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|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 June 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                                                                                                                                                                                                                                                                                                                  |  | (IR.S. Employer Identification
|or Organization)                                                                                                                                                                                                                                                                                                                                               |  | 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    | 
|                                |  |                                                                                                                                                |  |      | 
|                                |  | Condensed Consolidated Balance Sheets as of June 30,
 2009 and December 31, 2008 (Unaudited)                                                   |  | 1    | 
|                                |  |                                                                                                                                                |  |      | 
|                                |  | Condensed Consolidated Statements of Operations and
 Comprehensive Loss for the Three and Six Months Ended June 30, 2009 and 2008
 (Unaudited) |  | 2    | 
|                                |  |                                                                                                                                                |  |      | 
|                                |  | Condensed Consolidated Statements of Cash Flows for
 the Six Months Ended June 30, 2009 and 2008 (Unaudited)                                   |  | 3    | 
|                                |  |                                                                                                                                                |  |      | 
|                                |  | Notes to Condensed Consolidated Financial Statements
 (Unaudited)                                                                              |  | 4    | 
|                                |  |                                                                                                                                                |  |      | 
|ITEM 2.                         |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
 CONDITION AND RESULTS OF OPERATIONS                                                         |  | 11   | 
|                                |  |                                                                                                                                                |  |      | 
|ITEM 3.                         |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
 RISK                                                                                    |  | 24   | 
|                                |  |                                                                                                                                                |  |      | 
|ITEM 4T.                        |  | CONTROLS AND PROCEDURES                                                                                                                        |  | 24   | 
|                                |  |                                                                                                                                                |  |      | 
|PART II -
 OTHER INFORMATION    |  |                                                                                                                                                | 
|                                |  |                                                                                                                                                | 
|ITEM 1.                         |  | LEGAL PROCEEDINGS                                                                                                                              |  | 25   | 
|                                |  |                                                                                                                                                |  |      | 
|ITEM 1A.                        |  | RISK FACTORS                                                                                                                                   |  | 26   | 
|                                |  |                                                                                                                                                |  |      | 
|ITEM 2.                         |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
 PROCEEDS                                                                                   |  | 26   | 
|                                |  |                                                                                                                                                |  |      | 
|ITEM 3.                         |  | DEFAULTS UPON SENIOR SECURITIES                                                                                                                |  | 26   | 
|                                |  |                                                                                                                                                |  |      | 
|ITEM 4.                         |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS                                                                                            |  | 26   | 
|                                |  |                                                                                                                                                |  |      | 
|ITEM 5.                         |  | OTHER INFORMATION                                                                                                                              |  | 26   | 
|                                |  |                                                                                                                                                |  |      | 
|ITEM 6.                         |  | EXHIBITS                                                                                                                                       |  | 26   | 
|                                |  |                                                                                                                                                |  |      | 
|SIGNATURES                      |  |                                                                                                                                                |  | 27   | 

---



|                                             |                      
|-------------------------------------------- | ---------------------
|PART I - FINANCIAL INFORMATION              
|                                             |                      
|ITEM 1.                                      | FINANCIAL
 STATEMENTS
|                                             |                      
|CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.
|CONDENSED CONSOLIDATED BALANCE SHEETS       
|(unaudited)                                 

|                                                                                                                      |  |                |            |                    |   |            |  
|--------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | ------------------ | - | ---------- | -
|                                                                                                                      |  | June 30,
 2009 |            | December 31,
 2008 |  
|                                                                                                                      |  |                |            |                    |  
|ASSETS:                                                                                                               |  |                |            |                    |   |            |  
|Current
 Assets:                                                                                                      |  |                |            |                    |   |            |  
|Cash and cash equivalents                                                                                             |  | $              | 717,134    |                    | $ | 1,612,054  |  
|Accounts and notes receivable, less allowance for doubtful accounts
 of $5,969,399 and $4,834,745, respectively       |  |                | 10,144,096 |                    |   | 9,108,703  |  
|Sales representative advances, less allowance for doubtful accounts
 of $3,289,200 and $2,955,516, respectively       |  |                | 6,877,678  |                    |   | 8,637,653  |  
|Advances to suppliers                                                                                                 |  |                | 554,828    |                    |   | 446,168    |  
|Inventory, net of reserve for obsolescence of $148,181 and $147,978,
 respectively                                    |  |                | 3,360,899  |                    |   | 4,287,462  |  
|Other current assets                                                                                                  |  |                | 29,971     |                    |   | 41,177     |  
|                                                                                                                      |  |                |            |                    |   |            |  
|Total Current Assets                                                                                                  |  |                | 21,684,606 |                    |   | 24,133,217 |  
|                                                                                                                      |  |                |            |                    |   |            |  
|                                                                                                                      |  |                |            |                    |   |            |  
|Property, plant and equipment, net of accumulated depreciation of
 $5,714,934 and $5,341,933, respectively            |  |                | 7,534,993  |                    |   | 7,581,664  |  
|Intangible assets, net of accumulated amortization of $179,620 and
 $71,456, respectively                             |  |                | 558,808    |                    |   | 665,959    |  
|Long-term sales representative advances, less allowance for doubtful
 accounts of $667,725 and $664,532, respectively |  |                | 1,515,858  |                    |   | 663,433    |  
|                                                                                                                      |  |                |            |                    |   |            |  
|TOTAL ASSETS                                                                                                          |  | $              | 31,294,265 |                    | $ | 33,044,273 |  
|                                                                                                                      |  |                |            |                    |   |            |  
|                                                                                                                      |  |                |            |                    |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                 |  |                |            |                    |   |            |  
|Current Liabilities:                                                                                                  |  |                |            |                    |   |            |  
|Accounts payable                                                                                                      |  | $              | 1,702,841  |                    | $ | 1,293,460  |  
|Accrued expenses                                                                                                      |  |                | 8,733,930  |                    |   | 2,721,082  |  
|Deposits                                                                                                              |  |                | 5,259,457  |                    |   | 5,550,502  |  
|Payable to related parties                                                                                            |  |                | 39,666     |                    |   | 148,575    |  
|Short-term notes payable                                                                                              |  |                | 11,324,701 |                    |   | 9,850,211  |  
|Advances from customers                                                                                               |  |                | 813,879    |                    |   | 222,609    |  
|Taxes and related payables                                                                                            |  |                | 1,296,596  |                    |   | 1,236,574  |  
|Current portion of long-term debt                                                                                     |  |                | 1,460,963  |                    |   | 3,245,685  |  
|                                                                                                                      |  |                |            |                    |   |            |  
|Total Current Liabilities                                                                                             |  |                | 30,632,033 |                    |   | 24,268,698 |  
|                                                                                                                      |  |                |            |                    |   |            |  
|Long-Term Debt                                                                                                        |  |                |           |                    |   | 1,131,193  |  
|                                                                                                                      |  |                |            |                    |   |            |  
|Total Liabilities                                                                                                     |  |                | 30,632,033 |                    |   | 25,399,891 |  
|                                                                                                                      |  |                |            |                    |   |            |  
|                                                                                                                      |  |                |            |                    |   |            |  
|Stockholders Equity:                                                                                                 |  |                |            |                    |   |            |  
|Common stock, $0.0001 par value, 100,000,000 shares authorized,
 19,679,400 and 19,679,400 outstanding, respectively  |  |                | 1,968      |                    |   | 1,968      |  
|Additional paid-in capital                                                                                            |  |                | 6,193,927  |                    |   | 6,193,927  |  
|Statutory reserves                                                                                                    |  |                | 147,023    |                    |   | 147,023    |  
|Retained deficit                                                                                                      |  |                | (7,340,619 | )                  |   | (603,572   | )
|Accumulated other comprehensive income, foreign currency
translation                                                  |  |                | 1,659,933  |                    |   | 1,656,812  |  
|Noncontrolling Interest                                                                                               |  |                |           |                    |   | 248,224    |  
|                                                                                                                      |  |                |            |                    |   |            |  
|Total Stockholders Equity                                                                                            |  |                | 662,232    |                    |   | 7,644,382  |  
|                                                                                                                      |  |                |            |                    |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                            |  | $              | 31,294,265 |                    | $ | 33,044,273 |  
|                                                                                                                      |  |                |            |                    |   |            |  

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

1

---



|                                                
|------------------------------------------------
|CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.    
|CONDENSED CONSOLIDATED STATEMENTS OF
 OPERATIONS
|AND COMPREHENSIVE LOSS                          
|(unaudited)                                     

|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|----------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                |  | Three Months Ended June 30, |            | Six Months Ended June 30, |  
|                                                |  |                             |            |                           |  
|                                                |  | 2009                        |            | 2008                      |   | 2009       |   | 2008 |           
|                                                |  |                             |            |                           |   |            |   |      |           
|                                                |  |                             |            |                           |   |            |   |      |           
|Sale of Products                                |  | $                           | 8,130,333  |                           | $ | 8,591,297  |   | $    | 14,900,859 |   | $ | 14,077,765 |  
|Cost of Products Sold                           |  |                             | 2,394,530  |                           |   | 2,988,119  |   |      | 4,696,055  |   |   | 5,087,581  |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Gross Profit                                    |  |                             | 5,735,803  |                           |   | 5,603,178  |   |      | 10,204,804 |   |   | 8,990,184  |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Operating Expenses:                             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Selling expense                                 |  |                             | 6,221,263  |                           |   | 4,035,573  |   |      | 12,616,840 |   |   | 5,677,075  |  
|General and administrative expense              |  |                             | 3,120,299  |                           |   | 2,714,259  |   |      | 4,166,741  |   |   | 5,181,837  |  
|Research and development expense                |  |                             | 6,640      |                           |   | 70,213     |   |      | 13,921     |   |   | 189,189    |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Total Operating Expenses                        |  |                             | 9,348,202  |                           |   | 6,820,045  |   |      | 16,797,502 |   |   | 11,048,101 |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Loss from Operations                            |  |                             | (3,612,399 | )                         |   | (1,216,867 | ) |      | (6,592,698 | ) |   | (2,057,917 | )
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Other Income (Expense):                         |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Interest income                                 |  |                             | 431        |                           |   | 1,848      |   |      | 1,312      |   |   | 5,113      |  
|Income from research and development activities |  |                             | 119,611    |                           |   | 75,588     |   |      | 145,179    |   |   | 338,625    |  
|Interest expense                                |  |                             | (268,324   | )                         |   | (435,114   | ) |      | (520,014   | ) |   | (691,196   | )
|Non-operating expenses                          |  |                             | (15,137    | )                         |   | (65,337    | ) |      | (19,191    | ) |   | (138,482   | )
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Net Other Expense                               |  |                             | (163,419   | )                         |   | (423,015   | ) |      | (392,714   | ) |   | (485,940   | )
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Loss Before Income Taxes                        |  |                             | (3,775,818 | )                         |   | (1,639,882 | ) |      | (6,985,412 | ) |   | (2,543,857 | )
|Benefit from (provision for) income taxes       |  |                             |           |                           |   | 2,163      |   |      |           |   |   | (13        | )
|Minority interest in income of subsidiaries     |  |                             | 43         |                           |   | 100,250    |   |      | 248,365    |   |   | 153,741    |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Net Loss                                        |  | $                           | (3,775,775 | )                         | $ | (1,537,469 | ) | $    | (6,737,047 | ) | $ | (2,390,129 | )
|Foreign currency translation adjustment         |  |                             | 2,939      |                           |   | 217,091    |   |      | 3,121      |   |   | 690,175    |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Comprehensive Loss                              |  | $                           | (3,772,836 | )                         | $ | (1,320,378 | ) | $    | (6,733,926 | ) | $ | (1,700,056 | )
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Loss Per Share                                  |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Basic                                           |  | $                           | (0.19      | )                         | $ | (0.08      | ) | $    | (0.34      | ) | $ | (0.12      | )
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Diluted                                         |  | $                           | (0.19      | )                         | $ | (0.08      | ) | $    | (0.34      | ) | $ | (0.12      | )
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Weighted-Average Shares Outstanding             |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Basic                                           |  |                             | 19,679,400 |                           |   | 19,679,400 |   |      | 19,679,400 |   |   | 19,679,400 |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  
|Diluted                                         |  |                             | 19,679,400 |                           |   | 19,679,400 |   |      | 19,679,400 |   |   | 19,679,400 |  
|                                                |  |                             |            |                           |   |            |   |      |            |   |   |            |  

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

2

---



|                                                
|------------------------------------------------
|CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.    
|CONDENSED CONSOLIDATED STATEMENTS OF CASH
 FLOWS
|(unaudited)                                     

|                                                                                 |  |                            |            |      |   |            |  
|-------------------------------------------------------------------------------- |  | -------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                 |  | Six months ended
 June 30, |           
|                                                                                 |  | 2009                       |            | 2008 |  
|                                                                                 |  |                            |            |      |  
|                                                                                 |  |                            |            |      |  
|Cash Flows from Operating Activities:                                            |  |                            |            |      |   |            |  
|Net loss                                                                         |  | $                          | (6,737,047 | )    | $ | (2,390,129 | )
|Adjustments to reconcile net loss to net cash provided by operating
 activities: |  |                            |            |      |   |            |  
|Depreciation and amortization                                                    |  |                            | 473,840    |      |   | 429,102    |  
|Noncontrolling interest in loss of subsidiaries                                  |  |                            | (248,365   | )    |   | (165,334   | )
|Change in current assets and liabilities:                                        |  |                            |            |      |   |            |  
|Allowance for doubtful accounts                                                  |  |                            | 1,460,256  |      |   | 1,962,910  |  
|Accounts and notes receivable                                                    |  |                            | (2,212,347 | )    |   |           |  
|Sales representative advances                                                    |  |                            | 588,553    |      |   | (134,786   | )
|Advances to suppliers                                                            |  |                            | (505,648   | )    |   | 30,685     |  
|Inventory                                                                        |  |                            | 932,665    |      |   | 409,441    |  
|Other current assets                                                             |  |                            | 11,265     |      |   | 129,901    |  
|Accounts payable                                                                 |  |                            | 805,273    |      |   | 642,217    |  
|Accrued expenses                                                                 |  |                            | 6,001,346  |      |   | (1,220,462 | )
|Deposits                                                                         |  |                            | (298,736   | )    |   |           |  
|Advances from customers                                                          |  |                            | 652,055    |      |   | 2,362      |  
|Taxes and related payables                                                       |  |                            | 58,337     |      |   | (251,997   | )
|                                                                                 |  |                            |            |      |   |            |  
|Net Cash Provided by (Used in) Operating Activities                              |  |                            | 981,447    |      |   | (556,090   | )
|                                                                                 |  |                            |            |      |   |            |  
|                                                                                 |  |                            |            |      |   |            |  
|Cash Flows from Investing Activities:                                            |  |                            |            |      |   |            |  
|Capital expenditures                                                             |  |                            | (308,654   | )    |   | (137,079   | )
|Receivable from related parties                                                  |  |                            |           |      |   | 87,223     |  
|                                                                                 |  |                            |            |      |   |            |  
|Net Cash Used in Investing Activities                                            |  |                            | (308,654   | )    |   | (49,856    | )
|                                                                                 |  |                            |            |      |   |            |  
|                                                                                 |  |                            |            |      |   |            |  
|Cash Flows from Financing Activities:                                            |  |                            |            |      |   |            |  
|Payable to related parties                                                       |  |                            | (108,835   | )    |   | (93,864    | )
|Proceeds from short and long-term loans                                          |  |                            | 3,653,246  |      |   | 5,655,605  |  
|Payments on short and long-term loans                                            |  |                            | (5,114,544 | )    |   | (7,140,201 | )
|                                                                                 |  |                            |            |      |   |            |  
|Net Cash Used in Financing Activities                                            |  |                            | (1,570,133 | )    |   | (1,578,460 | )
|                                                                                 |  |                            |            |      |   |            |  
|                                                                                 |  |                            |            |      |   |            |  
|Effect of exchange rate changes on cash                                          |  |                            | 2,420      |      |   | 128,340    |  
|Net Decrease in Cash and Cash Equivalents                                        |  |                            | (894,920   | )    |   | (2,056,066 | )
|Cash and Cash Equivalents at Beginning of Period                                 |  |                            | 1,612,054  |      |   | 2,800,641  |  
|                                                                                 |  |                            |            |      |   |            |  
|Cash and Cash Equivalents at End of Period                                       |  | $                          | 717,134    |      | $ | 744,575    |  
|                                                                                 |  |                            |            |      |   |            |  
|                                                                                 |  |                            |            |      |   |            |  
|Supplemental Information                                                         |  |                            |            |      |   |            |  
|Cash paid for interest                                                           |  | $                          | 582,854    |      | $ | 691,196    |  
|Cash paid for income taxes                                                       |  |                            |           |      |   |           |  

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

3

---



NOTE 1  BASIS OF PRESENTATION

The
accompanying unaudited condensed consolidated financial statements of China
Shenghuo Pharmaceutical Holdings, Inc., (the Company or the Parent or the
Group) were prepared pursuant to the rules and regulations of the United
States Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations.
Management of the Company (Management) believes that the following
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in the Companys Form 10-K for the year ended December 31, 2008, as
amended.

These
unaudited condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) that, in the opinion of
Management, are necessary to present fairly the consolidated financial position
and results of operations of the Company for the periods presented. Operating
results for the six months ended June 30, 2009 are not necessarily indicative
of the results that may be expected for the full year ending December 31, 2009.

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

NOTE 2  ORGANIZATION AND NATURE OF
OPERATIONS

Nature
of Business The Company, through its
subsidiaries, designs, develops, markets, exports and sells pharmaceutical,
nutritional supplements and cosmetic products throughout the Peoples Republic
of China (PRC) and abroad. The Company also conducts research and development
for third parties as well as for itself using the medicinal herb Panax
notoginseng, also known as Sanqi, Sanchi, or Tienchi and sells pharmaceutical,
nutritional supplements and cosmetic products that contain this herb, which is
grown in two provinces in the PRC. Sales from the cosmetic products represent
less than 10% of total Company sales and revenue. The Company does not maintain
accounting records by line of business as the Companys subsidiaries sell
products from multiple lines of business and management evaluates each
subsidiary as a separate entity.

Organization The Company owns a 93.75% equity interest in Kunming Shenghuo
Pharmaceuticals Co., Ltd. (Shenghuo). Shenghuo owns a 99% equity interest in
Kunming Shenghuo Medicine Co., Ltd. (Medicine) and Kunming Pharmaceutical
Importation and Exportation Co., Ltd. (Import/Export), a 98.18% interest in
Kunming Shenghuo Cosmetics Co., Ltd. (Cosmetic). 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 real
property 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. No minority interest is presented at
June 30, 2009 due to accumulated losses of the Company.

NOTE 3  SELECTED SIGNIFICANT ACCOUNTING
POLICIES

Basis
of Presentation and Translating Financial Statements
 The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. The functional currency of the operating subsidiaries in
the PRC is the Chinese Yuan Renminbi (CNY); however, the consolidated
financial statements have been expressed in United States Dollars (USD). The
accompanying consolidated balance sheets have been translated into USD at the
exchange rates prevailing at each balance sheet date. The consolidated statements
of operations have been translated using the average exchange rates prevailing
during the operating periods of each statement.

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

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

4

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Fair
Value of Financial Instruments The carrying
amounts reported in the consolidated balance sheets for accounts and notes
receivables, employee advances, advances to suppliers, accounts payable,
accrued liabilities, and advances from customers approximate fair value because
of the immediate or short-term maturity of these financial instruments.
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 uncollectible accounts receivable is
established by charges to operations for amounts required to maintain an
adequate allowance, in Managements judgment, to cover anticipated losses from
customer accounts and sales returns. Such accounts are charged to the allowance
when collection appears doubtful. Any subsequent recoveries are credited to the
allowance account. The Company believes that the allowance for doubtful
accounts is consistent with industry standards in the PRC based on the products
that are being sold.

Notes
receivable were $129,149 and $750,877 as of June 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 due
within six months. Such sales and purchasing arrangements are consistent with
industry practices in the PRC.

Sales
Representative Advances  Sales representative
advances are presented net of an estimated allowance for doubtful advances. As
time passes from when advances are made to sales representatives for travel and
related expenses, the Company will create an allowance for these older
receivables as the likelihood of collection from each particular sales
representative decreases as their respective advances age. Long-term sales
representative advances are not expected to be realized in the current
operating period.

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

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

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

Impairment
of Long-Lived 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.

Deposits
and Accrued Expenses Accrued expenses consists
of accrued commission expense, accrued payroll expense, and accrued welfare
expense. Deposits consist of funds paid 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 $554,828 and $446,168 as of June 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
$813,879 and $222,609 as of June 30, 2009 and December 31, 2008, respectively
and are recognized in revenue when delivery has occurred.

5

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

The Company
recognizes revenue for its consignment sales only after the customer has
checked the quality of the goods and the Company has received a written
confirmation from the customer that it has accepted the goods.

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

Shipping
and Handling Costs  Shipping and handling
costs are included in selling expenses.

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.

Advertising
 Advertising expense was $26,027 and $1,395,146 for the six months ended June
30, 2009 and 2008, respectively.

Basic
and Diluted Earnings per Share  The computation of basic
and diluted earning per share is based on the weighted-average number of shares
outstanding during the periods presented. Potentially dilutive securities for
the three and six months ended June 30, 2009 and 2008 include 46,000 warrants
which were antidilutive 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 allowances for doubtful accounts and Management believes the
Companys current reserves are 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.

Business
Condition and Liquidity  Although the Company has had a
history prior to 2008 of positive income, working capital and retained
earnings, the Company has incurred a net loss for the six months ended June 30,
2009 of $6.7 million and had net cash provided by operating activities of $1.0
million and used funds in financing activities of $1.6 million. As a result,
during the six months ended June 30, 2009, the cash and cash equivalents
decreased $0.9 million. In addition, the Company had an accumulated deficit of
$7.3 million as of June 30, 2009, primarily due to the losses in the six months
ended June 30, 2009 and the loss of $4.6 million for fiscal 2008. As discussed
in Note 6, the Company has $11.3 million in short term loans that mature in the
next twelve months. Additionally, as discussed in Note 9, putative class action
lawsuits have been asserted against the Company and the Company is undergoing
an voluntary investigation by the Securities and Exchange Commission.

The Company
has expended significant efforts to expand its revenues by assisting its sales
representatives and increasing its marketing efforts during the six months
ended June 30, 2009 and during fiscal 2008. The net loss for the six months
ended June 30, 2009 was caused primarily by increased selling expenses, legal,
auditing, sales representative assistance and marketing expenses. As of June 1,
2009, the Company has changed its policy with respect to its sales representatives and has
reduced the percentage accrual for selling expenses which is based on a
percentage of revenue. The Company believes that it will be able to
stabilize selling, legal, auditing, marketing and sales representative

6

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assistance
expenses in the near future but the Company cannot give any assurance that this
will be the case. In addition, the Company may be forced to give significant
attention to the class action lawsuits noted above.

Recently Enacted
Accounting Standards  In June 2009, the FASB
issued SFAS No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles or SFAS No. 168. SFAS No. 168
will become the single source of authoritative nongovernmental U.S. GAAP,
superseding existing FASB, American Institute of Certified Public Accountants
(AICPA), Emerging Issues Task Force (EITF), and related accounting literature.
SFAS No. 168 reorganizes the thousands of GAAP pronouncements into roughly 90
accounting topics and displays them using a consistent structure. Also included
is relevant SEC guidance organized using the same topical structure in separate
sections. SFAS No. 168 will be effective for financial statements issued for
reporting periods ending after September 15, 2009. This will have an impact on
the Companys financial disclosures since all future references to
authoritative accounting literature will be references in accordance with SFAS
No. 168.

NOTE 4  INVENTORY

Inventory
consisted of the following:

|                                 |  |                |           |                    |   |           |  
|-------------------------------- |  | -------------- | --------- | ------------------ | - | --------- | -
|                                 |  | June 30,
 2009 |           | December 31,
 2008 |  
|                                 |  |                |           |                    |  
|Raw materials                    |  | $              | 545,246   |                    | $ | 1,061,465 |  
|Work-in-process                  |  |                | 1,081,294 |                    |   | 2,003,825 |  
|Finished goods                   |  |                | 858,253   |                    |   | 648,074   |  
|Product on consignment           |  |                | 1,024,286 |                    |   | 722,076   |  
|                                 |  |                |           |                    |   |           |  
|Total Inventory                  |  | $              | 3,509,080 |                    | $ | 4,435,440 |  
|Less: Provision for obsolescence |  |                | (148,181  | )                  |   | (147,978  | )
|                                 |  |                |           |                    |   |           |  
|Net Inventory                    |  | $              | 3,360,899 |                    | $ | 4,287,462 |  
|                                 |  |                |           |                    |   |           |  

NOTE 5  RELATED PARTY TRANSACTIONS

At June 30,
2009 and December 31, 2008 the amounts payable to officers were $39,666 and
$148,575, 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 6.

7

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NOTE 6  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 June 30,
2009 and December 31, 2008:

|                                                                                                                |  |                |            |                    |   |           | 
|--------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | ------------------ | - | --------- | 
|                                                                                                                |  | June 30,
 2009 |            | December 31,
 2008 |  
|                                                                                                                |  |                |            |                    |  
|Short-term note payable to a municipality,
 interest at 1.8%, due on demand, unsecured                          |  | $              | 73,048     |                    | $ | 72,948    | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a finance
 bureau, interest at 4.5%, due on demand, unsecured                        |  |                | 75,285     |                    |   | 75,182    | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a bank, interest
 at 5.31%, matures April 2010, secured by property                  |  |                | 3,652,408  |                    |   |          | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a bank, interest
 at 7.47%, matured April 2009, secured by property                  |  |                |           |                    |   | 3,647,399 | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a bank, interest
 at 6.57%, matures April 2010, secured by property                  |  |                | 1,460,963  |                    |   |          | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a government
 development zone interest at 2.43%, due on demand, secured by property |  |                | 219,144    |                    |   | 218,844   | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a bank, interest
 at 7.72%, matures August 2009, secured by shareholder              |  |                | 5,843,853  |                    |   | 5,835,838 | 
|                                                                                                                |  |                |            |                    |   |           | 
|Total short-term notes payable                                                                                  |  | $              | 11,324,701 |                    | $ | 9,850,211 | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  | June 30,
 2009 |            | December 31,
 2008 |  
|                                                                                                                |  |                |            |                    |  
|Long-term note payable to a bank, interest
 at 8.316%, matures April 2010, secured by property                  |  |                | 1,460,963  |                    |   | 1,458,959 | 
|Long-term note payable to a bank, interest
 at 6.57%, matures March 2010, due on demand, unsecured              |  |                |           |                    |   | 2,917,919 | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  |                |            |                    |   |           | 
|Total long-term debt                                                                                            |  |                | 1,460,963  |                    |   | 4,376,878 | 
|                                                                                                                |  |                |            |                    |   |           | 
|Less current maturities of long-term debt                                                                       |  |                | 1,460,963  |                    |   | 3,245,685 | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  |                |            |                    |   |           | 
|Long-term notes payable, net of current
 portion                                                                |  | $              |           |                    | $ | 1,131,193 | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  |                |            |                    |   |           | 
|Past due notes payable                                                                                          |  | $              | 294,430    |                    | $ | 294,026   | 
|                                                                                                                |  |                |            |                    |   |           | 

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%.

On August 17,
2007, the Company received a loan for $6,651,094 from Shuang Long Branch of
Agricultural Bank of China with a term of two years. The loan bears interest at
a rate of 7.72% which is due quarterly. The loan was for working capital and is
guaranteed by Lans International Medicine Investment Co Ltd. (LIMI). Gui Hua
Lan, our Chief Executive Officer; Feng Lan, our President; and Zheng Yi Wang,
our Executive Director of Exports, are directors and have voting and investment
control over the shares owned by LIMI, which beneficially owns or controls
approximately 78% of our outstanding shares. In addition, Gui Hua Lan, Feng Lan
and Zheng Yi Wang owns 62.42%, 5.15% and 1.45%, respectively, of LIMIs issued
and outstanding shares. LIMI is not receiving any compensation for the
guarantee of the Companys loan.

8

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NOTE 7  STOCKHOLDERS EQUITY

Statutory Reserves
- According to the Articles of
Association, the Company is required to transfer a certain portion of its net
profits to Statutory Reserves, as determined under PRC accounting regulations,
from net income to both the surplus reserve fund and the public welfare fund.
Accordingly, the Company has recorded an aggregate of $147,023 in the Statutory
Reserves account in the equity section of the accompanying balance sheet as of
June 30, 2009 and December 31, 2008, respectively.

The following
summarizes the outstanding warrants as of June 30, 2009:

|                |   |                       |  |                                                        |  |                     |  |     |  |  |  |        | 
|--------------- | - | --------------------- |  | ------------------------------------------------------ |  | ------------------- |  | --- |  |  |  | ------ | 
|Exercise
 Price |   | Warrants
 Outstanding |  | Weighted-Average
 Remaining
 Contractual
 Life (Years) |  | Number
 Exercisable | 
|                |   |                       |  |                                                        |  |                     | 
|                | $ | 3.50                  |  |                                                        |  | 6,000               |  | 3.2 |  |  |  | 6,000  | 
|                | $ | 4.20                  |  |                                                        |  | 40,000              |  | 3.0 |  |  |  | 40,000 | 
|                |   |                       |  |                                                        |  |                     |  |     |  |  |  |        | 
|                |   |                       |  |                                                        |  | 46,000              |  |     |  |  |  | 46,000 | 
|                |   |                       |  |                                                        |  |                     |  |     |  |  |  |        | 

NOTE 8  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.

On March 16, 2007, the National Peoples
Congress of China passed the new Enterprise Income Tax Law, (EIT Law), and on
December 6, 2007, the State Council of China issued the Implementation Regulations
for the EIT Law which took effect on January 1, 2008. The EIT Law and
Implementation Regulations Rules impose a unified EIT of 25% on all
domestic-invested enterprises and Foreign Invested Entities, or FIEs, unless
they qualify under certain limited exceptions.

As a result of the above change in the income
tax laws, the Parent has a 18% rate for 2009 with a tax holiday of 50% of the
tax rates in effect during fiscal 2009 through 2011 as determined by the PRC
government and the regional tax authorities. The phase-in income tax rate is
18% for 2009, 20% for 2010, 22% for 2011, 24% for 2012, and 25% for 2013 and
after. Medicine, Import/Export, Cosmetics, Beisheng and Pingbian Shenghuo are
taxed at the new 25% rate effective January 1, 2008.

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 the Parent
is located in a special region, it has a 15% corporate income tax rate and has
been granted a tax holiday during which it paid no income taxes through
December 31, 2008.

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 carryforwards 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.

The Company
has an aggregate of $12.1 million of net operating loss carryforwards available
to its subsidiaries in the PRC that, if unused by the offset of future income
of the individual subsidiary, begin to expire in 2011.

NOTE 9  COMMITMENTS AND CONTINGENCIES

SEC Investigation  The United States Securities and
Exchange Commission (SEC) has 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
is represented by counsel and has been cooperating with the SECs inquiry on a
voluntary basis.

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). 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
independent registered public accounting firm, Hansen, Barnett & Maxwell,
P.C. During the second quarter of 2009, the Company and the accounting firm
filed

9

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motions to
dismiss the complaint and the plaintiffs filed a memorandum in opposition to
those motions. During the third quarter of 2009, the Company plans to file 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.

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

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

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.

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

NOTE 10 - GEOGRAPHIC INFORMATION

The Company
derives its sales from China and from other various countries. Operations in
China make up the majority of the Companys sales, with a very small portion
from other various countries. No revenues from external customers attributed to
any individual foreign country are material. The following table summarizes
sales by geographic location for the three and six months ended June 30, 2009
and 2008, respectively:

|                            |  |                             |           |                           |   |           |  |      |            |  |   |            | 
|--------------------------- |  | --------------------------- | --------- | ------------------------- | - | --------- |  | ---- | ---------- |  | - | ---------- | 
|                            |  | Three months ended June 30, |           | Six months ended June 30, |  
|                            |  |                             |           |                           |  
|                            |  | 2009                        |           | 2008                      |   | 2009      |  | 2008 |           
|                            |  |                             |           |                           |   |           |  |      |           
|Sales from
 China           |  | $                           | 8,125,153 |                           | $ | 8,389,308 |  | $    | 14,827,243 |  | $ | 13,673,527 | 
|Sales from
 other countries |  |                             | 5,180     |                           |   | 201,989   |  |      | 73,616     |  |   | 404,238    | 
|                            |  |                             |           |                           |   |           |  |      |            |  |   |            | 
|Total Sales                 |  | $                           | 8,130,333 |                           | $ | 8,591,297 |  | $    | 14,900,859 |  | $ | 14,077,765 | 
|                            |  |                             |           |                           |   |           |  |      |            |  |   |            | 

NOTE 11  CONCENTRATIONS

For the six
months ended June 30, 2009 the Company had concentrations of purchases from one
vendor accounting for 59.7% of total purchases.

NOTE 12  SUBSEQUENT EVENTS

The Yunnan Shuang Long Branch
of Agricultural Bank of China (Agricultural Bank) has conducted a review of
the Companys operations and unencumbered assets, including the improvements
being made to the Company owned real estate on which it is constructing
Shenghuo Plaza. Based on its assessment, the Agricultural Bank has approved a
loan facility of up to RMB 110 million (approximately $16 million). The first
approved draw down of this facility will be to repay the RMB 39.6 million
(approximately $5.8 million) advanced by a government financial bureau to pay
the Agricultural Bank facility that matured in August 2009. It is also
anticipated that RMB 20 million of this facility (approximately $2.9 million)
will be advanced to fund further construction costs of Shenghuo Plaza. The
balance of the facility is intended to fund working capital needs. Each
borrowing will require the commitment of specific collateral to be determined
at that time. As currently contemplated, the interest rate on all advances will
be at the Agricultural Banks base rate.

10

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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 87% 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 Catalog;           
| |   |                                                                                                                                         
| |  | 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;                                                                                                       
| |   |                                                                                                                                         
| |  | 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 Renminbi;                                                       
| |   |                                                                                                                                         
| |  | cost of
 complying with current and future governmental regulations and the impact of
 any changes in the regulations on our operations;

11

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| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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; 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.

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 73% of
our sales for the six months ended June 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.

12

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Xuesaitong
Soft Capsules, which have been listed in the National Insurance Catalogue and
is 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 to hospital pharmacies in cities through regional
distributors in the area. No single distributor accounts for over 10% of our
sales as of June 30, 2009.

As of June 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 distributors to expand the distribution and presence of our
non-prescription brands and cosmetics.

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

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 non-prescription medicines in the future.

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 catalog. 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.

Our 12 WaysTM Chinese
Traditional Medicine Beauty Salon Series (12 Ways) cosmetic products are sold
to a number of cities and provinces outside our local region. We have opened a
number of retail specialty counters to offer our cosmetic products at
pharmacies throughout Eastern China, eventually expanding our retail presence
across China. As of June 30, 2009, we have opened approximately 605 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

13

---



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 get 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.

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

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

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

Fair
Value of Financial Instruments  The carrying
amounts reported in the consolidated balance sheets for accounts and notes
receivables, employee advances, advances to suppliers, accounts payable,
accrued liabilities, and advances from customers approximate fair value because
of the immediate or short-term maturity of these financial instruments. We
believe 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-Our cash and cash equivalents are maintained in bank deposit
accounts. We have not experienced any losses with respect to these deposits.
Cash and cash equivalents include interest bearing and non-interest bearing
bank deposits, money market accounts and short-term certificates of deposit
with original maturities of three months or less. We do not have any restricted
cash as of June 30, 2009. We did not enter into any hedge contracts
during any of the periods presented.

Accounts
and Notes Receivable and Allowance for Doubtful Accounts
 Trade receivables are carried at original invoiced amounts less an allowance
for doubtful accounts. An allowance for uncollectible accounts receivable is
established by charges to operations for amounts required to maintain an
adequate allowance, in our judgment, to cover anticipated losses from customer
accounts and sales returns. Such accounts are charged to the allowance when
collection appears doubtful. Any subsequent recoveries are credited to the
allowance account. We believe that the allowance for doubtful accounts is
consistent with industry standards in the PRC based on the products that are
being sold.

Notes
receivable were $129,149 and $750,877 as of June 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 due
within six months. Such sales and purchasing arrangements are consistent with
industry practices in the PRC.

Sales
Representative Advances  Sales representative
advances are presented net of an estimated allowance for doubtful advances. As
time passes from when advances are made to sales representatives for travel and
related expenses, we will create an allowance for these older receivables as
the likelihood of collection from each particular sales representative
decreases as their respective advances age. Long-term sales representative
advances are not expected to be realized in the current operating period.

14

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Inventory
 Inventories consist principally of pharmaceutical products and are stated at
weighted average cost. When market value of the inventory products is lower
than the weighted average cost, inventory is reduced to its net realizable
value. We also hold inventory on consignment.

Property
and Equipment  Property and equipment are stated
at cost. Maintenance and depreciation are charged to expense as incurred and
major improvements are capitalized. Gains or losses on sales or retirements are
included in the statements of operations in the period of disposition,
determined by reference to their carrying amounts. We review our 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We review our 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. We evaluate, at each balance sheet date, whether events and
circumstances have occurred that indicate possible impairment. We use 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.

Deposits
and Accrued Expenses Accrued expenses consists of
accrued commission expense, accrued payroll expense, and accrued welfare
expense. Deposits consist of funds paid by the sales representatives to obtain
our products to sell. We retain these deposits during the time the sales
representatives provide services to us. When we receive full payment from the
customer or sales representatives terminate sales services, the deposits are
returned to the sales representatives. We record deposits from sales
representatives when payments are received.

Advances to
Suppliers and Advances from Customers-We 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 $554,828 and
$446,168 as of June 30, 2009 and December 31, 2008, respectively. Advances to
suppliers are recorded when payment is made by us 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 $813,879 and $222,609 as of June 30,
2009 and December 31, 2008, respectively and are recognized in revenue when
delivery has occurred.

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

We recognize
revenue for its consignment sales only after the customer has checked the
quality of the goods and we have received a written confirmation from the
customer that it has accepted the goods.

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

Shipping
and Handling Costs Shipping and handling
costs are included in selling expenses.

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

Advertising
 Advertising expense was $26,027 and $1,395,146 for the six months ended June
30, 2009 and 2008, respectively.

Basic
and Diluted Earnings per Share The computation of basic
and diluted earning per share is based on the weighted-average number of shares
outstanding during the periods presented. Potentially dilutive securities for
the three and six months ended June 30, 2009 and 2008 include 46,000 warrants
which were antidilutive due to losses we sustained.

15

---



Retirement
Benefit Plans  We make 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 of
our existing and future retired employees. 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 tour
major exposure to credit risk in relation to our financial assets. No other
financial assets carry a significant exposure to credit risk. We perform
ongoing credit evaluations of each customers financial condition. We maintain
allowances for doubtful accounts and we believe our current reserves are
adequate.

We have our
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, our deposits
may be at a higher risk of loss.

Business
Condition and Liquidity  Although the Company has had a
history prior to 2008 of positive income, working capital and retained
earnings, the Company has incurred a net loss for the six months ended June 30,
2009 of $6.7 million and had net cash provided by operating activities of $1.0
million and used funds in financing activities of $1.6 million. As a result,
during the six months ended June 30, 2009, the cash and cash equivalents
decreased $0.9 million. In addition, the Company had an accumulated deficit of
$7.3 million as of June 30, 2009, primarily due to the losses in the six months
ended June 30, 2009 and the loss of $4.6 million for fiscal 2008. As discussed
in Note 6, the Company has $11.3 million in short term loans that mature in the
next twelve months. Additionally, as discussed in Note 9, putative class action
lawsuits have been asserted against the Company and the Company is undergoing
an voluntary investigation by the Securities and Exchange Commission.

The Company
has expended significant efforts to expand its revenues by assisting its sales
representatives and increasing its marketing efforts during the six months
ended June 30, 2009 and during fiscal 2008. The net loss for the six months
ended June 30, 2009 was caused primarily by increased selling expenses, legal,
auditing, sales representative assistance and marketing expenses. As of June 1,
2009, the Company has changed its policy with respect to its sales representatives and has
reduced the percentage accrual for selling expenses which is based on a
percentage of revenue. The Company believes that it will be able to
stabilize selling, legal, auditing, marketing and sales representative
assistance expenses in the near future but the Company cannot give any
assurance that this will be the case. In addition, the Company may be forced to
give significant attention to the class action lawsuits noted above.

Recently Enacted
Accounting Standards  In June 2009, the FASB
issued SFAS No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles or SFAS No. 168. SFAS No. 168
will become the single source of authoritative nongovernmental U.S. GAAP,
superseding existing FASB, American Institute of Certified Public Accountants
(AICPA), Emerging Issues Task Force (EITF), and related accounting literature.
SFAS No. 168 reorganizes the thousands of GAAP pronouncements into roughly 90
accounting topics and displays them using a consistent structure. Also included
is relevant SEC guidance organized using the same topical structure in separate
sections. SFAS No. 168 will be effective for financial statements issued for
reporting periods ending after September 15, 2009. This will have an impact on
the Companys financial disclosures since all future references to
authoritative accounting literature will be references in accordance with SFAS
No. 168.

16

---



Results of Operations

Three
Months Ended June 30, 2009 and 2008

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

|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|------------------------------------------------ |  | -------------------------------------------------- | ---------- | ---- | - | ---------- | - | ------------ | ------ | - |  | ------- | --
|                                                 |  | For the three months
 ended June,                  |            |      |   |            |  
|                                                 |  |                                                    |            |      |   |            |  
|                                                 |  | 2009                                               |            | 2008 |   | Change ($) |   | Variance (%) |       
|                                                 |  |                                                    |            |      |   |            |   |              |       
|                                                 |  | (in thousand, except share and per share
 amounts) |           
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Sale of Products                                 |  | $                                                  | 8,130      |      | $ | 8,591      |   |              | (461   | ) |  | (5.3    | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Cost of Products Sold                            |  |                                                    | 2,395      |      |   | 2,988      |   |              | (593   | ) |  | (19.85  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Gross Profit                                     |  |                                                    | 5,735      |      |   | 5,603      |   |              | 132    |   |  | 2.36    | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Operating Expenses:                              |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Selling
 expenses                                |  |                                                    | 6,221      |      |   | 4,036      |   |              | 2,185  |   |  | 54.14   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|General and
 administrative expenses             |  |                                                    | 3,120      |      |   | 2,714      |   |              | 406    |   |  | 15.0    | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Research and
 development expenses               |  |                                                    | 7          |      |   | 70         |   |              | (63    | ) |  | (91.43  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Total Operating Expenses                         |  |                                                    | 9,348      |      |   | 6,820      |   |              | 2,528  |   |  | 37.05   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Loss from Operations                             |  |                                                    | (3,613     | )    |   | (1,217     | ) |              | (2,396 | ) |  | (197.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Other Income (Expenses):                         |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Interest
 income                                 |  |                                                    |           |      |   | 2          |   |              | (2     | ) |  | (100.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Income from
 research and development activities |  |                                                    | 120        |      |   | 76         |   |              | 44     |   |  | 57.89   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Interest
 expense                                |  |                                                    | (268       | )    |   | (435       | ) |              | 167    |   |  | 38.39   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Non-operating
 expenses                          |  |                                                    | (15        | )    |   | (65        | ) |              | 50     |   |  | 76.92   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Net Other Income (Expense)                       |  |                                                    | (163       | )    |   | (422       | ) |              | 259    |   |  | 61.23   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Loss Before Income Taxes                         |  |                                                    | (3,776     | )    |   | (1,639     | ) |              | (2,137 | ) |  | (130.38 | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Benefit from
 (provision for) income taxes       |  |                                                    |           |      |   | 2          |   |              | (2     | ) |  | (100.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Minority
 interest in income of subsidiaries     |  |                                                    |           |      |   | 100        |   |              | (100   | ) |  | (100.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Net Loss                                         |  |                                                    | (3,776     | )    |   | (1,537     | ) |              | (2,239 | ) |  | 145.67  | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Foreign
 currency translation adjustments        |  |                                                    | 3          |      |   | 217        |   |              | (214   | ) |  | (98.62  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Comprehensive Loss                               |  | $                                                  | (3,773     | )    | $ | (1,320     | ) | $            | (2,453 | ) |  | (185.83 | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Earnings (Loss) Per Share                        |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Basic                                            |  | $                                                  | (0.19      | )    | $ | (0.08      | ) | $            | (0.11  | ) |  | 145.58  | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Diluted                                          |  | $                                                  | (0.19      | )    | $ | (0.08      | ) | $            | (0.11  | ) |  | 145.58  | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Weighted-Average Shares Outstanding              |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Basic                                            |  |                                                    | 19,679,400 |      |   | 19,679,400 |   |              |       |   |  |        | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |         |   
|Diluted                                          |  |                                                    | 19,679,400 |      |   | 19,679,400 |   |              |       |   |  |        | % 

17

---



Sale of products:Sale of
products for the three months ended June 30, 2009 was approximately $8.13
million, a decrease of approximately $0.46 million, or 5.37 %, from $8.59
million for the three months ended June 30, 2008. The decrease in sale of
products was primarily due to the decrease of $0.4 million in the sales of
other brands non-prescription pharmaceuticals, and approximately
$0.03 million decrease in the sales of cosmetic products and export of our
products, respectively.

Cost of products sold:Our cost of
products sold for the three months ended June 30, 2009 was approximately $2.39
million, a decrease of $0.6 million, or 19.85%, from approximately $2.99
million for the three months ended June 30, 2008. The decrease in cost of
products sold was due primarily to the decrease in the cost of products sold of
non-prescription pharmaceuticals because of the decrease in the sales volume of
such products for the three months ended June 30, 2009 as compared to the sales
volume of goods sold for the three months ended June 30, 2008.

Gross profit:Our gross
profit for the three months ended June 30, 2009 was approximately $5.74 million
as compared with approximately $5.6 million for the three months ended June 30,
2008, an increase of $0.14 million, or 2.36%. Gross profit as a percentage of
revenues was approximately 70.55% for the three months ended June 30, 2009, an
increase of 5.33 % from 65.22% for the three months ended June 30, 2008. The
increase in gross margin percentage was primarily due to the above-mentioned
reduction of the sales of non-prescription pharmaceuticals of other brands.

Selling expense: Selling expenses were approximately
    $6.22 million for the three months ended June 30, 2009, an increase of $2.18
    million, or 54.14%, from $4.04 million for the three months ended June 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 best-long term interest to grow our operations through the over-the-counter
 (OTC) market, which will produce higher profit margins, and we have decided to begin developing the OTC market
 in 2009. 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 to be
borne by us are being accrued in selling expenses.

Previously,
the Company advanced selling expenses to the sales representatives to develop
the market. Starting in 2009, due to the new policy, the Company accrues a
fixed amount of selling expenses to the sales representatives for each sale.
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 six
months.

General and administrative expense: General and
administrative expenses were approximately $3.12 million for the three months
ended June 30, 2009, an increase of $0.41 million, or 15.00%, from
approximately $2.71 million for the three months ended June 30, 2008. The
increase was primarily due to the increase of expense related to our status as
a public company with its securities traded on a U.S. national exchange.

Research and development expense:Research and
development expense for the three months ended June 30, 2009 was $6,640 as
compared to $70,213 for the period ended June 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 $163,419 for the
three months ended June 30, 2009 and $423,015 for the three months ended June
30, 2008. The decrease in net other expense was primarily due to (i) an
increase in the income generated from newly-developed products and (ii) a
decrease in the interest expense on long-term loans.

Net loss:Net loss
increased to $3.78 million for the three months ended June 30, 2009 as compared
to net loss of $1.54 million for the three months ended June 30, 2008. The
increase in net loss was primarily due to (i) an increase in the expenses
related to our status as a public company; (ii) an increase in selling expense
and (iii) an increase in the allowance for bad debts.

18

---



Six Months
Ended June 30, 2009 and 2008

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

|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|------------------------------------------------ |  | -------------------------------------------------- | ---------- | ---- | - | ---------- | - | ------------ | ------ | - |  | ------ | --
|                                                 |  | For the six months
 ended June,                    |            |      |   |            |  
|                                                 |  |                                                    |            |      |   |            |  
|                                                 |  | 2009                                               |            | 2008 |   | Change ($) |   | Variance (%) |       
|                                                 |  |                                                    |            |      |   |            |   |              |       
|                                                 |  | (in thousand, except share and per share
 amounts) |           
|                                                
|Sale of Products                                 |  | $                                                  | 14,901     |      | $ | 14,078     |   |              | 823    |   |  | 5.85   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Cost of Products Sold                            |  |                                                    | 4,696      |      |   | 5,088      |   |              | (392   | ) |  | (8.0   | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Gross Profit                                     |  |                                                    | 10,205     |      |   | 8,990      |   |              | 1,215  |   |  | 14.0   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Operating Expenses:                              |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Selling
 expenses                                |  |                                                    | 12,617     |      |   | 5,677      |   |              | 6,940  |   |  | 122.0  | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|General and
 administrative expenses             |  |                                                    | 4,167      |      |   | 5,182      |   |              | (1,015 | ) |  | (20.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Research and
 development expenses               |  |                                                    | 14         |      |   | 189        |   |              | (175   | ) |  | (93.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Total Operating Expenses                         |  |                                                    | 16,798     |      |   | 11,048     |   |              | 5,750  |   |  | 52.0   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Loss from Operations                             |  |                                                    | (6,593     | )    |   | (2,058     | ) |              | (4,535 | ) |  | (220.0 | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Other Income (Expenses):                         |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Interest
 income                                 |  |                                                    | 1          |      |   | 5          |   |              | (4     | ) |  | (80.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Income from
 research and development activities |  |                                                    | 145        |      |   | 339        |   |              | (194   | ) |  | (57.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Interest
 expense                                |  |                                                    | (520       | )    |   | (691       | ) |              | 171    |   |  | 25.0   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Non-operating
 expenses                          |  |                                                    | (19        | )    |   | (138       | ) |              | 119    |   |  | (86.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Net Other Income (Expense)                       |  |                                                    | (393       | )    |   | (485       | ) |              | 92     |   |  | (19.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Loss Before Income Taxes                         |  |                                                    | (6,986     | )    |   | (2,543     | ) |              | (4,443 | ) |  | (175.0 | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Benefit from
 (provision for) income taxes       |  |                                                    |           |      |   |           |   |              |       |   |  |       | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Minority
 interest in income of subsidiaries     |  |                                                    | 249        |      |   | 154        |   |              | 94     |   |  | 61.0   | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Net Loss                                         |  |                                                    | (6,737     | )    |   | (2,389     | ) |              | (4,349 | ) |  | (182.0 | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Foreign
 currency translation adjustments        |  |                                                    | 3          |      |   | 690        |   |              | (687   | ) |  | (99.0  | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Comprehensive Loss                               |  | $                                                  | (6,734     | )    | $ | (1,700     | ) | $            | (5,033 | ) |  | (296.0 | )%
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Loss Per Share                                   |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Basic                                            |  | $                                                  | (0.34      | )    | $ | (0.12      | ) | $            | 0.22   |   |  | 183.0  | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Diluted                                          |  | $                                                  | (0.34      | )    | $ | (0.12      | ) | $            | 0.22   |   |  | 183.0  | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Weighted-Average Shares Outstanding              |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Basic                                            |  |                                                    | 19,679,400 |      |   | 19,679,400 |   |              |       |   |  |       | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|Diluted                                          |  |                                                    | 19,679,400 |      |   | 19,679,400 |   |              |       |   |  |       | % 
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   
|                                                 |  |                                                    |            |      |   |            |   |              |        |   |  |        |   

19

---



Sale of products:Sale
of products for the six months ended June 30, 2009 was approximately $14.90
million, an increase of approximately $0.82 million, or 5.85%,
from approximately $14.08 million for the six months ended June 30, 2008. The increase in sales is due to
the increase in sales of our primary product, Xuesaitong Soft Capsules, by $0.93
million and an increase in our sales of cosmetic products by $0.02
million. The increase in sales was partially offset by the decrease of $0.07
million in our sales of other companies non-prescription medicine and the
decrease in exports of $0.06 million attributable to the general
condition of the global economy. The foreign exchange rate fluctuation also
impacted the sales revenue by $0.07 million.

Cost of products
sold:Our cost of products sold for the six
months ended June 30, 2009 was approximately $4.69 million, a decrease
of $0.39
million,
or 8%, from approximately $5.08 million for the six months ended June 30, 2008. The decrease
in cost of products sold was due primarily to the decrease in the cost of
products sold of non-prescription pharmaceuticals because of the decrease in
the sales volume of such products for the three months ended June 30, 2009 as
compared to the sales volume of goods sold for the three months ended June 30,
2008.

Gross profit:Our
gross profit for the six months ended June 30, 2009 was approximately $10.20
million as compared with approximately $8.99 million for the six
months ended June 30, 2008. Gross profit as a percentage of revenues was
approximately 68% for the six months ended June 30, 2009, up from 64% for
the six
months ended June 30, 2008. The increase in gross margin percentage is
attributable primarily to the Companys 2009 decision to reduce promotion of
other brands non-prescription medicines that had generated poor profit margins
for the period ended June 30, 2008.

Selling expense:Selling
expenses were approximately $12.61 million for the six
months ended June 30, 2009, an increase of approximately $6.94
million, or 122%, from approximately $5.67 million for the six
months ended June 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 best-long term
    interest to grow our operations through the over-the-counter (OTC)
    market, which will produce higher profit margins, and we have decided to
    begin developing the OTC market in 2009. 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
to be borne by us are being accrued in selling expenses.

Previously,
the Company advanced selling expenses to the sales representatives to develop
the market. Starting in 2009, due to the new policy, the Company accrues a
fixed amount of selling expenses to the sales representatives for each sale.
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 six
months.

General and
administrative expense:General and administrative
expenses were approximately $4.16 million for the six months ended June 30, 2009, a
decrease of approximately $1.02 million, or 20%, from approximately $5.18
million for the six months ended June 30, 2008. The decrease was primarily due to
the reduction in advertising expenses.

Research and
development expense:Research and development
expense for the six months ended June 30, 2009 was $14,000 as compared to $190,000
for the six
months ended June 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 $393,000
for the six
months ended June 30, 2009 as compared to $486,000 for the six
months ended June 30, 2008, a decrease of $93,000, or 19%. The decrease in net other expense was
primarily due to (i) an increase in the income generated from newly-developed
products and (ii) a decrease in the interest expense on long-term loans.

Benefits from
(provision for) income taxes:Provision for income
taxes was $0 for the six months ended June 30, 2009 as compared to a provision for
income tax of approximately $13 for the six months ended June 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. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practical because of the complexities
associated with its hypothetical calculation.

Net loss:We
incurred a net loss of $6.73 million for the six months ended June 30, 2009 as compared
to a net loss of $2.39 million for the six months ended June 30, 2008, an increase
in net loss of approximately $4.34 million. The increase in net loss was primarily due
to (i) an increase in the expenses related to our status as a public company;
(ii) an increase in selling expense and (iii) an increase in the allowance for
bad debts.

20

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Liquidity and Capital Resources

GeneralAs
of June 30, 2009, we had cash and cash equivalents of $717,134. We have
historically financed our business operations through bank loans, in addition
to equity offerings. As of June 30, 2009, we had borrowed from banks and other
institutions and had amounts of approximately $11.32 million in short-term
notes payable. All loans are secured by land, buildings and machinery as
collateral except the loan from the Agricultural Bank of China mentioned below
which is secured by a pledge by Lans International Medicine Investment Co Ltd.
(LIMI) of its shareholding in the Company.

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:

|                                                                                                                |  |                |            |                    |   |           | 
|--------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | ------------------ | - | --------- | 
|                                                                                                                |  | June 30,
 2009 |            | December 31,
 2008 |  
|                                                                                                                |  |                |            |                    |  
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a municipality,
 interest at 1.8%, due on demand, unsecured                          |  | $              | 73,048     |                    | $ | 72,948    | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a finance
 bureau, interest at 4.5%, due on demand, unsecured                        |  |                | 75,285     |                    |   | 75,182    | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a bank, interest
 at 5.31%, matures April 2010, secured by property                  |  |                | 3,652,408  |                    |   |          | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a bank, interest
 at 7.47%, matured April 2009, secured by property                  |  |                |           |                    |   | 3,647,399 | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a bank, interest
 at 6.57%, matures April 2010, secured by property                  |  |                | 1,460,963  |                    |   |          | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a government
 development zone interest at 2.43%, due on demand, secured by property |  |                | 219,144    |                    |   | 218,844   | 
|                                                                                                                |  |                |            |                    |   |           | 
|Short-term note payable to a bank, interest
 at 7.72%, matures August 2009, secured by shareholder              |  |                | 5,843,853  |                    |   | 5,835,838 | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  |                |            |                    |   |           | 
|Total short-term notes payable                                                                                  |  | $              | 11,324,701 |                    | $ | 9,850,211 | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  | June 30,
 2009 |            | December 31,
 2008 |  
|                                                                                                                |  |                |            |                    |  
|                                                                                                                |  |                |            |                    |   |           | 
|Long-term note payable to a bank, interest
 at 8.316%, matures April 2010, secured by property                  |  |                | 1,460,963  |                    |   | 1,458,959 | 
|Long-term note payable to a bank, interest
 at 6.57%, matures March 2010, due on demand, unsecured              |  |                |           |                    |   | 2,917,919 | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  |                |            |                    |   |           | 
|Total long-term debt                                                                                            |  |                | 1,460,963  |                    |   | 4,376,878 | 
|                                                                                                                |  |                |            |                    |   |           | 
|Less current maturities of long-term debt                                                                       |  |                | 1,460,963  |                    |   | 3,245,685 | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  |                |            |                    |   |           | 
|Long-term notes payable, net of current
 portion                                                                |  | $              |           |                    | $ | 1,131,193 | 
|                                                                                                                |  |                |            |                    |   |           | 
|                                                                                                                |  |                |            |                    |   |           | 
|Past due notes payable                                                                                          |  | $              | 294,430    |                    | $ | 294,026   | 
|                                                                                                                |  |                |            |                    |   |           | 

21

---



On August 17,
2007, we received a loan for $6,651,094 from Shuang Long Branch of Agricultural
Bank of China with a term of two years. The loan bears interest at a rate of
7.722%, which is due quarterly. The loan was
for working capital and is guaranteed by Lans International Medicine
Investment Co Ltd. (LIMI). Gui Hua Lan, our Chief Executive Officer; Feng
Lan, our President; and Zheng Yi Wang, our Executive Director of Exports, are
directors and have voting and investment control over the shares owned by LIMI,
which beneficially owns or controls approximately 77.3% of our outstanding
shares. In addition, Gui Hua Lan, Feng Lan and Zheng Yi Wang owns 62.42%, 5.15%
and 1.45%, respectively, of LIMIs issued and outstanding shares. LIMI is not
receiving any compensation for the guarantee of our loan.

In August,
2009, the Yunnan Shuang Long Branch of Agricultural Bank of China
(Agricultural Bank) has conducted a review of the Companys operations and
unencumbered assets, including the improvements being made to the Company owned
real estate on which it is constructing Shenghuo Plaza. Based on its
assessment, the Agricultural Bank has approved a loan facility of up to RMB 110
million (approximately $16 million). The first approved draw down of this
facility will be to repay the RMB 39.6 million (approximately $5.8 million)
advanced by a government financial bureau to pay the Agricultural Bank facility
that matured in August 2009. It is also anticipated that RMB 20 million of this
facility (approximately $2.9 million) will be advanced to fund further
construction costs of Shenghuo Plaza. The balance of the facility is intended
to fund working capital needs. Each borrowing will require the commitment of
specific collateral to be determined at that time. As currently contemplated,
the interest rate on all advances will be at the Agricultural Banks base rate.

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

Cash Flow
Six months ended June 30,

|                                                     |  |                           |        |      |   |        |  
|---------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | -
|                                                     |  | 2009                      |        | 2008 |  
|                                                     |  | (unaudited, in thousands) |       
|                                                     |  |                           |        |      |   |        |  
|Net cash
 provided by (used in) operating activities |  | $                         | 981    |      | $ | (556   | )
|                                                     |  |                           |        |      |   |        |  
|Net cash
 used in investing activities               |  |                           | (308   | )    |   | (50    | )
|                                                     |  |                           |        |      |   |        |  
|Net cash
 used in financing activities               |  |                           | (1,570 | )    |   | (1,578 | )
|                                                     |  |                           |        |      |   |        |  
|Cash and Cash Equivalents at End of Period           |  | $                         | 717    |      | $ | 744    |  

Operating Activities:
Net cash provided from operating activities for the six months ended June 30, 2009 was $981,447,
as compared to net cash used in operating activities of $556,090
for the six
months ended June 30, 2008. These results reflect the impacts of (i) net loss;
(ii) cash used in accounts and notes receivable, advances to suppliers and
deposits; and (iii) cash generated in accrued expenses, allowance for doubtful
accounts, sales representative advances, inventory, accounts payable, deposits,
and taxes and related payables.

Investing Activities:
Net cash used by investing activities was $308,654 for the six
months ended June 30, 2009, as compared to net cash used in the amount of $49,856
for the six months ended June 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, our wellness center and training facility
for professionals who use our cosmetic products.

Financing Activities:
Net cash used by financing activities was approximately $1.57
million for the six months ended June 30, 2009 compared to net cash used in the
amount of $1.58 million for the six months ended June 30, 2008. The decrease
in cash used was primarily due to the decrease in proceeds from short- and
long-term loans.

Working Capital

As of June 30,
2009, our accounts receivable and notes receivable (less allowance for doubtful
accounts of approximately $5.96 million) were approximately $10.14
million, an increase of approximately $1.03 million, or 11%
from accounts receivable of approximately $9.11 million (net of allowance for
doubtful accounts of $4.83 million) as of December 31, 2008. The collection
period typically runs from nine months to one year, considering the relatively
long collection period in our industry.

Our company
normally requires one to two months to deliver products once an order is placed
with our workshop. Inventory decreased for the six
months ended June 30, 2009 by $0.93 million, a decrease of 22% over
inventory as of December 31, 2008. The decrease in inventory was

22

---



primarily due
to the increased sales volume stimulated by the newly implemented sales policy
pursuant to which sales representatives are reimbursed for their selling
expenses rather than receiving advances.

Our payment
cycle is considerably shorter than our receivable cycle, since we typically pay
our suppliers all or a portion of the purchase price in advance and for some
suppliers we must maintain a deposit for future orders. We require our
customers to pay a certain percentage of the sales price as deposit before we
ship products to them. The percentage varies from customer to customer. During
the course of business, we reduce the deposit requirement for some customers
with good credit.

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

In addition,
in the course of our business, we must make significant deposits to our
suppliers when we place an order. As of June 30, 2009, our advance payments to
our suppliers totaled approximately $0.55 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.

Beginning June
1,2009, we implemented a new policy aimed at reducing sales representatives
selling expenses. We expect to see the effect of the new policy on operating
results in the second half of 2009.

Current and
long-term employee advances (net of allowances for doubtful accounts) were
approximately $8.39 million at June 30, 2009 and $9.3
million as of December 31, 2008, a decrease of approximately $0.9
million or 10%. The decrease was due to our change to a system of
reimbursing sales representatives based upon presentment of expense vouchers
rather than advancing funds for such expenses.

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

|                                   |  |                          |            |                      |   |            | 
|---------------------------------- |  | ------------------------ | ---------- | -------------------- | - | ---------- | 
|                                   |  | As of
 December 31, 2008 |            | As of
 June 30, 2009 |  
|                                   |  |                          |            |                      |   |            | 
|Gross amount
 of employee accounts |  | $                        | 12,921,134 |                      | $ | 12,350,461 | 
|                                   |  |                          |            |                      |   |            | 
|Allowance
 for doubtful accounts   |  |                          | 3,620,048  |                      |   | 3,956,925  | 
|                                   |  |                          |            |                      |   |            | 
|Net amount                         |  | $                        | 9,301,086  |                      | $ | 8,393,536  | 

Off-Balance Sheet Arrangements

None.

23

---



Foreign Currency Risk

Since all of
our operations are conducted in the PRC, we are subject to special
considerations and significant risks not typically associated with companies
operating in the United States of America. These risks include, among others,
the political, economic and legal environments and foreign currency exchange
rate fluctuations. Our operational results may be adversely affected by changes
in the political and social conditions in the PRC, and by changes in
governmental policies with respect to medical reforms and other laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things. Exchange rate
fluctuations may adversely affect the value, in U.S. dollar terms, of our net
assets and income derived from its operations in the PRC. In addition, all of
our revenue is denominated in the Chinese Yuan Renminbi (CNY), which must be
converted into other currencies before remittance out of the PRC. Both the
conversion of CNY into foreign currencies and the remittance of foreign
currencies abroad require approval of the PRC government. The effect of the
fluctuations of exchange rates is not considered to be material to our business
operations.

Interest Rate Risk

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

ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

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

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of
disclosure controls and procedures

As of June 30,
2009, our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO)
performed an evaluation of the effectiveness of our disclosure controls and
procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities
Exchange Act. Based on that evaluation, management concluded that our
disclosure controls and procedures were effective as of June 30, 2009.

Changes in Internal
Controls over Financial Reporting

Our
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 Securities 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 (Section 404) and to file an annual report
pursuant to section 13(a) of the Securities Exchange Act where we reported that
we determined the existence of a material weakness in internal control. The CEO
and CFO have evaluated several changes to our internal control over financial
reporting as of June 30, 2009 that will or are reasonably likely to materially
affect our internal control over financial reporting.

In making this
evaluation, they used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework. 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:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Material
 adjustments related to the prior year audits were not recorded in the
 companys accounting records that were necessary to reconcile the retained
 earnings to the prior year balances, which is a material weakness.                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | Due to the
 complexities of applying the audit adjustments to sub-ledgers, to date, only
 material audit adjustments to general ledgers were tracked, but the detailed
 adjustments to sub-ledgers still needs to be tracked.                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | Remediation:                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | In addition
 to keeping Chinese GAAP books as a statutory requirement in China, our
 financial department is working with our auditors to identify the detailed
 supporting information of prior year adjustments to sub-ledgers for all audit
 adjustments. We are endeavoring to keep clear records of all adjustments made
 to our accounts from year-to-year and to reconcile our accounts with audited
 reports.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | Remediation
 is in process at this date.                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Multiple
 material adjustments were made as a result of audit procedures performed,
 which is a material weakness.                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | Remediation:                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | Our
 financial department has improved our book keeping procedures and closing
 procedures to improve financial reporting quality and reduce material
 adjustments.                                                                                                                                                                                                                                                  

24

---



| |  |                                        
| |  | ---------------------------------------
| |  | Remediation
 is completed at this date.

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 and
significant deficiencies 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 believes the allegations in the amended
consolidated complaint are without merit, and intends to vigorously defend the
lawsuit. The Company does not believe the outcome of this suit
will have a material adverse effect on the Company.

SEC Investigation  The United States Securities and
Exchange Commission (SEC) has 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
is represented by counsel and has been cooperating with the SECs inquiry on a
voluntary basis.

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
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. During the third quarter of 2009, the Company plans
to file 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.

25

---



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.

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                                                                                           
|                |  |                                                                                                                   
|                |  |                                                                                                                   
|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.


26

---



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)                                
|                 |                                              |                                                   
|August 14,
 2009 | By:                                          | /s/ Gui Hua
 Lan                                  
|                 |                                              |                                                   
|                 |                                              | Gui Hua Lan                                       
|                 |                                              | Chief
 Executive Officer and Chairman of the Board

27

---



EXHIBIT INDEX

|                |  |                                                                                                                   
|--------------- |  | ------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Description
 of Exhibit                                                                                           
|                |  |                                                                                                                   
|                |  |                                                                                                                   
|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.


28

---