properly and completely reflected in the management accounts.
 These material audit adjustments were made to eliminate intercompany
 transactions, reclassify related party transactions, record prior year audit
 adjustments to adjust the allowance for doubtful accounts, adjust taxes
 payable for tax provision, record intangibles at gross amounts, and adjust
 deferred tax. The need for these material adjustments was a result of
 insufficient period end closing procedures and a deficiency in the
 reconciliation between the Companys prior-year audited financial statements
 and accounting records.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | Remediation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | Since
 January 1, 2009, we have maintained a separate set of accounting data to
 record all U.S. GAAP audit adjustments from 2008 along with the PRC
 accounting records so as to effectively reconcile PRC accounts to the
 financial statements under U.S. GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | In order to
 enhance our period end procedures, including adding a review of all account
 balances for                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

- 39 -

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | material
 adjustments, the Company added five new personnel to the financial department
 in May of 2009, which currently consists of 21 staff members, including one
 Chinese CPA and one Chinese senior accountant. Additionally, following a vote
 of the Board of Directors, in October 2009, the Company engaged Essence
 Consulting and Management Ltd, an independent third party financial advisor
 to aid in financial reporting procedures and to help with the preparation of
 the Companys annual and quarterly filings. In addition, we have allocated
 significant financial and human resources to strengthen our internal control
 structure.                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | We believe
 that the foregoing steps have helped us remediate the material weakness
 identified above and we will continue to monitor the effectiveness of these
 steps and make any changes that our management deems appropriate..                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | A material
 weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
 deficiency, or a combination of deficiencies, in internal control over
 financial reporting such that there is a reasonable possibility that a
 material misstatement of our annual or interim financial statements will not
 be prevented or detected on a timely basis. A significant deficiency is a deficiency,
 or a combination of deficiencies, in internal control over financial
 reporting that is less severe than a material weakness, yet important enough
 to merit attention by those responsible for oversight of the companys
 financial reporting.                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Because of
 its inherent limitations, internal control over financial reporting may not
 prevent or detect misstatements. Projections of any evaluation of
 effectiveness to future periods are subject to the risk that controls may
 become inadequate because of changes in conditions, or that the degree of
 compliance with the policies and procedures may deteriorate.                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | PART II - OTHER
 INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ITEM 1. LEGAL PROCEEDINGS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Mingying Co., Ltd. Lawsuit
  On July 20, 2009, the Company appeared before a court sitting in the
 Tianhe District of Guangzhou, Guandong Province, Peoples Republic of China,
 to defend itself in an action brought by Mingying Co., Ltd. for allegedly
 failing to satisfy payment obligations for advertising services. Mingying
 Co., Ltd. is seeking a judgment in the amount of RMB 465,000 (approximately
 $68,000). The court has informed Mingying Co., Ltd. that it has failed to
 meet its burden of proof in support of its claims, however the action is
 still proceeding. The Company lost the lawsuit in the trial of first
 instance, which was held in September. The Company has applied for a retrial
 but has not yet received a reply from the court.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The Company
 intends to continue to vigorously defend the lawsuit. The Company does not
 believe the outcome of this suit will have a material adverse effect on the
 Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

- 40 -

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SEC Investigation
  The United States Securities and Exchange Commission (SEC) had been
 conducting an informal inquiry regarding the events that resulted in the
 Companys restatement of its financial statements for the fiscal year 2007
 and the first quarter of 2008. The Company was represented by counsel
 cooperated with the SECs inquiry on a voluntary basis. On September, 2009,
 the Company received notification from the SEC that it had completed its investigation
 and reached a determination not to recommend any enforcement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Class Action Lawsuit 
 In 2008, putative class action lawsuits were asserted against the Company and
 certain other parties in the United States District Court for the Southern
 District of New York (the Court). On February 12, 2009, an amended
 complaint was served on the Company by new lead counsel for the class,
 consolidating the putative class actions and bearing the caption Beni
 Varghese, Individually and on Behalf of All Other Similarly Situated v. China
 Shenghuo Pharmaceutical Holdings, Inc., et al., Index No. 1:08 CIV. 7422. The
 defendants include the Company, the Companys controlling shareholders, Lans
 International Medicine Investment Co., Limited, the Companys chief executive
 officer, Gui Hua Lan, the Companys former chief financial officer, Qiong Hua
 Gao, and the Companys former independent registered public accounting firm,
 Hansen, Barnett & Maxwell, P.C. During the second quarter of 2009, the
 Company and the accounting firm filed motions to dismiss the complaint and
 the plaintiffs filed a memorandum in opposition to those motions. On August
 31, 2009, the Company filed a reply brief in further support of its motion.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The amended
 consolidated complaint alleges that the Company failed to take adequate steps
 to ensure its financial reporting comported with U.S. Generally Accepted
 Accounting Principles (GAAP) and, as a result, the Company was required to
 restate what are alleged to be materially false and misleading financials for
 accounting periods during the alleged class period from August 2007 through
 August 20, 2008. The amended consolidated complaint further alleges, 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, and Rule 10b-5 promulgated
 thereunder.                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The Company
 believes the allegations in the amended consolidated complaint are without
 merit, and intends to vigorously defend the class action lawsuits. The
 Company does not believe the outcome of this suit will have a material
 adverse effect on the Company. However, the Company is unable at this time to
 predict the outcome of this litigation or whether the Company will incur any
 liability associated with the litigation, or to estimate the effect such
 outcome would have on the financial condition, results of operations, or cash
 flows of 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-K for the year ended December 31, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

- 41 -

---



| |                                                                     
| | --------------------------------------------------------------------
| | 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                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                    
| | 10.1                                                                                                                                                                                                                                                                                                                                                                                                                                    | Line of
 Credit Agreement dated August 6, 2009 by and between the Company and the
 Agricultural Bank of China Limited Inc.                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                    
| | 10.2                                                                                                                                                                                                                                                                                                                                                                                                                                    | Pledge
 Agreement dated August 21, 2009 by and between the Company and Agricultural
 Bank of China Shuanglong Branch.                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                    
| | 10.3                                                                                                                                                                                                                                                                                                                                                                                                                                    | Insurance
 Policy dated May 4, 2009 issued by Ping An Property & Casualty Insurance
 Company of China, Ltd. in favor of the Company.                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                    
| | 10.4                                                                                                                                                                                                                                                                                                                                                                                                                                    | Indemnity
 Agreement dated June 9, 2009 by and among the Company, Ping An Property &
 Casualty Insurance Company of China, Ltd. and China Construction Bank Kunming
 Heping Branch.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                    
| | 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.

- 42 -

---



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 16,
 2009 |                                              | By:                                                | /s/ Gui Hua
 Lan
|                   |                                              |                                                    |                 
|                   |                                              | Gui Hua Lan                                       
|                   |                                              | Chief
 Executive Officer and Chairman of the Board

- 43 -

---



EXHIBIT INDEX

|                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number                                                                                                                                                                                                                                                                                                                                                                                                                         | Description
 of Exhibit                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                    
|10.1                                                                                                                                                                                                                                                                                                                                                                                                                                    | Line of
 Credit Agreement dated August 6, 2009 by and between the Company and the
 Agricultural Bank of China Limited Inc.                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                    
|10.2                                                                                                                                                                                                                                                                                                                                                                                                                                    | Pledge
 Agreement dated August 21, 2009 by and between the Company and Agricultural
 Bank of China Shuanglong Branch.                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                    
|10.3                                                                                                                                                                                                                                                                                                                                                                                                                                    | Insurance
 Policy dated May 4, 2009 issued by Ping An Property & Casualty Insurance
 Company of China, Ltd. in favor of the Company.                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                    
|10.4                                                                                                                                                                                                                                                                                                                                                                                                                                    | Indemnity
 Agreement dated June 9, 2009 by and among the Company, Ping An Property &
 Casualty Insurance Company of China, Ltd. and China Construction Bank Kunming
 Heping Branch.
|                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                    
|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.

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