**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**




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


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended September 30, 2007**





**OR**





**o** **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





**Commission
      File Number**


**000-51477**





**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


*(Exact
      name of small business issuer as specified in its charter)*





**Delaware**
              *(State
                or other jurisdiction of incorporation*
              *or
                organization)*
            
            **20-2903562**
              *(I.R.S.
                Employer Identification*
              *No.)***No.
                2, Jing You Road,**
              **Kunming
                National Economy &**
              **Technology
                Developing District**
              **People’s
                Republic of China 650217**
              *(Address
                of principal executive offices)*
            
            **N/A**
              *(Zip
                Code)*





**0086-871-728-2628**


*(Issuer’s
      telephone number, including area code)*





Check
      whether the issuer (1) filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act during the past 12 months (or
      for such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past
      90 days. Yes x No  o




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 registrant’s common stock, par value
      $.0001 per share, as of November 1, 2007.





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














**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**FORM
      10-QSB QUARTERLY REPORT**





**TABLE
      OF CONTENTS**





**Page**PART
                I - FINANCIAL INFORMATION
            3ITEM
                1.
            FINANCIAL
                STATEMENTSCondensed
                Consolidated Balance Sheets as of September 30, 2007 and December
                31, 2006
                (Unaudited)
            3Condensed
                Consolidated Statements of Operations and Comprehensive Income for
                the
                Three and Nine Months Ended September 30, 2007 and 2006
                (Unaudited)
            4Condensed
                Consolidated Statements of Cash Flows for the Nine Months Ended September
                30, 2007 and 2006 (Unaudited)
            5Notes
                to Condensed Consolidated Financial Statements (Unaudited)
            6ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            12ITEM
                3.
            CONTROLS
                AND PROCEDURES
            40PART
                II - OTHER INFORMATIONITEM
                1.
            LEGAL
                PROCEEDINGS
            41ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            41ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            41ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            41ITEM
                5.
            OTHER
                INFORMATION
            41ITEM
                6.
            EXHIBITS
            42SIGNATURES
            43








**PART
        I - FINANCIAL INFORMATION**
 **CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **AND
        SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **(Unaudited)**
 
 **September 30,**
              
              **December
                  31,****2007**
              
              **2006****ASSETS:****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              3,584,937
              
              $
              3,691,438Restricted
                  cash
              
              
              119,315
              
              
              474,576Accounts
                  receivable, less allowance for doubtful accounts of $1,784,341
                  at
                  September 30, 2007 and $794,468 at December 31, 2006,
                  respectively
              
              
              12,516,957
              
              
              9,907,184Employee
                  advances, less allowance for doubtful accounts of $1,481,881 and
                  $1,429,426 at September 30, 2007 and December 31, 2006,
                  respectively
              
              
              6,800,429
              
              
              3,130,045Advances
                  to suppliers
              
              
              403,565
              
              
              46,620Inventory,
                  net of reserve for obsolescence of $100,382 and $111,128 at September
                  30,
                  2007 and December 31, 2006, respectively
              
              
              4,404,054
              
              
              2,581,519Receivable
                  from related parties
              
              
              75,217
              
              
              76,751Other
                  current assets
              
              
              230,860
              
              
              17,454**Total
                  Current Assets**
              
              
              **28,135,334**
              
              
              **19,925,587**Property,
                  plant and equipment, net of accumulated depreciation of $3,966,246
                  and
                  $3,333,305 at September 30, 2007 and December 31, 2006,
                  respectively
              
              
              7,455,094
              
              
              7,554,747Intangible
                  assets, net of accumulated amortization of $36,058 and $22,569
                  at
                  September 30, 2007 and December 31, 2006, respectively
              
              
              635,131
              
              
              624,426Deferred
                  income taxes
              
              
              793,050
              
              
              655,223**TOTAL
                  ASSETS**
              
              **$**
              **37,018,609**
              
              **$**
              **28,759,983****LIABILITIES
                  AND STOCKHOLDERS' EQUITY:****Current
                  Liabilities:**Accounts
                  payable
              
              $
              1,356,884
              
              $
              764,636Accrued
                  expenses
              
              
              2,538,819
              
              
              1,966,822Deposits
              
              
              2,792,895
              
              
              1,573,426Payable
                  to related parties
              
              
              77,623
              
              
              393,213Short-term
                  notes payable
              
              
              9,299,863
              
              
              12,758,426Advances
                  from customers
              
              
              191,987
              
              
              342,531Taxes
                  and related payables
              
              
              785,610
              
              
              3,057,471Current
                  portion of long-term debt
              
              
              1,330,219
              
              
              -**Total
                  Current Liabilities**
              
              
              **18,373,900**
              
              
              **20,856,525****Long-Term
                  Debt**
              
              
              **5,320,875**
              
              
              **-****Total
                  Liabilities**
              
              
              **23,694,775**
              
              
              **20,856,525****Commitments
                  and Contingencies (Note 8)****Minority
                  Interest in Net Assets of Subsidiaries**
              
              
              **583,252**
              
              
              **385,067****Stockholders'
                  Equity:**Preferred
                  stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares
                  outstanding at September 30, 2007 and December 31, 2006,
                  respectively
              
              
              -
              
              
              -Common
                  stock, $0.0001 par value, 100,000,000 shares authorized, 19,579,400
                  and
                  19,119,400 shares issued and outstanding, respectively
              
              
              1,958
              
              
              1,912Additional
                  paid-in capital
              
              
              5,943,936
              
              
              4,829,633Statutory
                  reserves
              
              
              147,023
              
              
              147,023Retained
                  earnings
              
              
              5,977,603
              
              
              2,318,950Other
                  comprehensive income, foreign currency translation
              
              
              670,062
              
              
              220,873**Total
                  Stockholders' Equity**
              
              
              **12,740,582**
              
              
              **7,518,391****TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              **$**
              **37,018,609**
              
              **$**
              **28,759,983**
 The
          accompanying notes are an integral part of these unaudited condensed
          consolidated financial statements.
 3
 
 **CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
        INCOME**
 **(Unaudited)**
 
 **For
                  the Three Months Ended**
              
              **For
                  the Nine Months Ended****September
                  30,**
              
              **September
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****Sale
                  of Products**
              
              $
              4,201,613
              
              $
              5,142,567
              
              $
              14,884,955
              
              $
              13,796,773**Cost
                  of Products Sold**
              
              
              1,039,578
              
              
              1,314,466
              
              
              3,761,754
              
              
              4,478,021**Gross
                  Profit**
              
              
              3,162,035
              
              
              3,828,101
              
              
              11,123,201
              
              
              9,318,752**Operating
                  Expenses:**Selling
                  expense
              
              
              1,545,554
              
              
              1,236,817
              
              
              5,179,968
              
              
              2,951,964General
                  and administrative expense
              
              
              341,372
              
              
              1,692,825
              
              
              2,703,843
              
              
              2,724,668Research
                  and development expense
              
              
              5,371
              
              
              13,296
              
              
              10,720
              
              
              58,700**Total
                  Operating Expenses**
              
              
              1,892,297
              
              
              2,942,938
              
              
              7,894,531
              
              
              5,735,332**Income
                  from Operations**
              
              
              1,269,738
              
              
              885,163
              
              
              3,228,670
              
              
              3,583,420**Other
                  Income (Expense):**Interest
                  income
              
              
              5,446
              
              
              2,037
              
              
              14,712
              
              
              4,242Non-operating
                  income
              
              
              384
              
              
              31,360
              
              
              81,388
              
              
              102,508Interest
                  expense
              
              
              (275,514
              )
              
              (191,018
              )
              
              (665,155
              )
              
              (561,390
              )Non-operating
                  expenses
              
              
              -
              
              
              (190
              )
              
              -
              
              
              (5,071
              )**Net
                  Other Income (Expense)**
              
              
              (269,684
              )
              
              (157,811
              )
              
              (569,055
              )
              
              (459,711
              )**Income
                  Before Income Taxes**
              
              
              1,000,054
              
              
              727,352
              
              
              2,659,615
              
              
              3,123,709Benefit
                  from (provision for) income taxes
              
              
              (86,861
              )
              
              (259,234
              )
              
              1,223,386
              
              
              (697,357
              )Minority
                  interest in income of subsidiaries
              
              
              (45,552
              )
              
              (152,811
              )
              
              (224,348
              )
              
              (260,746
              )**Net
                  Income**
              
              $
              867,641
              
              $
              315,307
              
              $
              3,658,653
              
              $
              2,165,606Foreign
                  currency translation adjustment
              
              
              174,392
              
              
              88,901
              
              
              449,189
              
              
              118,094**Comprehensive
                  Income**
              
              $
              1,042,033
              
              $
              404,208
              
              $
              4,107,842
              
              $
              2,283,700**Earnings
                  Per Share:**Basic
              
              $
              0.04
              
              $
              0.02
              
              $
              0.19
              
              $
              0.13Diluted
              
              $
              0.04
              
              $
              0.02
              
              $
              0.19
              
              $
              0.13**Weighted-Average
                  Shares Outstanding:**Basic
              
              
              19,579,400
              
              
              17,170,309
              
              
              19,292,953
              
              
              16,545,024Diluted
              
              
              19,635,898
              
              
              17,170,309
              
              
              19,345,401
              
              
              16,545,024
 
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements .
  4
 
 **CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 
 **For
                  the Nine Months Ended****September
                  30,****2007**
              
              **2006****Cash
                  Flows from Operating Activities:**Net
                  income
              
              $
              3,658,653
              
              $
              2,165,606Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              503,559
              
              
              515,307Deferred
                  income taxes
              
              
              (109,382
              )
              
              (239,262
              )Minority
                  interest in income of subsidiaries
              
              
              224,348
              
              
              482,584Stock
                  issued for services
              
              
              -
              
              
              1,122,912Warrants
                  issued for services
              
              
              19,968
              
              
              -Change
                  in current assets and liabilities:Accounts
                  receivable
              
              
              (2,168,849
              )
              
              (8,275,347
              )Employee
                  advances
              
              
              (3,472,425
              )
              
              (203
              )Advances
                  to suppliers
              
              
              (347,767
              )
              
              (35,078
              )Inventory
              
              
              (1,684,096
              )
              
              2,220,140Other
                  current assets
              
              
              (212,717
              )
              
              42,906Accounts
                  payable
              
              
              550,162
              
              
              47,068Accrued
                  expenses and deposits
              
              
              1,619,494
              
              
              440,100Advances
                  from customers
              
              
              (160,826
              )
              
              183,863Unearned
                  revenue
              
              
              -
              
              
              (45,383
              )Taxes
                  and related payables
              
              
              (2,344,511
              )
              
              2,261,745**Net
                  Cash (Used in) Provided by Operating Activities**
              
              
              (3,924,389
              )
              
              886,958**Cash
                  Flows from Investing Activities:**Receivable
                  from related parties
              
              
              13,198
              
              
              179,357Restricted
                  cash
              
              
              366,485
              
              
              (141,514
              )Capital
                  expenditures
              
              
              (96,833
              )
              
              (106,287
              )Acquisition
                  of land use rights
              
              
              -
              
              
              (20,202
              )**Net
                  Cash (Used in) Provided by Investing Activities**
              
              
              282,850
              
              
              (88,646
              )**Cash
                  Flows from Financing Activities:**Payable
                  to related parties
              
              
              (324,450
              )
              
              (92,687
              )Issuance
                  of stock for cash
              
              
              1,094,381
              
              
              -Proceeds
                  from short and long-term loans
              
              
              17,978,676
              
              
              2,938,466Payments
                  on short-term loans
              
              
              (15,350,496
              )
              
              (2,243,120
              )Purchase
                  of minority interest
              
              
              -
              
              
              (260,654
              )**Net
                  Cash Provided by Financing Activities**
              
              
              3,398,111
              
              
              342,005Effect
                  of exchange rate changes on cash
              
              
              136,927
              
              
              (152,084
              )Net
                  Increase (Decrease) in Cash and Cash Equivalents
              
              
              (106,501
              )
              
              988,233Cash
                  and Cash Equivalents at Beginning of Period
              
              
              3,691,438
              
              
              1,104,043**Cash
                  and Cash Equivalents at End of Period**
              
              $
              3,584,937
              
              $
              2,092,276**Supplemental
                  Information**Cash
                  paid for interest
              
              $
              606,376
              
              $
              207,576**Non
                  Cash investing and financing activities**Reduction
                  in carrying amount of assets related to acquisition of minority
                  interest
              
              $
              -
              
              $
              428,230Conversion
                  of common shares to minority interest
              
              
              -
              
              
              223,312Proceeds
                  of offering held in escrow receivable
              
              
              -
              
              
              1,522,470
 The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
  5




**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





**NOTE
      1 – BASIS OF PRESENTATION**





The
      accompanying unaudited condensed consolidated financial statements of China
      Shenghuo Pharmaceutical Holdings, Inc., (formerly known as SRKP 8, Inc.) (the
      “Company”) were prepared pursuant to the rules and regulations of the United
      States Securities and Exchange Commission. Certain information and footnote
      disclosures normally included in financial statements prepared in accordance
      with accounting principles generally accepted in the United States of America
      have been condensed or omitted pursuant to such rules and regulations.
      Management of the Company (“Management”) believes that the following disclosures
      are adequate to make the information presented not misleading. These condensed
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and the notes thereto included in the
      Company’s Registration Statement on Form S-3/A filed with the Securities and
      Exchange Commission on September 18, 2007.





These
      unaudited condensed consolidated financial statements reflect all adjustments
      (consisting only of normal recurring adjustments) that, in the opinion of
      Management, are necessary to present fairly the consolidated financial position
      and results of operations of the Company for the periods presented. Operating
      results for the nine months ended September 30, 2007 are not necessarily
      indicative of the results that may be expected for the year ending December
      31,
      2007.





***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 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*** - China
      Shenghuo Pharmaceutical Holdings, Inc. (the “Company” or “the Parent” or “the
      Group”) and 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 was organized under the laws of the State of Delaware on May 24, 2005.
      On August 31, 2006, the Company consummated a share exchange agreement, as
      amended (“Agreement”), with Lan’s Int’l Medicine Investment Co., a Hong Kong
      corporation, and a shareholder holding 93.75% of the equity interest of Kunming
      Shenghuo Pharmaceuticals Co., Ltd. (“Shenghuo”) whereby the Company, in exchange
      for 15,213,000 shares of its common stock, acquired 93.75% of Shenghuo’s
      shares.




In
      addition, the Company agreed to cancel 2,036,000 shares of its common stock;
      issue 1,242,400 shares of its common stock and warrants to purchase 100,000
      shares of its common stock (the “Warrants”) for services rendered, and issue
      2,000,000 shares for $1,800,000 cash (less costs of $535,304).




There
      was
      no written agreement for the services to be performed in connection with the
      1,242,400 shares of common stock or the 100,000 warrants. The shares issued
      for
      services were valued at $0.90 per share. This value was taken from the value
      of
      the shares issued for cash on the same day. In accordance with FAS 123(R),
      as
      the fair value of the common shares could more reliably be measured than the
      fair value of the services, the fair value of the shares was used to measure
      the
      transaction. In accordance with EITF 96-18, the measurement date was determined
      to be the date of the Agreement as there was no contract that specifically
      outlined the commitment date or the performance date for the shares issued
      for
      services. Further, in accordance with the guidance given in EITF 00-18, the
      shares were expensed on the date of the agreement as all shares vested
      immediately.


6


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





The
      Warrants also vested immediately, have an exercise price of $2.50, and expire
      five years from the date of issue. The Warrants were valued using the Black
      Scholes Option Pricing Model with the following assumptions: dividend yield
      of
      0%, estimated life of 5 years, estimate market price of $0.90, volatility of
      44.96% and a risk-free interest rate of 4.73%. This resulted in a fair value
      of
      $0.1124 per warrant for a total value of $11,240 for the 100,000 warrants.
      On
      October 10, 2007 the Warrants were exercised and the Company received proceeds
      of $250,000.




As
      part
      of several agreements, the Company agreed to register the 1,242,400 shares
      of
      its common stock and the shares underlying the Warrants. The Company also agreed
      to register the 2,000,000 shares of common stock that were to be issued for
      cash
      and the 664,000 shares of common stock that were held by the Company’s
      shareholders immediately prior to the Agreement.




As
      part
      of these agreements, the Company agreed to a penalty provision with certain
      shareholders. If the Company failed to register the 2,000,000 shares that were
      issued for cash due to failure on the part of the Company, the Company would
      pay
      to those shareholders a cash payment equal to 0.0333% of the purchase price
      of
      their respective shares for each business day of the failure. There was no
      maximum potential consideration to be transferred. The Company also agreed
      to
      file the registration statement no later than thirty days after the consummation
      of the agreement and agreed to use reasonable best efforts to cause such
      registration statement to become effective within one hundred and fifty (150)
      days after the consummation of the agreement, or one hundred eighty (180) days
      after the consummation of the agreement if the registration statement was
      subject to a full review by the SEC. The Company is also required to use its
      reasonable best efforts to maintain the Registration Statement effective for
      a
      period of twenty-four (24) months at the Company’s expense. The registration
      statement for the above securities was declared effective by the SEC on June
      14,
      2007.




Similarly,
      the Company agreed that if the Company failed to register 315,400 of the shares
      that were outstanding prior to the Agreement or the 1,042,400 shares issued
      for
      services rendered, due to failure on the part of the Company, additional shares
      of its common stock would be issued to the respective shareholders in the amount
      of 0.0333% of their respective shares for each calendar day until the
      registration becomes effective. Correspondingly, there is no maximum potential
      consideration to be transferred in connection with the registration of these
      shares. Further, the Company agreed to file a registration statement no later
      than the tenth (10) day after the end of the six (6) month period that
      immediately follows the filing date of the initial registration statement (the
      “Required Filing Date”). The Company agreed to use its reasonable best efforts
      to cause such registration statement to become effective within one hundred
      and
      twenty (120) days after the Required Filing Date or the actual filing date,
      whichever is earlier, or one hundred fifty (150) days after the Required Filing
      Date or the actual filing date, whichever is earlier, if the registration
      statement is subject to a full review by the SEC. In addition, the
      Company agreed to use its reasonable best efforts to maintain the
      registration statement effective for a period of twenty-four (24) months at
      the
      Company’s expense. There is no penalty associated with the other shares or the
      Warrants.




The
      Company considers any probability of payment of either of these penalties to
      be
      remote as both are on a best efforts basis and the Company intends to and has
      resources available to comply with all requirements listed above. Therefore,
      there are no liabilities accrued or gains or losses resulting from changes
      to
      this liability included in the financial statements. On September 19, 2007,
      the
      Securities and Exchange Commission declared the Registration Statement covering
      the above mentioned shares effective.




Because
      the shares issued by the Company to Shenghuo’s shareholders in the
      aforementioned transaction represented a controlling interest, the transaction
      has been accounted for as a recapitalization or reverse merger with Shenghuo
      being considered the acquirer. The accompanying consolidated financial
      statements have been restated on a retroactive basis to present the capital
      structure of Shenghuo as though it were the reporting entity.




In
      October 1995, Shenghuo was formed under the laws of the Peoples Republic of
      China (“PRC”) and subsequently acquired an 80% interest in both Kunming Shenghuo
      Medicine Co., Ltd. (“Medicine”) and Kunming Pharmaceutical Importation and
      Exportation Co., Ltd. (“Import/Export”), and a 98.18% interest in Kunming
      Shenghuo Cosmetics Co., Ltd. (“Cosmetic”). All of these entities were also
      formed in and operate within the PRC. Stockholders' equity was represented
      by
      share capital and no shares were outstanding prior to August 31, 2006. Share
      capital of Shenghuo prior to the consummation of the agreement was $2,660,760.
      On August 30, 2006, the minority shareholders of Medicine agreed to transfer
      19%
      of their 20% interest to Shenghuo for $249,800. Also on August 30, 2006, the
      minority shareholders of Import/Export agreed to transfer 19% of their 20%
      interest to Shenghuo for $24,980. Subsequent to these transfers, Shenghuo owns
      99% of the equity interests in Medicine and Import/Export.


7


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




In
      September 2006, Shenghuo formed Kunming Beisheng Tech Development Ltd.
“Beisheng”, under the laws of the PRC as its partially owned subsidiary for the
      purpose of doing research and development on bio-tech products, health-care
      products and cosmetics, import and export business on medicines, equipment
      and
      pharmaceutical technologies. Upon formation, Shenghuo owned 70% of Beishing.
      In
      August 2007, Shenghuo, which is the 93.75%-owned subsidiary of the Company,
      established a new subsidiary named Pingbian Shenghuo Nanyao Development Co.,
      LTD. (“Pingbian Shenghuo”). Pingbian Shenghuo, which was organized under the
      laws of the PRC, has a registered capital of RMB 1,000,000 and Shenghuo holds
      100% of the equity interest of Pingbian Shenghuo. The scope of operation of
      Pingbian Shenghuo is to produce and refine the raw materials, such as Sanchi,
      that are needed to produce our products. There were no material operations
      for
      Beisheng or Pingbian Shenghuo for the nine months ended September 30,
      2007.





**NOTE
      3 – SELECTED SIGNIFICANT ACCOUNTING POLICIES**





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





***Accounts
      Receivable and Employee Advances and Allowance for Doubtful
      Accounts*** **–**
      Trade receivables and other 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. Customers that have outstanding balances
      for
      longer than three months have their credit curtailed. Other receivables consist
      of business advances to employees for travel and related expenses and various
      prepaid expenses. As time passes from when advances are made to employees for
      travel and related expenses, the Company will create an allowance for these
      older receivables as the likelihood of collection from each particular employees
      decreases as their respective advances age. 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. The allowance for doubtful accounts
      at September
      30, 2007 for
      trade accounts receivable and other receivables was $1,784,341 and $1,481,881,
      respectively, and at December 31, 2006, was $794,468 and $1,429,426,
      respectively.





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





***Basic
      and Diluted Earnings per Share*** **–**
      Basic and diluted earnings per share are calculated by dividing net earnings
      attributable to common stockholders by the weighted-average number of shares
      of
      common stock outstanding during the year. Diluted earnings per share are
      calculated to give effect to potentially issuable dilutive common shares.
      Potentially dilutive securities as of September 30, 2007 are comprised of
      warrants to purchase 100,000 shares of common stock at an exercise price of
      $2.50 per share, warrants to purchase 40,000 shares of common stock at an
      exercise price of $4.20 and warrants to purchase 6,000 shares of common stock
      at
      an exercise price of $3.50. There were no potentially dilutive shares at
      September 30, 2006.





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


8


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





***Advertising
      Expense*** **–**
      The Company expenses advertising costs as incurred. Advertising costs for the
      nine months ended September 30, 2007 and 2006 were $22,538 and $31,776,
      respectively.





***Recently
      Enacted Accounting Standards*** **–**In September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      157”).  SFAS 157 defines fair value, establishes a framework for measuring
      fair value, and expands disclosures about fair value measurements; however,
      it
      does not require any new fair value measurements. SFAS 157 will be applied
      prospectively and is effective for fiscal years beginning after November 15,
      2007, and interim periods within those fiscal years. SFAS 157 is not expected
      to
      have a material impact on the Company’s consolidated financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ,
      including an amendment of FASB Statement No. 115 (“SFAS 159”). This
      pronouncement permits entities to choose to measure many financial instruments
      and certain other items at fair value that are not currently required to be
      measured at fair value and to recognize the resulting gains and losses in the
      results of operations. SFAS 159 is effective as of the beginning of an entity’s
      first fiscal year that begins after November 15, 2007. The impact of adopting
      SFAS 159 on the Company’s consolidated financial statements, if any, has not yet
      been determined.





**NOTE
      4 – INVENTORY**





Inventory
      is stated at weighted average cost and consisted of the following:




September 30,
              
              December
                  31,2007
              
              2006Raw
                  materials
              
              $
              890,816
              
              $
              843,163Work-in-process
              
              
              2,216,802
              
              
              546,156Finished
                  goods
              
              
              970,360
              
              
              620,676Product
                  on consignment
              
              
              426,458
              
              
              682,652Gross
                  Inventory
              
              
              4,504,436
              
              
              2,692,647Less:
                  Provision for obsolescence
              
              
              (100,382
              )
              
              (111,128
              )Net
                  Inventory
              
              $
              4,404,054
              
              $
              2,581,519


**NOTE
      5 – RELATED PARTY TRANSACTIONS**





At
      September 30, 2007 and December 31, 2006, the Company had payables due to
      related parties in the amount of $77,623 and $393,213, respectively. These
      amounts are due on demand and do not accrue interest.




In
        August
        2007 the Company obtained a loan for $6,651,094 which is guaranteed by a
        stockholder. This loan guarantee is more fully described in Note 7.


**NOTE
      6 – INCOME TAXES**





The
      Company is not subject to any income taxes in the United States, but is subject
      to corporate income tax in the PRC at a rate of 30% and a local income tax
      rate
      of 3%. However, because the Company’s operations are located in a special region
      of the PRC, its corporate income tax rate is 15%. The Company recognizes
      deferred tax assets and liabilities for future tax consequences attributable
      to
      differences between the financial statement carrying amounts of existing assets
      and liabilities and the respective tax bases and any tax credit carry forwards
      available. Deferred tax assets and liabilities are measured using enacted tax
      rates expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The effect on deferred
      tax
      assets and liabilities of a change in tax rates is recognized in income in
      the
      period that includes the enactment date. The Company has established a valuation
      allowance for all deferred income tax assets of Cosmetic due to the uncertainty
      of their realization. Income taxes payable are included in taxes and related
      payables on the accompanying balance sheets.


9


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





On
      March
      15, 2007, the Company’s majority owned subsidiary, Medicine, was granted an
      approval of their application by the government of the PRC for relief of income
      taxes for the years ended December 31, 2006 and 2005. As a result, Medicine
      recognized an aggregate of $1,099,401 in income taxes that are no longer payable
      as of March 15, 2007. The amount has been recognized under the caption “Benefit
      from (provision for) income taxes” in the accompanying Condensed Consolidated
      Statement of Operations and Comprehensive Income for the nine months ended
      September 30, 2007.





**NOTE
      7 – LONG TERM DEBT**





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





2007
            
            $
            665,1092008
            
            
            1,995,3282009
            
            
            3,990,6576,651,094Less
                current portion
            
            
            (1,330,219
            )Long
                term debt
            
            $
            5,320,875





The
      loan
      is for working capital and is guaranteed by Lan's International Medicine
      Investment Co Ltd. (“LIMI”). Gui Hua Lan, our Chief Executive Officer; Feng Lan,
      our President; and Zheng Yi Wang, our Executive Director of Exports, are
      directors and have voting and investment control over the shares owned by LIMI,
      which beneficially owns or controls approximately 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.





**NOTE
      8 – COMMITMENTS AND CONTINGENCIES**





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


10


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





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





***Contingent
      Liability*** **–**
      The Company was sued by a former employee for violation of his contract and
      the
      courts entered a judgment in favor of the employee in 2003 for $128,978, which
      included litigation costs. The Company accrued the liability for this loss
      at
      December 31, 2003 and paid the amount of the judgment on April 27, 2004. In
      2006, the plaintiff has asked the court to have the Company pay a penalty for
      not paying the judgment timely in the amount of $100,000. The court had frozen
      a
      bank account that had $105,284. During the fourth quarter of 2006, the court
      rejected the request for the penalty and released the funds back to the Company.
      The employee has now asserted claims for allegedly ruining the employee’s
      reputation and causing mental anguish. No amount has been recorded in connection
      with this claim as the Company believes that no information suggests that it
      is
      probable a liability has been incurred and the amount of loss as a result of
      this litigation cannot be reasonably estimated.





**NOTE
      9 – STOCKHOLDERS EQUITY**





The
      Company has outstanding warrants to purchase 100,000 shares of common stock
      with
      an exercise price of $2.50 which expire five years from the date of issue of
      August 31, 2006. On October 10, 2007 the warrants were exercised and the Company
      received proceeds of $250,000.




On
      June
      19, 2007 the Company sold 460,000 shares of its common stock at a price of
      $3.50
      per share in an initial public offering for gross proceeds of $1,610,000. An
      aggregate of $1,094,381 of net proceeds, after deduction of underwriter’s fees
      and other expenses of $515,619 were received by the Company in the sale. In
      conjunction with the sale of common stock, the Company issued a warrant to
      the
      underwriter for services performed to purchase 40,000 shares of its common
      stock
      at an exercise price of $4.20 per share which expires on June 14, 2012. The
      proceeds were allocated to the warrants based upon their fair value of $206,268,
      and the remaining proceeds were allocated to the shares of common stock. The
      fair value of the warrant was determined using the Black-Scholes Option Pricing
      Model using the following assumptions: risk free interest rate of 5.0%, expected
      dividend yield of 0%, expected volatility of 91.89% and an expected life of
      5
      years. The warrant holder has unlimited piggyback registration rights, as well
      as the ability to request, at the Company’s expense a single registration of the
      shares underlying the warrant.





On
      September 25, 2007, pursuant to agreements with the two of the Company’s
      independent directors, the Company issued each independent director 3,000
      five-year warrants at an exercise price of $3.50 per share. The warrants were
      valued using the Black Scholes Option Pricing Model with the following
      assumptions: dividend yield of 0%, estimated life of 5 years, closing market
      price of $4.84, volatility of 72.4% and a risk-free interest rate of 4.26%.
      This
      resulted in a fair value of $3.328 per warrant for a total value of $19,968
      for
      the 6,000 warrants.





11


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





**Forward-Looking
      Statements**





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





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





**Overview**





We
      are
      primarily engaged in the research, development, manufacture, and marketing
      of
      pharmaceutical, nutritional supplement and cosmetic products. Almost all of
      our
      products are derived from the medicinal herb Panax notoginseng, also known
      as
      Sanqi, Sanchi or Tienchi. Panax notoginseng is a greyish-brown or greyish-yellow
      plant that only grows in a few geographic locations on Earth, one of which
      is
      Yunnan Province in southwest China, where we are located. The main root of
      Panax
      notoginseng are cylindrical shaped and are most commonly one to six centimeters
      long and one to four centimeters in diameter. Panax notoginseng saponins (PNS),
      the active ingredients in Panax notoginseng, are extracted from the plant using
      high-tech equipment and in accord with Good Manufacturing Practice (GMP)
      standards. Our main product, Xuesaitong Soft Capsules, accounted for more than
      80% of our sales for the nine months ended September 30, 2007.





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





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





Xuesaitong
      Soft Capsules, which are subject to wholesale and retail price controls by
      the
      Chinese government, are primarily sold in China, but the product is also sold
      in
      various developing countries, including Malaysia, Indonesia and Kyrgyzstan.
      Sales of the product in China are regulated by the SFDA as a prescription drug
      and therefore must be sold to consumers through hospital pharmacies and cannot
      be advertised, thus limiting the ability of the company to market the brand.
      Approximately 9.4% of sales of Xuesaitong Soft Capsules are sold to hospitals
      directly while approximately 85% of sales are made to distributors. Our three
      largest customers are Yunnan Province Pharmaceutical, LTD.; Nanyang Jikang
      Medicine LTD; and Beijing Ai’xin Weiye Medicine, LTD all of which accounted for
      6.2%, 5.4% and 5.1% of our sales, respectively, for the nine months ended
      September 30, 2007.





Our
      marketing team maintains sales offices or agents in approximately 20 provinces
      throughout China. The sales network covers approximately 186 cities and is
      staffed by approximately 400 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.




12




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





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





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





We
      do
      face certain challenges and risks, including our relatively high debt ratio,
      which is one of our main risks. If we fail to raise capital in overseas markets,
      we expect to encounter great difficulties as a result of the shortage
      of working capital which we will face when our new cosmetic and health products
      come onto the market. 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 the
      uncertainty of test results and clinical approvals, which relates only to our
      new products. Over the last three years, the price of the main raw material
      we
      use - sanchi - has stabilized and is rising slightly, which will likely increase
      our cost of products sold.





**Recent
      Events**




On
      October 10, 2007, a warrant holder fully exercised its warrants to purchase
      an
      aggregate of 100,000 shares of our common stock at a per share exercise price
      of
      $2.50. The exercise of the warrants was conducted in accordance with the warrant
      agreement entered into by the holder and us on August 31, 2006. As a result
      of
      the exercise, we issued the holder 100,000 shares of common stock and we
      received aggregate exercise proceeds of $250,000.





**Critical
      Accounting Policies and Estimates**





The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with generally accepted accounting principles in the United States.
      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.




13




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





***Cash
      and Cash Equivalents*** -
      Our
      cash and cash equivalents are maintained in bank deposit accounts. We have
      not
      experienced any losses with respect to these deposits. Cash and cash equivalents
      include interest bearing and non-interest bearing bank deposits, money market
      accounts, and short-term certificates of deposit with original maturities of
      three months or less. In connection with opening Bankers' Acceptance Bill,
      we
      have restricted cash in the amount of $119,315 as of September 30, 2007. We
      did
      not enter into any hedge contracts during any of the periods presented.





***Accounts
      Receivable and Employee Advances and Allowance for Doubtful Accounts*–** Trade
      receivables and other 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. Customers that have outstanding balances
      for
      longer than three months have their credit curtailed. Other receivables consist
      of business advances to employees for travel and related expenses and various
      prepaid expenses. As time passes from when advances are made to employees for
      travel and related expenses, we will create an allowance for these older
      receivables as the likelihood of collection from each particular employees
      decreases as their respective advances age. We believe that the allowance for
      doubtful accounts is consistent with industry standards in the PRC based on
      the
      products that are being sold. The allowance for doubtful accounts at September
      30, 2007 for trade accounts receivable and other receivables was $1,784,341
      and
      $1,481,881, respectively, and at December 31, 2006, was $794,468 and $1,429,426,
      respectively.





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





***Basic
      and Diluted Earnings per Share -*** Basic
      and
      diluted earnings per share are calculated by dividing net earnings attributable
      to common stockholders by the weighted-average number of shares of common stock
      outstanding during the year. Diluted earnings per share are calculated to give
      effect to potentially issuable dilutive common shares. Potentially dilutive
      securities as of September 30, 2007 are comprised of warrants to purchase
      100,000 shares of common stock at an exercise price of $2.50 per share, warrants
      to purchase 40,000 shares of common stock at an exercise price of $4.20 and
      warrants to purchase 6,000 shares of common stock at an exercise price of $3.50.
      There were no potentially dilutive shares at September 30, 2006.





***Advertising
      Expense*–** We
      expense advertising costs as incurred. Advertising costs for the nine months
      ended September 30, 2007 and 2006 were $22,538 and $31,776,
      respectively.





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


14





**Results
      of Operations**





**Three
      Months Ended September 30, 2007 and 2006**





The
      following table sets forth our statements of operations for the three months
      ended September 30, 2007 and 2006 in U.S. dollars (unaudited):





**For
                the three months**
              **ended
                September 30,****2007**
            
            **2006**
            
            **Change ($)**
            
            **Variance (%)***(in thousands, except share and per share amounts)***Sale
                of products**
            
            $
            4,202
            
            $
            5,142
            
            $
            -940
            
            
            -18.30
            %**Cost
                of products sold**
            
            
            1,040
            
            
            1,314
            
            
            -274
            
            
            -20.91
            %**Gross
                profit**
            
            
            3,162
            
            
            3,828
            
            
            -666
            
            
            -17.40
            %**Operating
                expenses:**Selling
                expenses
            
            
            1,546
            
            
            1,237
            
            
            309
            
            
            24.96
            %General
                and administrative expenses
            
            
            341
            
            
            1,693
            
            
            -1,352
            
            
            -79.83
            %Research
                and development expenses
            
            
            5
            
            
            13
            
            
            -8
            
            
            -59.60
            %**Total
                operating expenses**
            
            
            1,892
            
            
            2,943
            
            
            -1,051
            
            
            -35.70
            %**Income
                from operations**
            
            
            1,270
            
            
            885
            
            
            385
            
            
            43.45
            %**Other
                income (expenses):**Interest
                income
            
            
            5
            
            
            2
            
            
            3
            
            
            167.35
            %Non-operating
                income
            
            
            0
            
            
            31
            
            
            -31
            
            
            -98.78
            %Interest
                expense
            
            
            -275
            
            
            -191
            
            
            -84
            
            
            44.23
            %Non-operating
                expenses
            
            
            0
            
            
            0
            
            
            0
            
            
            -100.00
            %**Net
                other expense**
            
            
            -270
            
            
            -158
            
            
            -112
            
            
            70.89
            %**Income
                before income taxes**
            
            
            1,000
            
            
            727
            
            
            273
            
            
            37.49
            %Provision
                for income taxes
            
            
            -87
            
            
            -259
            
            
            172
            
            
            -66.49
            %Minority
                interest in income of subsidiaries
            
            
            -45
            
            
            -153
            
            
            108
            
            
            -70.19
            %**Net
                income**
            
            
            868
            
            
            315
            
            
            553
            
            
            175.17
            %Foreign
                currency translation adjustments
            
            
            174
            
            
            89
            
            
            85
            
            
            96.16
            %**Comprehensive
                income**
            
            $
            1,042
            
            $
            404
            
            $
            638
            
            
            157.80
            %**Earnings
                per share**Basic
            
            $
            0.04
            
            $
            0.02
            
            $
            0.03
            
            
            141.32
            %Diluted
            
            $
            0.04
            
            $
            0.02
            
            $
            0.03
            
            
            140.62
            %**Weighted-average
                shares outstanding**Basic
            
            
            19,579,400
            
            
            17,170,309
            
            
            2,409,091
            
            
            14.03
            %Diluted
            
            
            19,635,898
            
            
            17,170,309
            
            
            2,465,589
            
            
            14.36
            %





***Sale
      of products:*** Sale
      of
      products for the three months ended September 30, 2007 was approximately $4.20
      million, a decrease of approximately $0.94 million, or 18.30%, from $5.14
      million for the three months ended September 30, 2006. The decrease in sale
      of
      products was primarily due to us adopting more stringent credit policies, which
      resulted in a change in our customer base. The
      more
      stringent credit policies are designed to improve the quality and mix of our
      customer base, in addition to reducing the amount of uncollectible account
      receivables. Due to these stricter credit policies, we experienced a decrease
      in
      sales volume during the third quarter of 2007 but believe the
      implementation of these policies will improve our customer base and financial
      results in future periods.


***Cost
      of products sold:*** Our
      cost
      of products sold for the three months ended September 30, 2007 was approximately
      $1.04 million, a decrease of approximately $0.27 million, or 20.91%, from
      approximately $1.31 million for the three months ended September 30, 2006.
      The
      decrease in cost of products sold was primarily due to a decrease in the sales
      volume of our products,
      which
      was primarily caused by our adoption of stricter credit policies as described
      above.




***Gross
      profit:*** Our
      gross
      profit for the three months ended September 30, 2007 was approximately $3.16
      million as compared with approximately $3.83 million for the three months ended
      September 30, 2006. The decrease in gross profit as an amount was primarily
      due
      to a decrease in a decrease in the volume of sales of our products,
      which
      was primarily caused by our adoption of stricter credit policies as described
      above. Gross profit as a percentage of revenues was approximately 75.3%
      for the three months ended September 30, 2007, an increase of 0.9% from
      approximately 74.4% for the three months ended September 30, 2006.




15




***Selling
      expense:*** Selling expenses were approximately $1.55 million for the three months ended
      September 30, 2007, an increase of $0.31 million, or 24.96%, from approximately
      $1.24 million for the three months ended September 30, 2006. As a percentage
      of
      total revenue, selling expense increased by 36.8% for the three months ended
      September 30, 2007 as compared to 24.1% for the three months ended September
      30,
      2006. The primary reason for the increase was an increase in advertisement
      and
      production expenses, in addition to increased salaries paid to newly recruited
      employees in one of our subsidiaries, Shenghuo Cosmetic Co. LTD.





***General
      and administrative expense:*** General
      and administrative expenses were approximately $0.34 million for the three
      months ended September 30, 2007, a decrease of $1.35 million, or 79.83%, from
      approximately $1.69 million for the three months ended September 30, 2006.
      The
      decrease was primarily a result of our improved control over the collection
      of
      account receivables and other receivables, which resulted from our adoption
      of
      more stringent credit policy and a change in our customer base.





***Research
      and development expense:*** Research
      and development expense for the three months ended September 30, 2007 was $5,371
      as compared to $13,296 for the period ended September 30, 2006. The decrease
      was
      primarily due to the staggered fulfillment of research and development in recent
      years. Consistent with plans made in previous years, we plan to enhance new
      product development over the next three years in order to promote sustainable
      growth.





***Net
      other expense:*** Net other expense, which includes interest income, non-operating income,
      interest expense and non-operating expenses, was $269,684 for the three months
      ended September 30, 2007 and $157,811 for the three months ended September
      30,
      2006. The increase in net other expenses was primarily due to an increase in
      interest expenses resulting from an increase in bank loans.





***Net
      income:*** Net
      income increased to $0.87 million for the three months ended September 30,
      2007
      as compared to $0.32 million for the three months ended September 30, 2006,
      an
      increase of $0.55 million. Considering the foreign currency translation
      adjustments of $174,392 and $88,901, for the three months ended September 30,
      2007 and 2006, respectively, comprehensive income of $1.04 million or $0.40
      million was realized for the three-months ended September 30, 2007 and 2006,
      respectively.





**Nine
      months Ended September 30, 2007 and 2006**





The
      following table sets forth our statements of operations for the nine months
      ended September 30, 2007 and 2006 in U.S. dollars (unaudited):





**For
                the nine months**
              **ended
                September 30,****2007**
            
            **2006**
            
            **Change ($)**
            
            **Variance (%)***(in thousands, except earnings per share and share amounts)***Sale
                of products**
            
            $
            14,885
            
            $
            13,797
            
            $
            1,088
            
            
            7.89
            %**Cost
                of products sold**
            
            
            3,762
            
            
            4,478
            
            
            -716
            
            
            -16.00
            %**Gross
                profit**
            
            
            11,123
            
            
            9,319
            
            
            1,804
            
            
            19.36
            %**Operating
                expenses:**Selling
                expenses
            
            
            5,180
            
            
            2,952
            
            
            2,228
            
            
            75.48
            %General
                and administrative expenses
            
            
            2,704
            
            
            2,724
            
            
            -20
            
            
            -0.76
            %Research
                and development expenses
            
            
            11
            
            
            59
            
            
            -48
            
            
            -81.74
            %**Total
                operating expenses**
            
            
            7,895
            
            
            5,735
            
            
            2,160
            
            
            37.65
            %**Income
                from operations**
            
            
            3,228
            
            
            3,584
            
            
            -356
            
            
            -9.90
            %**Other
                income (expenses):**Interest
                income
            
            
            15
            
            
            4
            
            
            11
            
            
            246.82
            %Non-operating
                income
            
            
            81
            
            
            103
            
            
            -22
            
            
            -20.60
            %Interest
                expense
            
            
            -665
            
            
            -561
            
            
            -104
            
            
            18.48
            %Non-operating
                expenses
            
            
            0
            
            
            -5
            
            
            5
            
            
            -100.00
            %**Net
                other expense**
            
            
            -569
            
            
            -460
            
            
            -110
            
            
            23.79
            %**Income
                before income taxes**
            
            
            2,660
            
            
            3,124
            
            
            -464
            
            
            -14.86
            %Benefit
                from (provision for) income taxes
            
            
            1,223
            
            
            -697
            
            
            1,921
            
            
            -275.43
            %Minority
                interest in income of subsidiaries
            
            
            -224
            
            
            -261
            
            
            37
            
            
            -13.96
            %**Net
                income**
            
            $
            3,659
            
            $
            2,166
            
            $
            1,493
            
            
            68.94
            %Foreign
                currency translation adjustments
            
            
            449
            
            
            118
            
            
            331
            
            
            280.37
            %**Comprehensive
                income**
            
            $
            4,108
            
            $
            2,284
            
            $
            1,824
            
            
            79.88
            %**Earnings
                per share**Basic
            
            $
            0.19
            
            $
            0.13
            
            $
            0.06
            
            
            44.88
            %Diluted
            
            $
            0.19
            
            $
            0.13
            
            $
            0.06
            
            
            44.49
            %**Weighted-average
                shares outstanding**Basic
            
            
            19,292,953
            
            
            16,545,024
            
            
            2,747,929
            
            
            16.61
            %Diluted
            
            
            19,345,401
            
            
            16,545,024
            
            
            2,800,377
            
            
            16.93
            %




16




***Sale
      of products:*** Sale
      of
      products for the nine months ended September 30, 2007 was approximately $14.89
      million, an increase of approximately $1.09 million, or 7.89 %, from
      approximately $13.80 million for the nine months ended September 30, 2006.
      The
      increase was primarily due to the increase in sales prices of our products
      and
      our further developed distribution network over a majority of the 29
      provinces or regions in China,
      partially offset by a decrease in our sales volume in the third quarter due
      to the adoption of stricter credit policies as described
      above.





***Cost
      of products sold:*** Our
      cost of products sold for the nine months ended September 30, 2007 was
      approximately $3.76 million, a decrease of approximately $0.72 million, or
      16.00%, from approximately $4.48 million for the nine months ended September
      30,
      2006. Though the sale of products increased 7.89% for the nine months ended
      September 30, 2007 as compared to the sale of products for the nine months
      ended
      September 30, 2006, there was a decrease in the unit price of raw materials
      that
      are used in a majority of our products resulting from changes in medicine
      pricing policy in China, which resulted in a decrease for cost of products
      sold.
      In addition, there was a slight decrease in volume of sales during the nine
      month period ended September 30, 2007 as compared to the nine month period
      ended
      September 30, 2006.





***Gross
      profit:*** Our
      gross
      profit for the nine months ended September 30, 2007 was approximately $11.12
      million as compared with approximately $9.32 million for the nine months ended
      September 30, 2006. Gross profit as a percentage of revenues was approximately
      74.7% for the nine months ended September 30, 2007, an increase of approximately
      7.2% from 67.5% for the nine months ended September 30, 2006. The increase
      in
      gross margin was primarily due to an increase in revenue which resulted from
      an
      increase in sales price and a decrease in cost of products,
      partially offset by a decrease in its sales volume in the third quarter due
      to
      the adoption of stricter credit policies as described above.





***Selling
      expense:*** Selling expenses were approximately $5.18 million for the nine months ended
      September 30, 2007, an increase of $2.23 million, or 75.48%, from approximately
      $2.95 million for the nine months ended September 30, 2006. As a percentage
      of
      total revenue, selling expense increased by 34.8% for the nine months ended
      September 30, 2007 as compared to 21.4% for the nine months ended September
      30,
      2006. The primary reason for the increase was the higher commissions paid to
      sales representatives and sales offices in an effort to stimulate the sales
      market. Additional selling expenses were also incurred in connection with the
      marketing and advertising of new products, particularly in our cosmetics
      line.





***General
      and administrative expense:*** General
      and administrative expenses were $2.70 million for the nine months ended
      September 30, 2007, a slight decrease of approximately $21,000, or less than
      one
      percent, from approximately $2.73 million for the nine months ended September
      30, 2006. As a percentage of total revenue, general and administrative expense
      decreased by approximately 1.6% from 19.7% for the nine months ended September
      30, 2006 to 18.2% for the nine months ended September 30, 2007. The decrease
      was
      primarily a result of our
      adoption of more stringent credit policies in the third quarter of 2007 anda decrease in allowance for doubtful accounts attributable to the
      collection in trade receivables and other receivables, where the account age
      is
      more than one year, for the nine months ended September 30, 2007.





***Research
      and development expense:*** Research
      and development expense for the nine months ended September 30, 2007 was $10,720
      as compared to $58,700 for the nine months ended September 30, 2006. The
      decrease was primarily due to the staggered fulfillment of research and
      development in recent years. In keeping with plans made in previous years,
      we
      plan to enhance new product development over the next three years in order
      to
      promote sustainable growth.





***Net
      other expense:*** Net other expense, which includes interest income, non-operating income,
      interest expense and non-operating expenses, was $569,055 for the nine months
      ended September 30, 2007 as compared to $459,711 for the nine months ended
      September 30, 2006, an increase of $109,344, or 23.8%. The increase in net
      other
      expense was primarily due to the increase in bank loans and related increase
      in
      interest expense.




17




***Benefits
      from (Provision for) income taxes:*** Benefit
      from income taxes was approximately $1.22 million for the nine months ended
      September 30, 2007 as compared to a provision for income tax of approximately
      $0.70 million for the nine months ended September 30, 2006. The increase in
      the
      benefits from income taxes was related to our receipt of a grant of relief
      from
      income taxes. On March 15, 2007, one of our major subsidiaries, Shenghuo
      Medicine Co., Ltd., was granted an approval of their application by the PRC
      government for relief of income taxes for the years ended December 31, 2006
      and
      2005. As a result, Shenghuo Medicine Co., Ltd. recognized an aggregate of
      $1,099,401 in income taxes that are no longer payable as of March 15, 2007.
      The
      amount has been recognized under the caption “Benefit from (provision for)
      income taxes” in the accompanying Condensed Consolidated Statement of Operations
      and Comprehensive Income for the nine months ended September 30,
      2007.





***Net
      income:*** Net
      income increased to $3.66 million for the nine months ended September 30, 2007
      as compared to approximately $2.17 million for the nine months ended September
      30, 2006, an increase of $1.49 million, or 68.94%. Considering the foreign
      currency translation adjustments of $449,189 and $118,094, for the nine months
      ended September 30, 2007 and 2006, respectively, comprehensive income of $4.11
      million or $2.28 million was realized for the six-months ended September 30,
      2007 and 2006, respectively.





**Liquidity
      and Capital Resources**





***General
      -*** As
      of
      September 30, 2007, we had cash and cash equivalents of $3,584,937. We
      have
      historically financed our business operations through bank loans, in addition
      to
      equity offerings. As of September
      30 ,
      2007,
      we had borrowed from banks and other institutions and had amounts of
      approximately $9.3 million in short-term notes payable. As of September
      30 ,
      2007,
      we had also borrowed $1.3 million in our current portion of long-term debt.
      For
      the nine
      months ending September
      30 ,
      2007,
      the net decrease in cash and cash equivalents was $106,501. The gross proceeds
      that we received in June 2007 as a result of the sale of 460,000 shares of
      our
      common stock in an initial public offering were offset primarily by increases
      in
      receivables from related parties, accounts receivable and employee advances.
      In
      addition, we received gross proceeds of $250,000 in October 2007 from an
      exercise of warrants by a warrant holder to purchase 100,000 shares of our
      common stock at a per share exercise price of $2.50.





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





2007
            
            $
            665,1092008
            
            
            1,995,3282009
            
            
            3,990,6576,651,094Less
                current portion
            
            
            (1,330,219
            )Long
                term debt
            
            $
            5,320,875





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




18


The
      following table provides summary information about net cash flow for the nine
      months ended September 30, 2007 and 2006:





**Cash
                Flow****Nine months ended September 30,****2007**
            
            **2006****(unaudited,
                in thousands)**Net
                cash provided by (used in) operating activities
            
            $
            (3,924
            )
            $
            887Net
                cash provided by (used in) investing activities
            
            
            283
            
            
            89Net
                cash provided by (used in) financing activities
            
            
            3,398
            
            
            342**Cash
                and Cash Equivalents at End of Period**
            
            $
            3,585
            
            $
            2,092




**Operating
      Activities:** Net
      cash
      used in operating activities for the nine months ended September 30, 2007 was
      approximately $3.92 million, as compared to cash provided by operating
      activities of $0.89 million for the nine months ended September 30, 2006. The
      increase in cash used was primarily due to three factors. First, there was
      an
      increase in accounts receivable in the amount of $2.61 million due to a
      relatively long collection period typical of the pharmaceutical industry in
      China. Second, we made payment of $2.9 million on a tax amount due. Third,
      there
      was an increase in cash flows related to inventory and employee advances, which
      were partially offset by the increases related to accrued expenses, deposits,
      and accounts payable during the nine months ended September 30,
      2007.





**Investing
      Activities:** Net
      cash
      provided by investing activities was $282,850 for the nine months ended
      September 30, 2007, as compared to net cash used in the amount of $88,646 for
      the nine months ended September 30, 2006. The increase in net cash provided
      by
      investing activities was primarily a result of $366,485 in cash provided by
      a
      release of restricted cash for the nine months ended September 30, 2007, as
      compared to cash used in the amount of $14,514 for the same period in
      2006.





**Financing
      Activities:** Net
      cash
      provided by financing activities was approximately $3.40 million for the nine
      months ended September 30, 2007 compared to $342,005 provided for the nine
      months ended September 30, 2006. The increase in cash provided was primarily
      due
      to our sale of stock in an initial public offering in June 2007 pursuant to
      which we sold 460,000 shares of our common stock at a price of $3.50 per share
      in an initial public offering for gross proceeds of $1,610,000. We received
      an
      aggregate of $1,094,381 of net proceeds, after deducting underwriter’s fees and
      other expenses of $515,619 incurred in connection with the sale.





As
      of
      September 30, 2007, our accounts receivable (less allowance for doubtful
      accounts of $1.78 million) were $12.52 million, an increase of $2.61 million,
      or
      26.3% over accounts receivable of $9.9 million as of December 31, 2006. The
      collection period typically runs from nine months to one year, considering
      the
      relatively long collection period in our industry. In
      the
      third quarter of 2007, we adopted more stringent credit policies designed to
      improve the quality and mix of our customer base, in addition to reducing
      the amount of uncollectible account receivables. Due to these stricter credit
      policies, we experienced a decrease in sales volume during the third quarter
      but
      believe the implementation of these policies will improve our customer base
      and
      reduce the amount of uncollectible account receivables in future
      periods.




Our
      company normally requires one to two months to receive products that we order.
      Inventory increased during the nine month period ended September 30, 2007 by
      approximately $1.82 million, an increase of 70.60% over inventory as of December
      31, 2006. The increase in inventory was primarily due to the increase in work
      in
      progress. We purchased a significant amount of Sanchi ,
      which
      is our main raw material for products. In order to avoid a risk of spoilage
      by
      storing the Sanchi in our
      warehouse, our production department purified the Sanchi into
      powder for storage. As a result, inventory increased. Moreover, our payment
      cycle is considerably shorter than our receivable cycle, since we typically
      pay
      our suppliers all or a portion of the purchase price in advance and for some
      suppliers we must maintain a deposit for future orders. We require our customers
      to pay a certain percentage of the sales price as deposit before we ship
      products to them. The percentage varies from customer to customer. During the
      course of business, we reduce the deposit requirement for some customers with
      good credit. To the extent that we cannot satisfy our cash needs, whether from
      operations or from a financing source, our business would be impaired in that
      it
      may be difficult for us to obtain products which could, in turn, impair our
      ability to generate sales. We have implemented new policies aimed at improving
      collection of accounts receivable in the future, including more detailed
      reporting from and increased control over provincial sales offices and
      representatives, incentives for sales representatives more closely tied to
      timely collection, and more stringent enforcement of payment terms with
      distributors.





In
      addition, in the course of our business, we must make significant deposits
      to
      our suppliers when we place an order. As of September 30, 2007, our advance
      payments to our suppliers totaled approximately $0.40 million. We are
      confident that our available funds and cash generated from operations will
      provide us with sufficient capital for a sustainable operation; however, we
      may
      require additional capital for acquisitions or for the operation of the combined
      companies. As of the date of this report, we have no material commitments for
      capital expenditures. We cannot assure that such funding will be
      available.




19




We
      make
      significant cash advances to our sales representatives to assist and encourage
      them to expand the marketing and sales of our products into new markets and
      gain
      new customers. We believe the sales representatives are more able to expand
      into
      new markets and obtain new customers if they have advanced funds for their
      travel, meals, and other incidental expenses that arise over the time they
      perform their functions as sales representatives. Because recently the Chinese
      economy has grown quickly and because competition in the pharmaceutical industry
      is intense, prior to September 2006, we did not ask sales representatives to
      pay
      off advances immediately. Instead, we encouraged sales representatives to expand
      their markets and gain more customers. However, beginning in September of 2006,
      we began to more vigorously pursue collection of all employee advances.
      Nonetheless, there are some employee advances that have aged significantly
      that,
      based on prior experience, we do not expect to collect on every outstanding
      advance and have estimated the uncollectible balance based on the age of the
      advances. When we makes advances to sales representatives, we require that
      our
      selling offices sign advance agreements with sales representatives to arrange
      the specific purpose of the advance, the amount of the advance, and the term
      of
      the advance. Our finance department records the detail of advances and checks
      the remaining balance with sales representatives every month. We also supervise
      the repayment of the advances. For sales representatives who do not have good
      credit, we require them to use real property as collateral when receiving
      advances from us. Additionally, for sales representatives who refuse to pay
      off
      the advances, we attempt to collect on the advances and decrease the risk of
      bad
      debt as much as possible by withholding sales commissions, prosecuting
      delinquent sales representatives, and by other valid means of collection. On
      January 1, 2007, we added punitive measures for overdue advances to the advance
      agreement.





Employee
      advances were approximately $6.80 million at September 30, 2007 and $3.13
      million as of December 31, 2006. The increase was due to us advancing more
      money
      to sales representatives to encourage them to expand their markets and increase
      sales. We began to experience a significant increase in employee
      advances in the fourth quarter of 2006. As of September 30, 2007, the gross
      amount of employee advances was $8.28 million and as of December 31, 2006 it
      was
      $4.56 million, an increase of $3.72 million in that nine-month period. As of
      September 30, 2007, the gross amount of employee advances aged over one year
      was
      $1.57 million. Additionally, we began to employ more sales
      representatives in September 2006 and, as a result, we made more advances to
      sales representatives in an attempt to encourage and assist sales
      representatives to expand into new selling markets and gain new customers.
      Because of the increase in the balance of employee advances, we, our
      compliance with our established policy to reserve an allowance for specific
      percentages of our aged receivables, accrued a larger allowance for the
      increased employee advances in order to consistently apply our established
      allowance policy.





The
      table
      below sets forth the outstanding gross and net amount of outstanding balances
      of
      employee advances for the years ended December 31, 2006 and 2005 and the nine
      months ended September 30, 2007.


**Balance at beginning**
                **of
                  period**
              
              **Additions**
              
              **Reductions**
              
              **Balance
                  at**
                **end
                  of**
                **period****For
                  the year ended December 31, 2005**Gross
                  amount of employee accounts
              
              $
              3,309,841
              
              $
              1,543,143
              
              $
              2,217,715
              
              $
              2,635,269Allowance
                  for doubtful accounts
              
              
              719,661
              
              
              -
              
              
              61,260
              
              
              658,401Net
                  amount
              
              $
              2,590,180
              
              $
              1,543,143
              
              $
              2,156,455
              
              $
              1,976,868**For
                  the year ended December 31, 2006**Gross
                  amount of employee advances
              
              $
              2,635,269
              
              $
              3,492,160
              
              $
              1,567,958
              
              $
              4,559,471Allowance
                  for doubtful accounts
              
              
              658,401
              
              
              771,025
              
              
              -
              
              
              1,429,426Net
                  amount
              
              $
              1,976,868
              
              $
              2,721,135
              
              $
              1,567,958
              
              $
              3,130,045**For
                  the nine months ended September 30, 2007**Gross
                  amount of employee advances
              
              $
              4,559,471
              
              $
              7,646,626
              
              $
              3,923,787
              
              $
              8,282,310Allowance
                  for doubtful accounts
              
              
              1,429,426
              
              
              52,455
              
              
              -
              
              
              1,481,881Net
                  amount
              
              $
              3,130,045
              
              $
              7,594,171
              
              $
              3,923,787
              
              $
              6,800,429




20




As
      of
      December 31, 2006, we had accrued taxes that included $1.4 million in income
      taxes and $1.6 million in Value Added Taxes, or VAT taxes. In China, companies
      are required to file income tax returns for the current year before April 15
      of
      the following year and file VAT tax returns for the current month within ten
      days of the end of the month. In the past, we filed VAT tax returns every month
      after getting VAT invoices; however, because some customers did not immediately
      process these invoices, we did not include on a timely basis those invoices
      in
      the income and VAT tax returns. In June 2006, we became aware that there were
      some income taxes and VAT taxes that were not included on a timely basis on
      our
      tax returns and we requested that these customers process all invoices from
      us.
      On March 15, 2007, one of our majority owned subsidiaries was granted an
      exemption from income taxes for the years ended December 31, 2006 and 2005.
      The
      approval of this exemption by the government of the PRC reduced the amount
      of
      prior income tax payable during the first quarter of 2007 by $904,501. We have
      communicated to the taxing authorities the situation and we have agreed to
      a
      payment schedule with the taxing authority in order to become current in the
      payment of VAT taxes. Under
      the
      agreed payment schedule, we remitted all VAT taxes incurred during prior periods
      over a three month period and became current in our payment of VAT taxes in
      July
      2007. As of September 30, 2007, we had accrued taxes that included approximately
      $0.2 million in income taxes and $0.6 million in VAT taxes. During 2007, we
      believe that we will have sufficient cash flows to meet the accrued tax
      liabilities.




**Off-Balance
      Sheet Arrangements**





None.





**Foreign
      Currency Risk**





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





**Interest
      Rate Risk**





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





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





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





The
      forward-looking statements contained in this quarterly report are based on
      current expectations and beliefs concerning future developments and the
      potential effects on the parties and the transaction. 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 the parties’ 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 80% of our
                revenues;


·
            our
                reliance on a few suppliers for Sanchi, a scarce plant that is the
                primary
                ingredient in almost all of our
                products;


·
            our
                ability to develop and market new
                products;


·
            our
                ability to establish and maintain a strong
                brand;


·
            costs
                and expenses related to expansion of retail distribution of
                products;




21




·
            continued
                maintenance of certificates, permits and licenses required to conduct
                business in China;


·
            protection
                of our intellectual property rights;


·
            market
                acceptance of our products;


·
            changes
                in the laws of the PRC that affect our
                operations;


·
            any
                recurrence of severe acute respiratory syndrome or avian
                flu;


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


·
            development
                of a public trading market for our securities;


·
            cost
                of complying with current and future governmental regulations and
                the
                impact of any changes in the regulations on our operations;
                and


·
            other
                factors referenced in thisquarterlyreport, including, without limitation, under the sections entitled
“Risk
                Factors” and “Management’s Discussion and Analysis of Financial Condition
                and Results of Operations.”





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




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




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





**RISK
      FACTORS**


Any
        investment in our common stock involves a high degree of risk. Investors
        should
        carefully consider the risks described below and all of the information
        contained in this report before deciding whether to invest in our common
        stock.
        Our business, financial condition or results of operations could be materially
        adversely affected by these risks if any of them actually occur. The trading
        price of our securities could decline due to the occurrence of any of these
        risks, and an investor may lose all or part of his investment.
  As
        described above, this report also contains forward-looking statements that
        involve risks and uncertainties. Our actual results could differ materially
        from
        those anticipated in these forward-looking statements as a result of certain
        factors, including the risks we face as described below.
 
 **RISKS
        RELATED TO OUR OPERATIONS**
 
 **Our
        Current Business Is Primarily Based On A Single Product, Which Currently
        Accounts For More Than 90% Of Our Revenues, And We May Not Be Able To Generate
        Significant Revenue If This Product Fails.**
 
 More
        than
        90%, 80%, and 85% of our revenue for the years ended December 31, 2005 and
        2006
        and the nine months ended September 30, 2007, respectively, comes from a
        single
        product, Xuesaitong Soft Capsules, and our business may fail if this product
        fails. If we experience difficulties or obstacles in the manufacture and
        sale of
        the Xuesaitong Soft Capsules, or if our licenses and government approvals
        are
        revoked to sell the product, then we may not be able to generate significant
        revenues, our business may fail and you would lose all or part of your
        investment in our company.
 
 **We
        Rely On A Few Suppliers For Sanchi, The Primary Ingredient in Most of Our
        Products, And Any Disruption With Our Suppliers Could Delay Product Shipments
        And Have a Material Adverse Impact on Our Business Operations And
        Profitability.**
 
 Due
        to
        the limited availability of Sanchi, we currently rely on a small number of
        suppliers as our source for Sanchi, the primary raw material that is needed for
        us to produce our products. We believe that there are few alternative suppliers
        available to supply the Sanchi plant, and should any of our current suppliers
        terminate their business arrangements with us or increase their prices of
        materials supplied, it could delay product shipments and would adversely
        affect
        our business operations and profitability. In addition, if the suppliers
        refused
        to sell Sanchi, or increased the sales prices of Sanchi, our results of
        operations would be materially and adversely impacted.
  22
 **If
          Our Primary Product Is Subject To New Competition From Other Medicines
          Or Is
          Removed From China’s Insurance Catalogue In The Future, Our Revenue Will Suffer
          Substantially.**
 
 Under
          Chinese regulations, patients purchasing medicines listed by China’s state
          and/or provincial governments in the Insurance Catalogue may be reimbursed,
          in
          part or in whole, by a social medicine fund. Accordingly, pharmaceutical
          distributors prefer to engage in the distribution of medicines listed in
          the
          Insurance Catalogue. Since 2005, the main product, Xuesaitong Soft Capsules,
          that we manufacture and sell is listed in the Insurance Catalogue. The
          content
          of the Insurance Catalogue is subject to change by the Ministry of Labor
          and
          Social Security of China, and new medicines may be added to the Insurance
          Catalogue by provincial level authorities as part of their limited ability
          to
          change certain medicines listed in the Insurance Catalogue. Xuesaitong
          Soft
          Capsules accounted for more than 90%, 80%, and 85% of our revenue for the
          years
          ended December 31, 2005 and 2006 and the nine months ended September 30,
          2007,
          respectively, and if this product becomes subject to new competition from
          other
          medicines listed in the Insurance Catalogue or removed from the Insurance
          Catalogue in the future, our total revenue will suffer
          substantially.
  **We
        May Need To Raise Additional Capital To Fund Our Operations, And Our Failure
        To
        Raise Additional Capital May Force Us To Delay, Reduce, Or Eliminate Our
        Product
        Development Programs.**
 
 Due
        to
        the significant amount of funds required for research and development and
        the
        subsequent marketing of products, the pharmaceutical industry is very capital
        intensive. The industry is characterized by large receivable turnovers, which
        could mean that we will need more working capital if our revenues increase.
        We
        have traditionally been committed to research and development and it is possible
        that we will need to raise additional capital within the foreseeable future.
        Additional capital may be needed for the development of new products or product
        lines, financing of general and administrative expenses, licensing or
        acquisition of additional technologies, and marketing of new or existing
        products. There are no assurances that we will be able to raise the appropriate
        amount of capital needed for our future operations. Failure to obtain funding
        when needed may force us to delay, reduce, or eliminate our product development
        programs.
  **We
        Make Cash Employee Advances To Our Sales Representatives, And If We Are Not
        Able
        To Collect On These Advances In A Timely Manner, Or At All, Then It Will
        Decrease The Amount Of Working Capital That We Have Available To Effectively
        Operate Our Business.**
 
 We
        make
        cash advances to our sales representatives in an attempt to encourage and
        assist
        them in expanding the marketing and sales of our products into new regions.
        We
        employ a large number of sales representatives and, as a result, the aggregate
        amount sufficient to sales representatives is a significant amount. We have
        experienced a significant growth in the amount of outstanding employee advances,
        and if we are unable to collect such advances in a timely manner, or at all,
        it
        will reduce our available cash and restrict out ability to effectively operate
        our business. As of September 30, 2007, the gross amount of employee
        advances was $8.3 million and as of December 31, 2006 it was $4.6 million,
        an
        increase of $3.7 million. By making such cash advances, we will not
        have the amounts advanced available to operate our business, reducing our
        liquidity and forcing us to look to other, possibly less cost efficient,
        sources
        of capital to fund our operations. In addition, if we are unable to collect
        the
        amounts advanced, or if it takes a significant amount of time and resources
        to
        collect such advances, our results of operation may suffer, and the value
        of our
        stock may decline.
 
 **Our
        Three Largest Customers Account For A Significant Percentage of Our Sales.
        We
        Cannot Be Certain That These Sales Will Continue; If They Do Not, Our Revenues
        Will Likely Decline.**
 
 Our
        three
        largest customers collectively accounted for approximately 21.7%, 32.1%,
        and
        16.7% of our sales for the years ended December 31, 2005 and 2006 and for
        the
        nine months ended September 30, 2007, respectively. We do not have any long-term
        contracts with these customers, each of whom orders only on a “purchase order”
basis. There can be no assurances that any of these customers will continue
        to
        purchase products from us. The loss of any or all of these customers or a
        significant reduction in their orders would have a materially adverse effect
        on
        our revenues.
 
 **The
        Failure To Manage Growth Effectively Could Have An Adverse Effect On Our
        Business, Financial Condition, And Results Of Operations.**
 
 Rapid
        market growth, if any, of our pharmaceutical products may require us to expand
        our employee base for managerial, operational, financial, and other purposes.
        As
        of September 30, 2007, we had 400 full-time, salaried employees, in addition
        to
        our employment over 530 sales representatives who are paid on a commission
        basis. The continued future growth will impose significant added
        responsibilities upon the members of our management to identify, recruit,
        maintain, integrate, and motivate new employees. Aside from increased
        difficulties in the management of human resources, we may also encounter
        working
        capital issues, as we need increased liquidity to finance the purchases of
        raw
        materials and supplies, research and development of new products, acquisition
        of
        new businesses and technologies, and the hiring of additional employees.
        For
        effective growth management, we will be required to continue improving our
        operations, management, and financial systems and control. Our failure to
        manage
        growth effectively may lead to operational and financial inefficiencies that
        will have a negative effect on our profitability.
 
 23
  **Our
        Planned Expansion Of Sales Into Overseas Markets Could Fail, Reduce Operating
        Results And/Or Expose Us To Increased Risks Associated With Different Market
        Dynamics And Competition In Any Of The Foreign Countries Where We Attempt
        To
        Sell Our Products.**
 
 We
        could
        face many new obstacles in our planned expansion of product sales in overseas
        markets. These markets are untested for our products and we face risks in
        expanding our business overseas, which include differences in regulatory
        product
        testing requirements, patent protection, taxation policy, legal systems and
        rules, marketing costs, fluctuations in currency exchange rates and changes
        in
        political and economic conditions. We may not be as successful as our
        competitors in generating revenues in international markets due to the lack
        of
        recognition of our products or other factors. Developing product recognition
        overseas is expensive and time-consuming and our international expansion
        efforts
        may be more costly and less profitable than we expect. If we are not successful
        in our target markets, our sales could decline, our margins could be negatively
        impacted and we could lose market share, any of which could materially harm
        our
        business, results of operations and profitability.
  **We
        Are Dependent On Certain Key Personnel And Loss Of These Key Personnel Could
        Have A Material Adverse Effect On Our Business, Financial Condition And Results
        Of Operations.**
 
 Our
        success is, to a certain extent, attributable to the management, sales and
        marketing, and pharmaceutical factory operational expertise of key personnel.
        Gui Hua Lan, our Chief Executive Officer, Zheng Yi Wang, our Executive Director
        of Exports, Feng Lan, our President, Lei Lan, our Executive Director of Sales,
        and Qiong Hua Gao, our Chief Financial Officer, perform key functions in
        the
        operation of our business. There can be no assurance that we will be able
        to
        retain these officers after the term of their employment contracts expire.
        The
        loss of these officers could have a material adverse effect upon our business,
        financial condition, and results of operations. We must attract, recruit
        and
        retain a sizeable workforce of technically competent employees. Our ability
        to
        effectively implement our business strategy will depend upon, among other
        factors, the successful recruitment and retention of additional highly skilled
        and experienced management and other key personnel. We cannot assure you
        that we
        will be able to hire or retain such employees.
 
 **Our
        Business And The Success Of Our Products Could Be Harmed If We Are Unable
        To
        Maintain Our Brand Image.**
 
 We
        believe that establishing and strengthening our Lixuwang brand is critical
        to
        achieving widespread acceptance of our products and to establishing key
        strategic relationships. The importance of brand recognition will increase
        as
        current and potential competitors enter the Chinese pharmaceutical market
        with
        competing products. Our ability to promote and position our Lixuwang brand
        depends largely on the success of our marketing efforts and our ability to
        provide high quality products and customer service. These activities are
        expensive and we may not generate a corresponding increase in sales to justify
        these costs. If we fail to establish and maintain our brand, or if our brand
        value is damaged or diluted, we may be unable to maintain or increase our
        sales
        or revenue.
 
 24
  **We
        Face Intense Competition In The Pharmaceutical Industry And Such Competition
        Could Cause Our Sales Revenue And Profits To Decline.**
 
 The
        pharmaceutical industry both within China and globally is intensely competitive
        and is characterized by rapid and significant technological progress, and
        our
        operating environment is increasingly competitive. We face intense competitors
        that will attempt to create or are marketing products in the PRC that are
        similar to our products. Our competitors, both domestic and international,
        include large pharmaceutical companies, universities, and public and private
        research institutions that currently engage in or may engage in efforts related
        to the discovery and development of new pharmaceuticals. Many of these entities
        have substantially greater research and development capabilities and financial,
        scientific, manufacturing, marketing and sales resources than we do, as well
        as
        more experience in research and development, clinical trials, regulatory
        matters, manufacturing, marketing and sales. There can be no assurance that
        our
        products will be either more effective in therapeutic capabilities and/or
        be
        able to compete in price with those of our competitors. Failure to do either
        of
        these may result in decreased profits.
 
 **We
        May Not Be Successful In Competing With Other Manufacturers Of Pharmaceuticals
        In The Tender Processes For The Purchase Of Medicines By State-Owned And
        State-Controlled Hospitals.**
 
 A
        substantial portion of the products we sell to our distributor customers
        are
        then sold to hospitals owned and controlled by counties or higher level
        government authorities in China. These hospitals must implement collective
        tender processes for the purchase of medicines listed in the Insurance Catalogue
        and medicines that are consumed in large volumes and commonly prescribed
        for
        clinical uses. During a collective tender process, the hospitals will establish
        a committee consisting of recognized pharmaceutical experts. The committee
        will
        assess the bids submitted by the pharmaceutical manufacturers, taking into
        consideration, among other things, the quality and price of the medicine
        and the
        service and reputation of the manufacturers. For the same type of
        pharmaceutical, the committee usually selects from among two to three different
        brands. Only pharmaceuticals that have won in the collective tender processes
        may be purchased by these hospitals. The collective tender process for
        pharmaceuticals with the same chemical composition must be conducted at least
        annually, and pharmaceuticals that have won in the collective tender processes
        previously must participate and win in the collective tender processes in
        the
        following period before new purchase orders can be issued. If we are unable
        to
        win purchase contracts through the collective tender processes in which we
        decide to participate, we will lose market share to our competitors, and
        our
        revenue and profitability will be adversely affected.
 
 **Counterfeit
        Pharmaceuticals In China Could Negatively Impact Our Revenues, Brand Reputation,
        Business And Results Of Operations.**
 
 Our
        products are also subject to competition from counterfeit pharmaceuticals,
        which
        are pharmaceuticals manufactured without proper licenses or approvals and
        are
        fraudulently mislabeled with respect to their content and/or manufacturer.
        Counterfeiters may illegally manufacture and market pharmaceuticals under
        our
        brand name or that of our competitors. Counterfeit pharmaceuticals are generally
        sold at lower prices than the authentic products due to their low production
        costs, and in some cases are very similar in appearance to the authentic
        products. Counterfeit pharmaceuticals may or may not have the same chemical
        content as their authentic counterparts. If counterfeit pharmaceuticals
        illegally sold under our brand name results in adverse side effects to
        consumers, we may be associated with any negative publicity resulting from
        such
        incidents. In addition, consumers may buy counterfeit pharmaceuticals that
        are
        in direct competition with our pharmaceuticals, which could have an adverse
        impact on our revenues, business and results of operations. Although the
        PRC
        government has recently been increasingly active in policing counterfeit
        pharmaceuticals, there is not yet an effective counterfeit pharmaceutical
        regulation control and enforcement system in China. The proliferation of
        counterfeit pharmaceuticals has grown in recent years and may continue to
        grow
        in the future. Any such increase in the sales and production of counterfeit
        pharmaceuticals in China, or the technological capabilities of the
        counterfeiters, could negatively impact our revenues, brand reputation, business
        and results of operations.
 
 25
  **If
        Our Pharmaceutical Products Fail To Receive Regulatory Approval Or Are Severely
        Limited In These Products’ Scope Of Use, We May Be Unable To Recoup Considerable
        Research And Development Expenditures.**
 
 The
        production of our pharmaceutical products is subject to the regulatory approval
        of the State Food and Drug Administration (SFDA) in China. The regulatory
        approval procedure for pharmaceuticals can be quite lengthy, costly, and
        uncertain. Depending upon the discretion of the SFDA, the approval process
        may
        be significantly delayed by additional clinical testing and require the
        expenditure of resources not currently available; in such an event, it may
        be
        necessary for us to abandon our application. Even where approval of the product
        is granted, it may contain significant limitations in the form of narrow
        indications, warnings, precautions, or contra-indications with respect to
        conditions of use. If approval of our product is denied, abandoned, or severely
        limited in terms of the scope of product use, it may result in the inability
        to
        recoup considerable research and development expenditures.
  Currently,
        two of our products, Wei Dingkang Soft Capsules and Dencichine Hemostat,
        have
        pending applications with the SFDA. Phase II clinical testing for Wei DingKang
        Soft Capsules was completed in July 2007. We expect to present to the SFDA
        information regarding the completion of Phase II testing and initiation of
        Phase
        III testing prior to the end of 2007. With respect to Dencichine Hemostat,
        it
        has completed the neurotoxicity testing performed by the Chinese Military
        Medical Institute and we are currently applying for the Phase I clinical
        testing
        for it. If we do not receive timely approval for either of these drugs, then
        production will be delayed and sales of the products cannot be planned
        for.
 
 **If
        All Or A Significant Portion Of Our Customers With Trade Receivables Fail
        To Pay
        All Or Part Of The Trade Receivables Or Delay The Repayment, Our Net Income
        Will
        Decrease And Our Profitability Will Be Adversely Affected.**
 
 We
        had
        trade receivables, net of allowance for doubtful accounts, of approximately
        $12.5 million (unaudited) as of September 30, 2007. The standard credit period
        for most of our new clients is two months. For certain clients, such as
        long-standing clients or large clients, we will extend the credit period.
        Currently, most of our clients have established a long-term corporate
        relationship with us, so their credit periods are generally six months. Within
        the medical industry in China, the collection period is generally longer
        than
        for other industries. Our estimated average collection period for the year
        ended
        December 31, 2006 was 150 days. There is no assurance that our trade receivables
        will be fully repaid on a timely basis. If all or a significant portion of
        our
        customers with trade receivables fail to pay all or part of the trade
        receivables or delay the payment due to us for whatever reason, our net profit
        will decrease and our profitability will be adversely affected.
 
 **Our
        Success Is Highly Dependent On Continually Developing New And Advanced Products,
        Technologies, And Processes And Failure To Do So May Cause Us To Lose Our
        Competitiveness In The Pharmaceutical Industry And May Cause Our Profits
        To
        Decline.**
 
 To
        remain
        competitive in the pharmaceutical industry, it is important to continually
        develop new and advanced products, technologies, and processes. There is
        no
        assurance that our competitors’ new products, technologies, and processes will
        not render our existing products obsolete or non-competitive. Our
        competitiveness in the pharmaceutical market therefore relies upon our ability
        to enhance our current products, introduce new products, and develop and
        implement new technologies and processes. The research and development of
        new
        products and technologies is costly and time consuming, and there are no
        assurances that our research and development of new products will either
        be
        successful or completed within the anticipate timeframe, if ever at all.
        Our
        failure to technologically evolve and/or develop new or enhanced products
        may
        cause us to lose our competitiveness in the pharmaceutical industry and may
        cause our profits to decline.
 
 26
  **If
        We Fail To Develop New Products With High Profit Margins And Our High Profit
        Margin Products Are Substituted By Competitor’s Products, Our Gross And Net
        Profit Margins Will Be Adversely Affected.**
 
 For
        the
        year ended December 31, 2006 and the nine months ended September 30, 2007,
        the
        gross profit margin for our products was approximately 67.9% and 74.7%
        (unaudited), respectively. However, there is no assurance that we will be
        able
        to sustain such profit margins in the future. The pharmaceutical industry
        is
        very competitive, and there may be pressure to reduce sale prices of products
        without a corresponding decrease in the price of raw materials. Further,
        because
        of the limited number of suppliers, we are subject to an increased risk of
        raw
        material shortages or related delivery issues, which could increase our costs.
        In addition, the medical industry in China is highly competitive and new
        products are constantly being introduced to the market. In order to increase
        the
        sales of our products and expand our market, we may be forced to reduce prices
        in the future, leading to a decrease in gross profit margin. To the extent
        that
        we fail to develop new products with high profit margins and our high profit
        margin products are substituted by competitors’ products, our gross profit
        margins will be adversely affected.
 
 **The
        Commercial Success Of Our Products Depends Upon The Degree Of Market Acceptance
        Among The Medical Community And Failure To Attain Market Acceptance Among
        The
        Medical Community May Have An Adverse Impact On Our Operations And
        Profitability.**
 
 The
        commercial success of our products depends upon the degree of market acceptance
        among the medical community, such as hospitals and physicians. Even if our
        products are approved by the SFDA, there is no assurance that physicians
        will
        prescribe or recommend our products to patients. Furthermore, a product’s
        prevalence and use at hospitals may be contingent upon our relationship with
        the
        medical community. The acceptance of our products among the medical community
        may depend upon several factors, including, but not limited to, the product’s
        acceptance by physicians and patients as a safe and effective treatment,
        cost
        effectiveness, potential advantages over alternative treatments, and the
        prevalence and severity of side effects. Failure to attain market acceptance
        among the medical community may have an adverse impact on our operations
        and
        profitability.
  **Our
        Primary Product Is Subject To Price Controls By The China Government, Which
        May
        Affect Both Our Revenues And Net Income.**
 
 The
        laws
        of the PRC provide for the government to fix and adjust prices. During the
        year
        ended December 31, 2006 and the nine months ended September 30, 2007, our
        primary product, Xuesaitong Soft Capsules, was subject to price controls
        which
        affected our gross profit, gross margin and net income. It is possible that
        additional products may be subject to price controls, or that price controls
        may
        be increased in the future. To the extent that we are subject to price controls,
        our revenue, gross profit, gross margin and net income will be affected since
        the revenue we derive from our sales will be limited and we may face no
        limitation on our costs. Further, if price controls affect both our revenue
        and
        costs, our ability to be profitable and the extent of our profitability will
        be
        effectively subject to determination by the applicable regulatory authorities
        in
        the PRC.
 
 27
  **Our
        Certificates, Permits, And Licenses Related To Our Pharmaceutical Operations
        Are
        Subject To Governmental Control And Renewal And Failure To Obtain Renewal
        Will
        Cause All Or Part Of Our Operations To Be Terminated.**
 
 We
        are
        subject to various PRC laws and regulations pertaining to the pharmaceutical
        industry. We have attained certificates, permits, and licenses required for
        the
        operation of a pharmaceutical enterprise and the manufacturing of pharmaceutical
        products in the PRC. We also obtained pharmaceutical products and health
        food
        GMP certificates. The pharmaceutical production permit and GMP certificates
        are
        valid for a term of five years and the health food certifications are valid
        for
        four year terms, and each must be renewed before their expiration. We originally
        obtained our Medicine Production Permit on November 4, 1996, which is valid
        until December 31, 2010. The Medicine Production Permit applies to products
        described as tablet, granule, capsule, soft capsule, powder, ointment and
        medicinal. If the permit expires without renewal, we will not be able to
        conduct
        any medicine production operations, which will cause our operations to be
        terminated. We intend to apply for a renewed Medicine Production Permit before
        our current production permit expires on December 31, 2010.
 
 We
        hold
        GMP certificates that expire as follows:
 
 ·
            a
                GMP certificate for ointment products that expires on June 12,
                2011;  ·
            a
                GMP certificate for powder products that expires on April 21,
                2009;  ·
            a
                GMP certificate for products in the form of tablet, capsules, soft
                capsules and granules, including pre-processing products and extracts
                of
                herbs that expires on July 18, 2012; and  ·
            a
                GMP certificate for health food products in the form of tablets,
                capsules,
                soft capsules, and granules that expires on October 13, 2009.  We
        intend
        to apply for renewal of these GMP certificates prior to expiration. During
        the
        renewal process, we will be re-evaluated by the appropriate governmental
        authorities and must comply with the then prevailing standards and regulations
        which may change from time to time. In the event that we are not able to
        renew
        the certificates, permits and licenses, all or part of our operations may
        be
        terminated. Furthermore, if escalating compliance costs associated with
        governmental standards and regulations restrict or prohibit any part of our
        operations, it may adversely affect our operation and
        profitability.
  **We
        Cannot Guarantee The Protection Of Our Intellectual Property Rights And If
        Infringement Or Counterfeiting Of Our Intellectual Property Rights Occurs,
        Our
        Reputation And Business May Be Adversely Affected.**
 
 To
        protect the reputation of our products, we have registered and applied for
        registration of our trademarks in the PRC where we have a major business
        presence. Our products are sold under these trademarks. There is no assurance
        that there will not be any infringement of our brand name or other registered
        trademarks or counterfeiting of our products in the future. Should any such
        infringement or counterfeiting occur, our reputation and business may be
        adversely affected. We may also incur significant expenses and substantial
        amounts of time and effort to enforce our intellectual property rights in
        the
        future. Such diversion of our resources may adversely affect our existing
        business and future expansion plans.
 
 28
  **Our
        Plans To Commence The Retail Sale Of Our Cosmetic Products Depends On Our
        Ability To Open And Operate A Certain Number Of New Counters On An Ongoing
        Basis, Which Could Strain Our Resources And Cause The Performance Of Our
        Existing Operations To Suffer.**
 
 We
        hope
        to open a number of retail specialty counters to offer our cosmetic products
        at
        pharmacies throughout Eastern China by the first half of 2008, eventually
        expanding our retail presence across China. Our retail strategy will largely
        depend on our ability to find sites for, open and operate retail locations
        successfully. Our ability to open and operate retail locations successfully
        depends on several factors, including, among others, our ability to:
 
 ·
            identify
                suitable counter locations, the availability of which may be outside
                our
                control;  ·
            purchase
                and negotiate acceptable lease terms;  ·
            prepare
                counters for opening within budget;  ·
            source
                sufficient levels of inventory at acceptable costs to meet the needs
                of
                counters;  ·
            hire,
                train and retain qualified personnel;  ·
            secure
                required governmental permits and approvals;  ·
            successfully
                integrate counters into our existing operations;  ·
            contain
                payroll costs; and  ·
            generate
                sufficient operating cash flows or secure adequate capital on commercially
                reasonable terms to fund our retail strategy plans.  
 Any
        failure to successfully open and operate retail counters for our cosmetic
        products could have a material adverse effect on our results of operations.
        In
        addition, our proposed retail plan will place increased demands on our
        operational, managerial and administrative resources. These increased demands
        could cause us to operate our business less effectively, which, in turn,
        could
        cause deterioration in the financial performance of our overall
        business.
 
 **We
        Enjoy Certain Preferential Tax Concessions And Loss Of These Preferential
        Tax
        Concessions Will Cause Our Tax Liabilities To Increase And Our Profitability
        To
        Decline.**
 
 We
        enjoy
        preferential tax concessions in the PRC as a high-tech enterprise. Pursuant
        to
        the State Council’s Regulations on Encouraging Investment in and Development, we
        were granted a reduction in our income tax rate and have had an income tax
        rate
        of 15% since 2003. We are currently applying for a more favorable tax treatment
        under which we would pay no income taxes for the fiscal years 2007 and 2008
        and
        half of our current rate for the three years thereafter. If the application
        is
        not successful, the income tax rate is expected to remain at 15%. In addition,
        there is no assurance that the preferential tax treatment in the PRC will
        remain
        unchanged and effective. Our tax liabilities will increase and our profits
        may
        accordingly decline if our reduced income tax rate is no longer applicable
        and/or the tax relief on investment in PRC is no longer available.
  Additionally,
        the PRC Enterprise Income Tax Law (the “EIT Law”) was enacted on March 16, 2007.
        Under the EIT Law, effective January 1, 2008, China will adopt a uniform
        tax
        rate of 25.0% for all enterprises (including foreign-invested enterprises)
        and
        cancel several tax incentives enjoyed by foreign-invested enterprises. However,
        for foreign-invested enterprises established before the promulgation of the
        EIT
        Law, a five-year transition period is provided during which reduced rates
        will
        apply but gradually be phased out. Since the PRC government has not announced
        implementation measures for the transitional policy with regards to such
        preferential tax rates, we cannot reasonably estimate the financial impact
        of
        the new tax law to us at this time. Further, any future increase in the
        enterprise income tax rate applicable to us or other adverse tax treatments,
        such as the discontinuation of preferential tax treatments for high and new
        technology enterprises altogether, would have a material adverse effect on
        our
        results of operations and financial condition.
 
 29
  **We
        Do Not Carry Insurance To Cover Any Losses Due To Fire, Casualty Or Theft
        At Our
        Production Facility Located In Kunming, China.**
 
 We
        have
        not obtained fire, casualty and theft insurance, and there is no insurance
        coverage for our raw materials, goods and merchandise, furniture and equipment
        and production facility in China. Any losses incurred by us will have to
        be
        borne by us without any assistance, and we may not have sufficient capital
        to
        cover material damage to, or the loss of, our production facility due to
        fire,
        severe weather, flood or other cause, and such damage or loss would have
        a
        material adverse effect on our financial condition, business and
        prospects.
  **We
        May Suffer As A Result Of Product Liability Or Defective
        Products.**
 
 We
        may
        produce products which inadvertently have an adverse pharmaceutical effect
        on
        the health of individuals despite proper testing. Existing PRC laws and
        regulations do not require us to maintain third party liability insurance
        to
        cover product liability claims. However, if a product liability claim is
        brought
        against us, it may, regardless of merit or eventual outcome, result in damage
        to
        our reputation, breach of contract with our customers, decreased demand for
        our
        products, costly litigation, product recalls, loss of revenue, and the inability
        to commercialize some products.
 
 **We
        Rely On The Cooperation With Research Laboratories And Universities, And
        If
        These Institutions Cease To Cooperate With Us And We Cannot Find Other Suitable
        Substitute Research And Development Partners, Our Ability To Develop New
        Products May Be Hindered And Our Business May Be Adversely
        Affected.**
 
 We
        cooperate with several research institutions including the Shijia Research
        Center of Beijing University. We rely to a certain extent on these institutions
        for our development of new products. There is no assurance that these
        institutions will continue cooperating with us to develop new products. In
        the
        event that these institutions cease to cooperate with us and it cannot find
        other suitable substitute research and development partners, our ability
        to
        develop new products may be hindered and our business may be adversely affected.
 
 **RISKS
        RELATED TO CONDUCTING BUSINESS IN CHINA**
 
 **All
        Of Our Assets Are Located In China And Substantially All Of Our Revenues
        Are
        Derived From Our Operations In China, And Changes In The Political And Economic
        Policies Of The PRC Government Could Have A Significant Impact Upon The Business
        We May Be Able To Conduct In The PRC And Our Results Of Operations And Financial
        Condition.**
 
 Our
        business operations may be adversely affected by the current and future
        political environment in the PRC. The PRC has operated as a socialist state
        since the mid-1900s and is controlled by the Communist Party of China. The
        Chinese government exerts substantial influence and control over the manner
        in
        which we must conduct our business activities. The PRC has only permitted
        provincial and local economic autonomy and private economic activities since
        1988. The government of the PRC has exercised and continues to exercise
        substantial control over virtually every sector of the Chinese economy,
        particularly the pharmaceutical industry, through regulation and state
        ownership. Our ability to operate in China may be adversely affected by changes
        in Chinese laws and regulations, including those relating to taxation, import
        and export tariffs, raw materials, environmental regulations, land use rights,
        property and other matters. Under our current leadership, the government
        of the
        PRC has been pursuing economic reform policies that encourage private economic
        activity and greater economic decentralization. There is no assurance, however,
        that the government of the PRC will continue to pursue these policies, or
        that
        it will not significantly alter these policies from time to time without
        notice.
  30
  **The
        PRC Laws And Regulations Governing Our**  **Current
        Business Operations Are Sometimes Vague And Uncertain. Any Changes In Such
        PRC
        Laws And Regulations May Have A Material And Adverse Effect On Our
        Business.**
 
 The
        PRC’s
        legal system is a civil law system based on written statutes, in which system
        decided legal cases have little value as precedents unlike the common law
        system
        prevalent in the United States. There are substantial uncertainties regarding
        the interpretation and application of PRC laws and regulations, including
        but
        not limited to the laws and regulations governing our business, or the
        enforcement and performance of our arrangements with customers in the event
        of
        the imposition of statutory liens, death, bankruptcy and criminal proceedings.
        The Chinese government has been developing a comprehensive system of commercial
        laws, and considerable progress has been made in introducing laws and
        regulations dealing with economic matters such as foreign investment, corporate
        organization and governance, commerce, taxation and trade. However, because
        these laws and regulations are relatively new, and because of the limited
        volume
        of published cases and judicial interpretation and their lack of force as
        precedents, interpretation and enforcement of these laws and regulations
        involve
        significant uncertainties. New laws and regulations that affect existing
        and
        proposed future businesses may also be applied retroactively. We are considered
        a foreign person or foreign funded enterprise under PRC laws, and as a result,
        we are required to comply with PRC laws and regulations. We cannot predict
        what
        effect the interpretation of existing or new PRC laws or regulations may
        have on
        our businesses. If the relevant authorities find that we are in violation
        of PRC
        laws or regulations, they would have broad discretion in dealing with such
        a
        violation, including, without limitation:
 
 ·
            levying
                fines;  ·
            revoking
                our business and other licenses;  ·
            requiring
                that we restructure our ownership or operations;
                and  ·
            requiring
                that we discontinue any portion or all of our
                business.   **The
        Foreign Currency Exchange Rate Between U.S. Dollars And Renminbi Could Adversely
        Affect Our Financial Condition.**
 
 To
        the
        extent that we need to convert dollars into Renminbi for our operational
        needs,
        our financial position and the price of our common stock may be adversely
        affected should the Renminbi appreciate against the U.S. dollar at that time.
        Conversely, if we decide to convert our Renminbi into dollars for the
        operational needs or paying dividends on our common stock, the dollar equivalent
        of our earnings from our subsidiary in China would be reduced should the
        dollar
        appreciate against the Renminbi.
 
 Until
        1994, the Renminbi experienced a gradual but significant devaluation against
        most major currencies, including the U.S. dollar, and there was a significant
        devaluation of the Renminbi on January 1, 1994 in connection with the
        replacement of the dual exchange rate system with a unified managed floating
        rate foreign exchange system. Since 1994, the value of the Renminbi relative
        to
        the U.S. dollar has remained stable and has appreciated slightly against
        the
        U.S. dollar. Countries, including the United States, have argued that the
        Renminbi is artificially undervalued due to China’s current monetary policies
        and have pressured China to allow the Renminbi to float freely in world markets.
        In July 2005, the PRC government changed its policy of pegging the value
        of the
        Renminbi to the U.S. dollar. Under the new policy the Renminbi is permitted
        to
        fluctuate within a narrow and managed band against a basket of designated
        foreign currencies. While the international reaction to the Renminbi revaluation
        has generally been positive, there remains significant international pressure
        on
        the PRC government to adopt an even more flexible currency policy, which
        could
        result in further and more significant appreciation of the Renminbi against
        the
        U.S. dollar.
 
 31
  **Inflation
        In The PRC Could Negatively Affect Our Profitability And
        Growth.**
 
 While
        the
        PRC economy has experienced rapid growth, such growth has been uneven among
        various sectors of the economy and in different geographical areas of the
        country. Rapid economic growth can lead to growth in the money supply and
        rising
        inflation. During the past decade, the rate of inflation in China has been
        as
        high as approximately 20% and China has experienced deflation as low as
        approximately minus 2%. If prices for our products rise at a rate that is
        insufficient to compensate for the rise in the costs of supplies such as
        raw
        materials, it may have an adverse effect on our profitability. In order to
        control inflation in the past, the PRC government has imposed controls on
        bank
        credits, limits on loans for fixed assets and restrictions on state bank
        lending. The implementation of such policies may impede economic growth.
        In
        October 2004, the People’s Bank of China, the PRC’s central bank, raised
        interest rates for the first time in nearly a decade and indicated in a
        statement that the measure was prompted by inflationary concerns in the Chinese
        economy. In April 2006, the People’s Bank of China raised the interest rate
        again. Repeated rises in interest rates by the central bank would likely
        slow
        economic activity in China which could, in turn, materially increase our
        costs
        and also reduce demand for our products.
  **Recent
        PRC Regulations Relating To Acquisitions Of PRC Companies By Foreign Entities
        May Create Regulatory Uncertainties That Could Restrict Or Limit Our Ability
        To
        Operate. Our Failure To Obtain The Prior Approval Of The China Securities
        Regulatory Commission, Or The CSRC, For Our June 2007 Public Offering And
        Listing And Trading Of Our Common Stock On The American Stock Exchange Could
        Have A Material Adverse Effect On Our Business, Operating Results, Reputation
        And Trading Price Of Our Common Stock, And May Also Create Uncertainties
        For Our
        June 2007 Public Offering.**
 
 The
        PRC
        State Administration of Foreign Exchange, or SAFE, issued a public notice
        in
        January 2005 concerning foreign exchange regulations on mergers and acquisitions
        in China. The public notice states that if an offshore company controlled
        by PRC
        residents intends to acquire a PRC company, such acquisition will be subject
        to
        strict examination by the relevant foreign exchange authorities. The public
        notice also states that the approval of the relevant foreign exchange
        authorities is required for any sale or transfer by the PRC residents of
        a PRC
        company’s assets or equity interests to foreign entities for equity interests or
        assets of the foreign entities.
 
 In
        April
        2005, SAFE issued another public notice further explaining the January notice.
        In accordance with the April notice, if an acquisition of a PRC company by
        an
        offshore company controlled by PRC residents has been confirmed by a Foreign
        Investment Enterprise Certificate prior to the promulgation of the January
        notice, the PRC residents must each submit a registration form to the local
        SAFE
        branch with respect to their respective ownership interests in the offshore
        company, and must also file an amendment to such registration if the offshore
        company experiences material events, such as changes in the share capital,
        share
        transfer, mergers and acquisitions, spin-off transaction or use of assets
        in
        China to guarantee offshore obligations. The April notice also provides that
        failure to comply with the registration procedures set forth therein may
        result
        in restrictions on our PRC resident shareholders and subsidiaries. Pending
        the
        promulgation of detailed implementation rules, the relevant government
        authorities are reluctant to commence processing any registration or application
        for approval required under the SAFE notices.
 
 32
  In
        addition, on August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the
        State-Owned Assets Supervision and Administration Commission of the State
        Council, State Administration of Taxation, State Administration for Industry
        and
        Commerce, CSRC and SAFE, amended and released the Provisions for Foreign
        Investors to Merge and Acquire Domestic Enterprises, new foreign-investment
        rules which took effect September 8, 2006, superseding much, but not all,
        of the
        guidance in the prior SAFE circulars. These new rules significantly revise
        China’s regulatory framework governing onshore-offshore restructurings and how
        foreign investors can acquire domestic enterprises. These new rules signify
        greater PRC government attention to cross-border merger, acquisition and
        other
        investment activities, by confirming MOFCOM as a key regulator for issues
        related to mergers and acquisitions in China and requiring MOFCOM approval
        of a
        broad range of merger, acquisition and investment transactions. Further,
        the new
        rules establish reporting requirements for acquisition of control by foreigners
        of companies in key industries, and reinforce the ability of the Chinese
        government to monitor and prohibit foreign control transactions in key
        industries.
 
 Specifically,
        this regulation, among other things, has some provisions that purport to
        require
        that an offshore special purpose vehicle, or SPV, formed for listing purposes
        and controlled directly or indirectly by PRC companies or individuals shall
        obtain the approval of the CSRC prior to the listing and trading of such
        SPV’s
        securities on an overseas stock exchange. On September 21, 2006, the CSRC
        published on its official website procedures specifying documents and materials
        required to be submitted to it by SPVs seeking CSRC approval of their overseas
        listings. However, the application of this PRC regulation remains unclear
        with
        no consensus currently existing among the leading PRC law firms regarding
        the
        scope and applicability of the CSRC approval requirement.
  Our
        PRC
        counsel, Tianyuan Law Firm, has advised us that because we completed our
        restructuring before September 8, 2006, the effective date of the new
        regulation, it is not necessary for us to submit the application to the CSRC
        for
        its approval, and the listing and trading of our Common Stock on the American
        Stock Exchange does not require CSRC approval.
 
 If
        the
        CSRC or another PRC regulatory agency subsequently determines that CSRC approval
        was required for the public offering that we conducted in June 2007, we may
        face
        regulatory actions or other sanctions from the CSRC or other PRC regulatory
        agencies. These regulatory agencies may impose fines and penalties on our
        operations in the PRC, limit our operating privileges in the PRC, delay or
        restrict the repatriation of the proceeds from the offering into the PRC,
        or
        take other actions that could have a material adverse effect on our business,
        financial condition, results of operations, reputation and prospects, as
        well as
        the trading price of our Common Stock. The CSRC or other PRC regulatory agencies
        also may take actions requiring us, or making it advisable for us, to halt
        trading of our securities on the American Stock Exchange. Consequently, if
        you
        engage in market trading or other activities in our securities, you do so
        at the
        risk that settlement and delivery may not occur.
 
 Also,
        if
        later the CSRC requires that we obtain its approval, we may be unable to
        obtain
        a waiver of the CSRC approval requirements, if and when procedures are
        established to obtain such a waiver. Any uncertainties and/or negative publicity
        regarding this CSRC approval requirement could have a material adverse effect
        on
        the trading price of our Common Stock.
 
 These
        new
        rules may significantly affect the means by which offshore-onshore
        restructurings are undertaken in China in connection with offshore private
        equity and venture capital financings, mergers and acquisitions. It is expected
        that such transactional activity in China in the near future will require
        significant case-by-case guidance from MOFCOM and other government authorities
        as appropriate. It is anticipated that application of the new rules will
        be
        subject to significant administrative interpretation, and we will need to
        closely monitor how MOFCOM and other ministries apply the rules to ensure
        its
        domestic and offshore activities continue to comply with PRC law. Given the
        uncertainties regarding interpretation and application of the new rules,
        we may
        need to expend significant time and resources to maintain
        compliance.
 
 33
  It
        is
        uncertain how our business operations or future strategy will be affected
        by the
        interpretations and implementation of the SAFE notices and new rules. Our
        business operations or future strategy could be adversely affected by the
        SAFE
        notices and the new rules. For example, we may be subject to more stringent
        review and approval process with respect to our foreign exchange
        activities.
 
 **Failure
        To Comply With The United States Foreign Corrupt Practices Act Could Subject
        Us
        To Penalties And Other Adverse Consequences.**
 
 We
        are
        subject to the United States Foreign Corrupt Practices Act, which generally
        prohibits United States companies from engaging in bribery or other prohibited
        payments to foreign officials for the purpose of obtaining or retaining
        business. Foreign companies, including some that may compete with us, are
        not
        subject to these prohibitions. Corruption, extortion, bribery, pay-offs,
        theft
        and other fraudulent practices occur from time-to-time in the PRC. We can
        make
        no assurance that our employees or other agents have not or will not engage
        in
        such conduct for which we might be held responsible. If our employees or
        other
        agents are found to have engaged in such practices, we could suffer severe
        penalties and other consequences that may have a material adverse effect
        on our
        business, financial condition and results of operations.
 
 **Any
        Recurrence Of Severe Acute Respiratory Syndrome, Avian Flu, Or Another
        Widespread Public Health Problem, In The PRC Could Adversely Affect Our
        Operations.**
 
 A
        renewed
        outbreak of Severe Acute Respiratory Syndrome, Avian Flu or another widespread
        public health problem in China, where all of our manufacturing facilities
        are
        located and where all of our sales occur, could have a negative effect on
        our
        operations. Such an outbreak could have an impact on our operations as a
        result
        of:
 
 ·
            quarantines
                or closures of some ofourmanufacturing facilities, which would severely disrupt our
                operations,  ·
            the
                sickness or death ofourkey officers and employees, and  ·
            a
                general slowdown in the Chinese economy.  Any
        of
        the foregoing events or other unforeseen consequences of public health problems
        could adversely affect our operations.
 
 **A
        Downturn In The Economy Of The PRC May Slow Our Growth And
        Profitability.**
 
 The
        growth of the Chinese economy has been uneven across geographic regions and
        economic sectors. There can be no assurance that growth of the Chinese economy
        will be steady or that any downturn will not have a negative effect on our
        business, especially if it results in either a decreased use of our products
        or
        in pressure on us to lower our prices.
 
 **We
        May Have Difficulty Establishing Adequate Management, Legal And Financial
        Controls In The PRC.**
 
 PRC
        companies have historically not adopted a U.S. style of management and financial
        reporting concepts and practices, which includes strong corporate governance,
        internal controls and computer, financial and other control systems. In
        addition, we may have difficulty in hiring and retaining a sufficient number
        of
        qualified employees to work in the PRC. As a result of these factors, we
        may
        experience difficulty in establishing management, legal and financial controls,
        collecting financial data and preparing financial statements, books of account
        and corporate records and instituting business practices that meet U.S.
        standards. Therefore, we may, in turn, experience difficulties in implementing
        and maintaining adequate internal controls as required under Section 404
        of the
        Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or
        material weaknesses in our internal controls which could impact the reliability
        of our financial statements and prevent it from complying with SEC rules
        and
        regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such
        deficiencies, weaknesses or lack of compliance could have a materially adverse
        effect on our business.
 
 34
  **If
        We Make Equity Compensation Grants To Persons Who Are PRC Citizens, They
        May Be
        Required To Register With The State Administration Of Foreign Exchange Of
        The
        PRC, Or SAFE. We May Also Face Regulatory Uncertainties That Could Restrict
        Our
        Ability To Adopt An Equity Compensation Plan For Our Directors And Employees
        And
        Other Parties Under PRC Law.**
  On
        April
        6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
        Individuals Participating in the Employee Stock Ownership Plan or Stock Option
        Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear
        whether Circular 78 covers all forms of equity compensation plans or only
        those
        which provide for the granting of stock options. For any plans which are
        so
        covered and are adopted by a non-PRC listed company after April 6, 2007,
        Circular 78 requires all participants who are PRC citizens to register with
        and
        obtain approvals from SAFE prior to their participation in the plan. In
        addition, Circular 78 also requires PRC citizens to register with SAFE and
        make
        the necessary applications and filings if they participated in an overseas
        listed company’s covered equity compensation plan prior to April 6, 2007. We
        intend to adopt an equity compensation plan in the future and make option
        grants
        to our officers and directors, most of who are PRC citizens. Circular 78
        may
        require our officers and directors who receive option grants and are PRC
        citizens to register with SAFE. We believe that the registration and approval
        requirements contemplated in Circular 78 will be burdensome and time consuming.
        If it is determined that any of our equity compensation plans are subject
        to
        Circular 78, failure to comply with such provisions may subject us and
        participants of our equity incentive plan who are PRC citizens to fines and
        legal sanctions and prevent us from being able to grant equity compensation
        to
        our PRC employees. In that case, our ability to compensate our employees
        and
        directors through equity compensation would be hindered and our business
        operations may be adversely affected.
 
 **You
        May Experience Difficulties In Effecting Service Of Legal Process, Enforcing
        Foreign Judgments Or Bringing Original Actions In China Based Upon U.S. laws,
        Including The Federal Securities Laws Or Other Foreign Laws Against Us Or
        Our
        Management.**
 
 All
        of
        our current operations are conducted in China. Moreover, all of our directors
        and officers are nationals and residents of China. All or substantially all
        of
        the assets of these persons are located outside the United States and in
        the
        PRC. As a result, it may not be possible to effect service of process within
        the
        United States or elsewhere outside China upon these persons. In addition,
        uncertainty exists as to whether the courts of China would recognize or enforce
        judgments of U.S. courts obtained against us or such officers and/or directors
        predicated upon the civil liability provisions of the securities law of the
        United States or any state thereof, or be competent to hear original actions
        brought in China against us or such persons predicated upon the securities
        laws
        of the United States or any state thereof.
 
 35
  **RISKS
        RELATED TO OUR CAPITAL STRUCTURE**
 
 **Our
        Stock Price Is Volatile And You Might Not Be Able To Resell Your Securities
        At
        Or Above The Price You Have Paid.**
 
 Since
        our
        initial public offering and listing of our Common Stock on the American Stock
        Exchange on June 14, 2007, the price at which our common stock had traded
        has
        been highly volatile, with a high and low sales price of $19.75 and $3.10,
        respectively, as through November 13, 2007. You might not be able to sell
        the shares of our common stock at or above the price you have paid. The stock
        market has experienced extreme volatility that often has been unrelated to
        the
        performance of its listed companies. Moreover, only a limited number of our
        shares are traded each day, which could increase the volatility of the price
        of
        our stock. These market fluctuations might cause our stock price to fall
        regardless of our performance. The market price of our Common Stock might
        fluctuate significantly in response to many factors, some of which are beyond
        our control, including the following:
  ·
            actual
                or anticipated fluctuations in our annual and quarterly results of
                operations;  ·
            changes
                in securities analysts’ expectations;  ·
            variations
                in our operating results, which could cause us to fail to meet analysts’
                or investors’ expectations;  ·
            announcements
                by our competitors or us of significant new products, contracts,
                acquisitions, strategic partnerships, joint ventures or capital
                commitments;  ·
            conditions
                and trends in our industry;  ·
            general
                market, economic, industry and political conditions;  ·
            changes
                in market values of comparable companies;  ·
            additions
                or departures of key personnel;  ·
            stock
                market price and volume fluctuations attributable to inconsistent
                trading
                volume levels; and  ·
            future
                sales of equity or debt securities, including sales which dilute
                existing
                investors.  
 **Shares
        Eligible For Future Sale May Adversely Affect The Market Price Of** **Our** **Common Stock, As The Future Sale Of A Substantial Amount Of Outstanding Stock
        In
        The Public Marketplace Could Reduce The Price Of Our Common
        Stock.** **
 
 The
        market price of our Common Stock could decline as a result of sales of a
        large
        number of shares of our common stock in the market or the perception that
        these
        sales could occur. These sales, or the possibility that these sales may occur,
        also might make it more difficult for us to sell equity securities in the
        future
        at a time and at a price that we deem appropriate.
 
 As
        of
        November 1, 2007, we had 19,679,400 shares of Common Stock outstanding, and
        approximately 4,466,400 are freely tradable without further restriction under
        the Securities Act of 1933, as amended, by persons other than our affiliates
        (within the meaning of Rule 144 under the Securities Act). Of these freely
        tradeable shares, 2,000,000 shares were sold in a private placement and are
        subject to a lock up restriction pursuant to which one-ninth of the shares
        are
        released on a monthly basis, with the first release occurring on July 14,
        2007
        and the last release scheduled to occur on March 14, 2008, subject to early
        release by us.
 
 36
  Additionally,
        following the share exchange transaction that we conducted in August 2006
        pursuart to which we the 93.75% parent of Kunming Shenghuo Pharmaceutical
        (Group) Co., Ltd. ("Shenghuo China"), the former stockholder of Shenghuo
        China,
        which is our largest stockholder, may be eligible to sell all or some of
        its
        15,213,000 shares of Common Stock of our company by means of ordinary brokerage
        transactions in the open market pursuant to Rule 144, promulgated under the
        Securities Act (“Rule 144”), subject to certain limitations. In general,
        pursuant to Rule 144, a stockholder (or stockholders whose shares are
        aggregated) who has satisfied a one-year holding period may, under certain
        circumstances, sell within any three-month period a number of securities
        which
        does not exceed the greater of 1% of the then outstanding shares of common
        stock
        or the average weekly trading volume of the class during the four calendar
        weeks
        prior to such sale. As of November 1, 2007, 1% of our issued
        and outstanding shares of common stock was approximately 196,794 shares.
        In
        connection with our initial public offering in June 2007, the majority
        stockholder entered into a lock up agreement with the underwriter pursuant
        to
        which it agreed not to sell or transfer any of its shares until June 2008.
        Any
        substantial sale of common stock pursuant to any resale registration statement
        or Rule 144 may have an adverse effect on the market price of our Common
        Stock by creating an excessive supply.
 
 **The
        Former Principal Stockholder Of Shenghuo China Has Significant Influence
        Over
        Us.**
  Our
        largest stockholder, Lan’s Int’l Medicine Investment Co., Limited, or LIMI,
        beneficially owns or controls approximately 77% of our outstanding shares
        as of
        November 1, 2007. 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. 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. Other of our officers and
        directors hold equity interests in LIMI. LIMI has controlling influence in
        determining the outcome of any corporate transaction or other matters submitted
        to our stockholders for approval, including mergers, consolidations and the
        sale
        of all or substantially all of our assets, election of directors, and other
        significant corporate actions. LIMI also has the power to prevent or cause
        a
        change in control. In addition, without the consent of LIMI, we could be
        prevented from entering into transactions that could be beneficial to it.
        The
        interests of LIMI may differ from the interests of our other
        stockholders.
 
 **The
        Interests Of The Existing Minority Shareholder In Shenghuo China May Diverge
        From Our Own Interests And This May Adversely Affect Our Ability To Manage
        Shenghuo China.**
 
 Shenghuo
        China, our principal operating subsidiary, is an equity joint venture in
        which
        we directly own a 93.75% interest and SDIC Venture Capital Investment, Co.,
        Ltd., or SDIC, a state-owned investment company, owns the remaining 6.25%
        interest. SDIC’s interest may not be aligned with our interest at all times. If
        our interests diverge, SDIC may exercise its right under PRC laws to protect
        its
        own interest, which may be adverse to us and our investors. For example,
        under
        China’s joint venture regulations, unanimous approval of members of a joint
        venture’s (such as Shenghuo China) board of directors who are present at a board
        meeting is required for any amendment to the joint venture’s articles of
        association, the termination or dissolution of the joint venture company,
        an
        increase or decrease in the registered capital of the joint venture company
        or a
        merger or de-merger of the joint venture. Accordingly, SDIC has the ability
        to
        block any action that requires unanimous board approval. Further, should
        we wish
        to transfer our equity interest in Shenghuo China, in whole or in part, to
        a
        third-party, SDIC has a right of first refusal under China’s joint venture
        regulations.
 
 In
        addition to our statutory rights as a minority shareholder, SDIC has additional
        rights under the joint venture contract and under the articles of association
        of
        Shenghuo China. The joint venture contract and articles of association require
        the consent of each of Shenghuo China’s shareholders and/or unanimous board
        approval on matters such as a major change in the business line of the company
        and expansion or amendment of the business scope of the company.
 
 37
  SDIC
        has
        thus far been cooperative with us in handling matters with respect to the
        business of Shenghuo China. There is no assurance, however, that SDIC will
        continue to act in a cooperative manner in the future.
 
 **The
        Ability Of Our Chinese Operating Subsidiaries To Pay Dividends May Be Restricted
        Due To Our Corporate Structure.**
 
 Substantially
        all of our operations are conducted in China and substantially all of our
        revenues are generated in China. As an equity joint venture, Shenghuo China
        is
        required to establish reserve funds and staff and workers’ bonus and welfare
        funds, each of which is appropriated from net profit after taxation but before
        dividend distributions in accordance with Chinese law. Shenghuo China is
        required to allocate at least 10% of our net profits to the reserve fund
        until
        the balance of this fund has reached 50% of Shenghuo China’s registered
        capital.
 
 In
        addition, the profit available for distribution from our Chinese subsidiaries
        is
        determined in accordance with generally accepted accounting principles in
        China.
        This calculation may differ from the one performed under generally accepted
        accounting principles in the United States, or GAAP. As a result, we may
        not
        receive sufficient distributions from our Chinese subsidiaries to enable
        us to
        make dividend distributions to our stockholders in the future and limitations
        on
        distributions of the profits of Shenghuo China could negatively affect our
        financial condition and assets, even if our GAAP financial statements indicate
        that our operations have been profitable.
 
 **If** **We** **Fail To Maintain Effective Internal Controls Over Financial Reporting Or
        Effective Disclosure Controls and Procedures, The Price Of** **Our** **Common Stock May Be Adversely Affected.**
 
 Our internal
        control over financial reporting or disclosure controls and procedures may
        have
        weaknesses and conditions that need to be addressed, the disclosure of which
        may
        have an adverse impact on the price of our common stock. We
        are required
        to establish and maintain appropriate internal controls over financial reporting
        and disclosure controls and procedures. Failure to establish those controls,
        or
        any failure of those controls once established, could adversely impact our
        public disclosures regarding our business, financial condition or results
        of
        operations. In addition, management’s assessment of internal controls over
        financial reporting or disclosure controls and procedures may identify
        weaknesses and conditions that need to be addressed in our internal
        controls over financial reporting, disclosure controls and procedures or
        other
        matters that may raise concerns for investors. Any actual or perceived
        weaknesses and conditions that need to be addressed in our internal
        control over financial reporting or disclosure controls and procedures may
        have
        an adverse impact on the price of our common stock.
 
 As
        of
        September 30, 2007, our Chief Executive Officer (CEO) and our Chief Financial
        Officer (CFO) performed an evaluation of our disclosure controls and procedures
        and concluded that our disclosure controls and procedures had significant
        deficiencies that caused our controls and procedures to be ineffective. These
        deficiencies consisted of inadequate staffing and supervision that could
        lead to
        the untimely identification and resolution of accounting and disclosure matters
        and failure to perform timely and effective reviews, as well as deficiencies
        in
        the recording and classification of accounting transactions and a lack of
        personnel with expertise in US generally accepted accounting principles and
        U.S.
        Securities and Exchange Commission rules and regulations. We may be forced
        to
        expend a significant amount of funds to address these deficiencies, and there
        is
        no guarantee that we will be able to resolve these deficiencies, which may
        result in an adverse impact on the price of our common stock.
 
 38
  **Compliance
        With Changing Regulation Of Corporate Governance And Public Disclosure Has
        Resulted In, And Is Expected To Continue To Result In, Additional
        Expenses.**
  Changing
        laws, regulations and standards relating to corporate governance and public
        disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
        regulations, have created uncertainty for public companies and significantly
        increased the costs and risks associated with accessing the public markets
        and
        public reporting. Our management team has needed to, and is expected to continue to invest significant
        management time and financial resources to comply with both existing and
        evolving standards for public companies, which increases general and
        administrative expenses and a diversion of management time and attention
        from
        revenue generating activities to compliance activities.
 
 **Standards
        For Compliance With Section 404 Of The Sarbanes-Oxley Act Of 2002 Are Uncertain,
        And If** **We** **Fail To Comply In A Timely Manner, Our Business Could Be Harmed And Our Stock
        Price Could Decline.**
  Rules
        adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
        require annual assessment of our internal
        control over financial reporting, and attestation of this assessment by our
        company’s independent registered public accountants. The SEC extended the
        compliance dates for non-accelerated filers, as defined by the SEC. Accordingly, we believe
        that the annual assessment of our internal controls requirement will first
        apply
        to our annual report for the 2007 fiscal year and the attestation
        requirement of management’s assessment by our company’s independent registered
        public accountants will first apply to our annual report for the 2008 fiscal
        year. The standards that must be met for management to assess the internal
        control over financial reporting as effective are new and complex, and require
        significant documentation, testing and possible remediation to meet the detailed
        standards. We may
        encounter problems or delays in completing activities necessary to make an
        assessment of our internal control over financial reporting. In addition,
        the
        attestation process by our independent registered public accountants is new
        and
        it may encounter problems or delays in completing the implementation of any
        requested improvements and receiving an attestation of our assessment by our independent registered public accountants. If we cannot
        assess our internal
        control over financial reporting as effective, or our independent registered
        public accountants are unable to provide an unqualified attestation report
        on
        such assessment, investor confidence and share value may be negatively impacted.
  **Our** **Common Stock May Be Considered A “Penny Stock,” And Thereby Be Subject To
        Additional Sale And Trading Regulations That May Make It More Difficult To
        Sell.**
  Our common
        stock may be considered to be a “penny stock” if it does not qualify for one of
        the exemptions from the definition of “penny stock” under Section 3a51-1 of the
        Securities Exchange Act for 1934, as amended (the “Exchange Act”). Our common
        stock may be a “penny stock” if it meets one or more of the following conditions
        (i) the stock trades at a price less than $5.00 per share; (ii) it is not
        traded
        on a “recognized” national exchange; or (iii) is issued by a company that has
        been in business less than three years with net tangible assets less than
        $5
        million.
  The
        principal result or effect of being designated a “penny stock” is that
        securities broker-dealers participating in sales of our common
        stock will be subject to the “penny stock” regulations set forth in Rules 15-2
        through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2
        requires broker-dealers dealing in penny stocks to provide potential investors
        with a document disclosing the risks of penny stocks and to obtain a manually
        signed and dated written receipt of the document at least two business days
        before effecting any transaction in a penny stock for the investor’s account.
        Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
        account of any investor for transactions in such stocks before selling any
        penny
        stock to that investor. This procedure requires the broker-dealer to (i)
        obtain
        from the investor information concerning his or her financial situation,
        investment experience and investment objectives; (ii) reasonably determine,
        based on that information, that transactions in penny stocks are suitable
        for
        the investor and that the investor has sufficient knowledge and experience
        as to
        be reasonably capable of evaluating the risks of penny stock transactions;
        (iii)
        provide the investor with a written statement setting forth the basis on
        which
        the broker-dealer made the determination in (ii) above; and (iv) receive
        a
        signed and dated copy of such statement from the investor, confirming that
        it
        accurately reflects the investor’s financial situation, investment experience
        and investment objectives. Compliance with these requirements may make it
        more
        difficult and time consuming for holders of our common stock to resell their
        shares to third parties or to otherwise dispose of them in the market or
        otherwise.
 
 39




**ITEM
      3.**  **CONTROLS
      AND PROCEDURES**




*(a)
      Evaluation of disclosure controls and procedures*





As
      of
      September 30, 2007, our Chief Executive Officer (CEO) and our Chief Financial
      Officer (CFO) performed an evaluation of the effectiveness of and the operation
      of our disclosure controls and procedures as defined in Rule
      13a-15 (e)
      or Rule
      15d-15 (e)
      under
      the Exchange Act. Based on that evaluation, our CEO concluded that our
      disclosure controls and procedure as of September 30, 2007 had significant
      deficiencies that caused our controls and procedures to be ineffective. These
      deficiencies consisted of inadequate staffing and supervision that could lead
      to
      the untimely identification and resolution of accounting and disclosure matters
      and failure to perform timely and effective reviews. In addition, there are
      deficiencies in the recording and classification of accounting transactions
      and
      a lack of personnel with expertise in US generally accepted accounting
      principles and US Securities and Exchange Commission rules and
      regulations.





We
      are in
      the process of improving our controls and procedures in an effort to remediate
      these deficiencies through improving supervision, education, and training of
      our
      accounting staff. Management may also seeks additional qualified in house or
      third-party accounting personnel to ensure that management will have adequate
      resources in order to attain complete reporting of financial information
      disclosures in a timely matter. We believe that the remedial steps that we
      take
      will address the conditions identified by our CEO as significant deficiencies
      in
      our disclosure controls and procedures. Additional effort is needed to fully
      remedy these deficiencies and we are continuing our efforts to improve and
      strengthen our control processes and procedures. Our CEO believes that there
      are
      no material inaccuracies, or omissions of material facts necessary to make
      the
      statements not misleading in light of the circumstances in which they were
      made,
      in this Form 10-QSB.




40




*(b)
      Changes in internal control over financial reporting*




There
      have been no changes in our internal control over financial reporting identified
      in connection with the evaluation required by Rule 13a-15(d) or Rule 15d-15(d)
      under the Exchange Act that occurred during the quarter ended September 30,
      2007
      that have materially affected, or are reasonably likely to materially affect,
      our internal control over financial reporting.





**PART
      II-OTHER INFORMATION**





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





In
      2003,
      we were sued by a former employee for allegedly violating his contract and
      the
      courts entered a judgment in favor of the employee in 2003 for $128,978, which
      included litigation costs. We accrued the liability for this loss at December
      31, 2003 and paid the amount of the judgment to the employee on April 27, 2004.
      In 2006, the plaintiff asked the court to have us pay a penalty in the amount
      of
      $100,000 for not paying the judgment in a timely manner. During the court’s
      review of the request for the penalty, the court froze a bank account of ours
      that held $105,284. The court has rejected the employee’s claim and the bank
      account has been unfrozen. The employee has now asserted claims against us
      for
      allegedly ruining the employee’s reputation and causing mental anguish. No
      amount has been recorded on our books in connection with this claim as we
      believe that no information suggests that it is probable a liability has been
      incurred and the amount of loss as a result of this litigation cannot yet be
      reasonably estimated.





**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**





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





2007
            
            $
            665,1092008
            
            
            1,995,3282009
            
            
            3,990,6576,651,094Less
                current portion
            
            
            (1,330,219
            )Long
                term debt
            
            $
            5,320,875





The
      loan
      is for working capital and is guaranteed by Lan's International Medicine
      Investment Co Ltd. (“LIMI”). Gui Hua Lan, our Chief Executive Officer; Feng Lan,
      our President; and Zheng Yi Wang, our Executive Director of Exports, are
      directors and have voting and investment control over the shares owned by LIMI,
      which beneficially owns or controls approximately 77.3% of our outstanding
      shares. In addition, Gui Hua Lan, Feng Lan and Zheng Yi Wang owns 62.42%, 5.15%
      and 1.45%, respectively, of LIMI’s issued and outstanding shares. LIMI is not
      receiving any compensation for the guarantee of our loan. A copy of the loan
      is
      attached hereto as Exhibit
      10.1 .




41


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




*(a)
      Exhibits*





**Exhibit**
              **Number**
            
            **Description
                of Exhibit**10.1
            
            Loan
                Agreement dated August 17, 2007 by and between the Company and Shuang
                Long
                Branch of Agricultural Bank of China31.1
            
            Certification
                of the Chief Executive Officer pursuant to Exchange Act Rule
                13a-14(a)31.2
            
            Certification
                of the Chief Financial Officer pursuant to Exchange Act Rule
                13a-14(a)32.1
            
            Certification
                pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes Oxley Act of 2002*





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


42


**SIGNATURES**





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





**CHINA
                SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
              (Registrant)November
                14, 2007
            By:
            /s/ Gui
                Hua LanGui
                Hua LanChief
                Executive Officer and Chairman of the
                Board




43