**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**




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


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended June 30, 2008**




**OR**




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


**SECURITIES
      EXCHANGE ACT OF 1934**





**For
      the transition period from ______________ to
      ______________**




**Commission
      file number**  **001-33537**




**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


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




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





**0086-871-728-2628**


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




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


Yes x No
o




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




Large
      accelerated filer oAccelerated
      filer oNon-accelerated
      filer oSmaller Reporting
      Company x




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




There
      were 19,679,400 shares outstanding of the issuer’s common stock, par value
      $.0001 per share, as of November 13, 2008.





Transitional
      Small Business Disclosure Format (check one): Yes oNo x









**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**FORM
      10-QSB QUARTERLY REPORT**





**TABLE
      OF CONTENTS**





**Page**PART
                I - FINANCIAL INFORMATION
            1ITEM
                1.
            FINANCIAL
                STATEMENTS
            1Condensed
                Consolidated Balance Sheets as of June 30, 2008 and December 31,
                2007
                (Unaudited)
            1Condensed
                Consolidated Statements of Operations and Comprehensive Income for
                the
                Three and Six Months Ended June 30, 2008 and 2007
                (Unaudited)
            2Condensed
                Consolidated Statements of Cash Flows for the Six Months Ended June
                30,
                2008 and 2007 (Unaudited)
            3Notes
                to Condensed Consolidated Financial Statements (Unaudited)
            4ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            14ITEM
                3.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            30ITEM
                4T.
            CONTROLS
                AND PROCEDURES
            30PART
                II - OTHER INFORMATION
            32ITEM
                1.
            LEGAL
                PROCEEDINGS
            32ITEM
                1A.
            RISK
              FACTORS
            32ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            32ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            32ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            32ITEM
                5.
            OTHER
                INFORMATION
            32ITEM
                6.
            EXHIBITS
            33SIGNATURES
            
            34









**PART
      I - FINANCIAL INFORMATION**




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






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


**June
                  30,**
              
              **December
                  31,****2008**
              
              **2007****ASSETS:**
              
              
              
              **As
                  Restated****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              744,575
              
              $
              2,800,641Accounts
                  and notes receivable, less allowance for doubtfulaccounts
                  of $6,466,649 and $3,218,661, respectively
              
              
              9,227,579
              
              
              10,567,672Employee
                  advances, less allowance for doubtful accounts of$784,500
                  and $729,995, respectively
              
              
              8,874,047
              
              
              8,249,806Advances
                  to suppliers
              
              
              681,391
              
              
              669,858Inventory,
                  net of reserve for obsolescence of$166,872
                  and $136,359, respectively
              
              
              3,969,302
              
              
              4,125,193Receivable
                  from related parties
              
              
              -
              
              
              27,555Other
                  current assets
              
              
              30,991
              
              
              159,657**Total
                  Current Assets**
              
              
              **23,527,885**
              
              
              **26,600,382**Property,
                  plant and equipment, net of accumulated depreciation of$4,953,450
                  and $4,247,993, respectively
              
              
              7,769,698
              
              
              7,573,204Intangible
                  assets, net of accumulated amortization of$55,341
                  and $42,957, respectively
              
              
              680,198
              
              
              648,090Long-term
                  employee advances, less allowance for doubtful accounts of$1,358,402
                  and $1,717,078, respectively
              
              
              592,608
              
              
              514,042**TOTAL
                  ASSETS**
              
              **$**
              **32,570,389**
              
              **$**
              **35,335,718****LIABILITIES
                  AND STOCKHOLDERS' EQUITY:****Current
                  Liabilities:**Accounts
                  payable
              
              $
              1,454,486
              
              $
              745,514Accrued
                  expenses
              
              
              1,795,233
              
              
              2,017,748Deposits
              
              
              2,757,554
              
              
              3,439,892Payable
                  to related parties
              
              
              50,561
              
              
              94,939Short-term
                  notes payable
              
              
              4,731,702
              
              
              5,334,260Advances
                  from customers
              
              
              129,396
              
              
              119,287Taxes
                  and related payables
              
              
              650,759
              
              
              855,084Current
                  portion of long-term debt
              
              
              2,910,446
              
              
              4,101,667**Total
                  Current Liabilities**
              
              
              **14,480,137**
              
              
              **16,708,391****Long-Term
                  Debt**
              
              
              **8,149,248**
              
              
              **6,836,111****Total
                  Liabilities**
              
              
              **22,629,385**
              
              
              **23,544,502****Minority
                  Interest in Net Assets of Subsidiaries**
              
              
              **329,162**
              
              
              **479,318****Stockholders'
                  Equity:**Preferred
                  stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares
                  outstanding
              
              
              -
              
              
              -Common
                  stock, $0.0001 par value, 100,000,000 shares authorized,19,679,400
                  outstanding, respectively
              
              
              1,968
              
              
              1,968Additional
                  paid-in capital
              
              
              6,193,927
              
              
              6,193,927Statutory
                  reserves
              
              
              147,023
              
              
              147,023Retained
                  earnings
              
              
              1,649,208
              
              
              4,039,337Accumulated
                  other comprehensive income, foreign currency translation
              
              
              1,619,716
              
              
              929,643**Total
                  Stockholders' Equity**
              
              
              **9,611,842**
              
              
              **11,311,898****TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              **$**
              **32,570,389**
              
              **$**
              **35,335,718**




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




1




**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **AND
        COMPREHENSIVE INCOME**
 **(unaudited)**
  **Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****Sale
                  of Products**
              
              $
              8,591,297
              
              $
              6,356,217
              
              $
              14,077,765
              
              $
              10,683,342**Cost
                  of Products Sold**
              
              
              2,988,119
              
              
              1,580,478
              
              
              5,087,581
              
              
              2,722,176**Gross
                  Profit**
              
              
              5,603,178
              
              
              4,775,739
              
              
              8,990,184
              
              
              7,961,166**Operating
                  Expenses:**Selling
                  expense
              
              
              4,035,573
              
              
              2,031,590
              
              
              5,677,075
              
              
              3,634,414General
                  and administrative expense
              
              
              2,714,259
              
              
              1,388,866
              
              
              5,181,837
              
              
              2,362,471Research
                  and development expense
              
              
              70,213
              
              
              2,472
              
              
              189,189
              
              
              5,349**Total
                  Operating Expenses**
              
              
              6,820,045
              
              
              3,422,928
              
              
              11,048,101
              
              
              6,002,234**Income
                  (Loss) from Operations**
              
              
              (1,216,867
              )
              
              1,352,811
              
              
              (2,057,917
              )
              
              1,958,932**Other
                  Income (Expense):**Interest
                  income
              
              
              1,848
              
              
              2,804
              
              
              5,113
              
              
              9,266Income
                  from research and development activities
              
              
              75,588
              
              
              79,786
              
              
              338,625
              
              
              81,004Interest
                  expense
              
              
              (435,114
              )
              
              (209,458
              )
              
              (691,196
              )
              
              (389,641
              )Non-operating
                  expenses
              
              
              (65,337
              )
              
              -
              
              
              (138,482
              )
              
              -**Net
                  Other Expense**
              
              
              (423,015
              )
              
              (126,868
              )
              
              (485,940
              )
              
              (299,371
              )**Income
                  (Loss) Before Income Taxes**
              
              
              (1,639,882
              )
              
              1,225,943
              
              
              (2,543,857
              )
              
              1,659,561Benefit
                  from (provision for) income taxes
              
              
              2,163
              
              
              172,769
              
              
              (13
              )
              
              1,310,247Minority
                  interest in income of subsidiaries
              
              
              100,250
              
              
              (80,876
              )
              
              153,741
              
              
              (178,796
              )**Net
                  (Loss) Income**
              
              $
              (1,537,469
              )
              $
              1,317,836
              
              $
              (2,390,129
              )
              $
              2,791,012Foreign
                  currency translation adjustment
              
              
              217,091
              
              
              189,062
              
              
              690,073
              
              
              274,797**Comprehensive
                  Income (Loss)**
              
              $
              (1,320,378
              )
              $
              1,506,898
              
              $
              (1,700,056
              )
              $
              3,065,809**Earnings
                  (Loss) Per Share****Basic**
              
              $
              (0.08
              )
              $
              0.07
              
              $
              (0.12
              )
              $
              0.15**Diluted**
              
              $
              (0.08
              )
              $
              0.07
              
              $
              (0.12
              )
              $
              0.15**Weighted-Average
                  Shares Outstanding****Basic**
              
              
              19,679,400
              
              
              19,175,004
              
              
              19,679,400
              
              
              19,147,356**Diluted**
              
              
              19,679,400
              
              
              19,228,838
              
              
              19,679,400
              
              
              19,200,691




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




2




**CHINA
        SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(unaudited)**
  **Six
                  Months Ended****June
                  30,****2008**
              
              **2007****Cash
                  Flows from Operating Activities:**Net
                  income
              
              $
              (2,390,129
              )
              $
              2,791,012Adjustments
                  to reconcile net income to net cashfrom
                  operating activities:Depreciation
                  and amortization
              
              
              429,102
              
              
              332,839Deferred
                  income taxes
              
              
              -
              
              
              (204,058
              )Minority
                  interest in (loss) income of subsidiaries
              
              
              (165,334
              )
              
              178,796Change
                  in current assets and liabilities:Accounts
                  and notes receivable
              
              
              1,962,910
              
              
              (3,123,300
              )Employee
                  advances
              
              
              (134,786
              )
              
              (1,477,824
              )Advances
                  to suppliers
              
              
              30,685
              
              
              (211,970
              )Inventory
              
              
              409,441
              
              
              (825,344
              )Other
                  current assets
              
              
              129,901
              
              
              (23,170
              )Accounts
                  payable
              
              
              642,217
              
              
              703,676Accrued
                  expenses and deposits
              
              
              (1,220,462
              )
              
              1,238,609Advances
                  from customers
              
              
              2,362
              
              
              (144,825
              )Taxes
                  and related payables
              
              
              (251,997
              )
              
              (1,692,042
              )**Net
                  Change in Operating Activities**
              
              
              (556,090
              )
              
              (2,457,601
              )**Cash
                  Flows from Investing Activities:**Receivable
                  from related parties
              
              
              87,223
              
              
              (517,465
              )Restricted
                  cash
              
              
              -
              
              
              362,877Capital
                  expenditures
              
              
              (137,079
              )
              
              (53,099
              )**Net
                  Change in Investing Activities**
              
              
              (49,856
              )
              
              (207,687
              )**Cash
                  Flows from Financing Activities:**Payable
                  to related parties
              
              
              (93,864
              )
              
              (319,165
              )Proceeds
                  from short and long-term loans
              
              
              5,655,605
              
              
              9,145,423Payments
                  on short and long-term loans
              
              
              (7,140,201
              )
              
              (9,121,972
              )Issuance
                  of common stock
              
              
              
              
              
              1,094,381**Net
                  Change in Financing Activities**
              
              
              (1,578,460
              )
              
              798,667Effect
                  of exchange rate changes on cash
              
              
              128,340
              
              
              53,275Net
                  Change in Cash and Cash Equivalents
              
              
              (2,056,066
              )
              
              (1,813,346
              )Cash
                  and Cash Equivalents at Beginning of Period
              
              
              2,800,641
              
              
              3,691,438**Cash
                  and Cash Equivalents at End of Period**
              
              $
              744,575
              
              $
              1,878,092**Supplemental
                  Information**Cash
                  paid for interest
              
              $
              691,196
              
              $
              402,021




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




3




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




**NOTE
      1 - BASIS OF PRESENTATION**


The
        accompanying unaudited condensed consolidated financial statements of China
        Shenghuo Pharmaceutical Holdings, Inc., (formerly known as SRKP 8, Inc.)
        (the
“Company”) were prepared pursuant to the rules and regulations of the United
        States Securities and Exchange Commission. Certain information and footnote
        disclosures normally included in financial statements prepared in accordance
        with accounting principles generally accepted in the United States of America
        have been condensed or omitted pursuant to such rules and regulations.
        Management of the Company (“Management”) believes that the following disclosures
        are adequate to make the information presented not misleading. These condensed
        consolidated financial statements should be read in conjunction with the
        audited
        consolidated financial statements and the notes thereto included in the
        Company’s Form 10-KSB for the year ended December 31, 2007.
 
 These
        unaudited condensed consolidated financial statements reflect all adjustments
        (consisting only of normal recurring adjustments) that, in the opinion of
        Management, are necessary to present fairly the consolidated financial position
        and results of operations of the Company for the periods presented. Operating
        results for the six months ended June 30, 2008 are not necessarily indicative
        of
        the results that may be expected for the year ending December 31,
        2008.
 
 ***Translating
        Financial Statements*** - The
        consolidated financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        The
        functional currency of the operating subsidiaries in the People’s Republic of
        China (“PRC”) is the Chinese Yuan Renminbi (“CNY”); however, the condensed
        consolidated financial statements have been expressed in United States Dollars
        (“USD”). The accompanying condensed consolidated balance sheets have been
        translated into USD at the exchange rates prevailing at each balance sheet
        date.
        The condensed consolidated statements of operations have been translated
        using
        the weighted average exchange rates prevailing during the operating periods
        of
        each statement.
 
 ***Restatement
        of Financial Statements*** -
        During August 2008, the Company was informed by its auditing firm that the
        December 31, 2007 consolidated financial statements needed to be revised
        to
        correct certain errors related to accounts and notes receivable and advances
        to
        employees. The Audit Committee of the Board of Directors commenced an internal
        investigation which focused on the reported errors.
 
 As
        a
        result the Company has restated its consolidated balance sheet for December
        31,
        2007 to correct the errors related to accounts and notes receivable and advances
        to employees. See Note 10. The errors also affected the realization of the
        deferred tax asset creating a valuation allowance that was caused by  unsettled
        circumstances that, if unfavorably resolved, would adversely affect future
        operations and profit levels on a continuing basis in future years.
 
 4
 
 **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 The
        effects of the restatement were as follows:
  **As
                    Previously**
                
                **Effect
                    of****Reported**
                
                **Restatement**
                
                **As
                    Restated****Consolidated
                    Balance Sheet****As
                    of December 31, 2007**Accounts
                    and notes receivable, net
                
                $
                9,651,304
                
                $
                916,368
                
                $
                10,567,672Employee
                    advances, net
                
                
                10,147,415
                
                
                (1,897,609
                )
                
                8,249,806Total
                    Current Assets
                
                
                27,581,623
                
                
                (981,241
                )
                
                26,600,382Deferred
                    Income Taxes
                
                
                1,593,159
                
                
                (1,593,159
                )
                
                -TOTAL
                    ASSETS
                
                
                37,910,118
                
                
                (2,574,400
                )
                
                35,335,718Minority
                    Interest in Net Assets of Subsidiaries
                
                
                655,962
                
                
                (176,644
                )
                
                479,318Stockholders'
                    Equity:Retained
                    earnings
                
                
                6,335,590
                
                
                (2,296,253
                )
                
                4,039,337Accumulated
                    other comprehensive income,foreign
                    currency translation
                
                
                1,031,146
                
                
                (101,503
                )
                
                929,643Total
                    Stockholders' Equity
                
                
                13,709,654
                
                
                (2,397,756
                )
                
                11,311,898TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY
                
                
                37,910,118
                
                
                (2,574,400
                )
                
                35,335,718
  **NOTE
        2 - ORGANIZATION AND NATURE OF OPERATIONS**
 
 ***Nature
        of Business*** - The
        Company (“the Parent”) and its subsidiaries designs, develops, markets, exports
        and sells pharmaceutical, nutritional supplements and cosmetic products
        throughout PRC and abroad. The Company also conducts research and development
        for third parties as well as for itself using the medicinal herb Panax
        notoginseng, also known as Sanqi, Sanchi, or Tienchi and sells pharmaceutical,
        nutritional supplements and cosmetic products that contain this herb, which
        is
        grown in two provinces in the PRC. Sales from the cosmetic products represent
        less than 10% of total Company sales and revenue. The Company does not maintain
        accounting records by line of business as the Company’s subsidiaries sell
        products from multiple lines of business and management evaluates each
        subsidiary as a separate entity.
 
 ***Organization*** **** -
        The
        Company was organized under the laws of the State of Delaware on May 24,
        2005.
        On August 31, 2006, the Company consummated a share exchange agreement, as
        amended (the “Agreement”), with Lan’s Int’l Medicine Investment Co., a Hong Kong
        corporation, and a shareholder holding 93.75% of the equity interest of Kunming
        Shenghuo Pharmaceuticals Co., Ltd. (“Shenghuo”) whereby the Company, in exchange
        for 15,213,000 shares of its common stock, acquired 93.75% of Shenghuo’s
        shares.
 
 In
        addition, the Company agreed to cancel 2,036,000 shares of its common stock;
        issue 1,242,400 shares of its common stock and warrants to purchase 100,000
        shares of its common stock (the “Warrants”) for services rendered, and issue
        2,000,000 shares for $1,800,000 cash (less costs of $535,304).
 
 There
        was
        no written agreement for the services to be performed in connection with
        the
        1,242,400 shares of common stock or the 100,000 warrants. The shares issued
        for
        services were valued at $0.90 per share. This value was taken from the value
        of
        the shares issued for cash on the same day. In accordance with FAS 123(R),
        as
        the fair value of the common shares could more reliably be measured than
        the
        fair value of the services, the fair value of the shares was used to measure
        the
        transaction. In accordance with EITF 96-18, the measurement date was determined
        to be the date of the Agreement as there was no contract that specifically
        outlined the commitment date or the performance date for the shares issued
        for
        services. Further, in accordance with the guidance given in EITF 00-18, the
        shares were expensed on the date of the agreement as all shares vested
        immediately.
  5
  **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 As
        part
        of several agreements, the Company agreed to register the 1,242,400 shares
        of
        its common stock and the Warrants. The Company also agreed to register the
        2,000,000 shares of common stock that were to be issued for cash and the
        664,000
        shares of common stock that were held by the Company’s shareholders immediately
        prior to the Agreement.
 
 Because
        the shares issued by the Company to Shenghuo’s shareholders in the
        aforementioned transaction represented a controlling interest, the transaction
        has been accounted for as a recapitalization or reverse merger with Shenghuo
        being considered the acquirer. The accompanying consolidated financial
        statements have been restated on a retroactive basis to present the capital
        structure of Shenghuo as though it were the reporting entity.
 
 In
        October 1995, Shenghuo was formed under the laws of the PRC and subsequently
        acquired an 80% interest in both Kunming Shenghuo Medicine Co., Ltd.
        (“Medicine”) and Kunming Pharmaceutical Importation and Exportation Co., Ltd.
        (“Import/Export”), and a 98.18% interest in Kunming Shenghuo Cosmetics Co., Ltd.
        (“Cosmetic”). All of these entities were also formed in and operate within the
        PRC. Stockholder’s equity was represented by share capital and no shares were
        outstanding prior to August 31, 2006. Share capital of Shenghuo prior to
        the
        consummation of the Agreement was $2,660,760. On August 30, 2006, the minority
        shareholders of Medicine agreed to transfer 19% of their 20% interest to
        Shenghuo for $249,800. Also on August 30, 2006, the minority shareholders
        of
        Import/Export agreed to transfer 19% of their 20% interest to Shenghuo for
        $24,980. Subsequent to these transfers, Shenghuo owns 99% of the equity
        interests in Medicine and Import/Export.
 
 In
        September 2006, Shenghuo, which is the 93.75%-owned subsidiary of the Company,
        formed Kunming Beisheng Science and Technology Development Company, Ltd.
        (“Beisheng”), under the laws of the PRC as its partially owned subsidiary for
        the purpose of doing research and development on bio-tech products, health-care
        products and cosmetics, the importation and exportation of medicines and
        equipment and the development of pharmaceutical technologies. Upon formation,
        Shenghuo owned 70% of Beishing. In August 2007, Shenghuo established a new
        subsidiary named Pingbian Shenghuo Nanyao Development Co., LTD. (“Pingbian
        Shenghuo”). Pingbian Shenghuo was organized under the laws of the PRC, has a
        registered capital of RMB 1,000,000 and Shenghuo holds 100% of the equity
        interest of Pingbian Shenghuo. The scope of operation of Pingbian Shenghuo
        is to
        produce and refine the raw materials, such as Sanchi, that are needed to
        produce
        our products. There were no material operations for Beisheng or Pingbian
        Shenghuo for the six months ended June 30, 2008.
  **NOTE
        3 - SELECTED SIGNIFICANT ACCOUNTING POLICIES**
 
 ***Cash
        and Cash Equivalents*** - The
        Company’s cash and cash equivalents are maintained in bank deposit accounts. The
        Company has not experienced any losses with respect to these deposits. Cash
        and
        cash equivalents include interest bearing and non-interest bearing bank
        deposits, money market accounts, and short-term certificates of deposit with
        original maturities of three months or less. The Company did not enter into
        any
        hedge contracts during any of the periods presented.
  6
 **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 ***Accounts
        and Notes Receivable and Allowance for Doubtful
        Accounts*** - Trade
        receivables are carried at original invoiced amounts less an allowance for
        doubtful accounts. An allowance for uncollectible accounts receivable is
        established by charges to operations for amounts required to maintain an
        adequate allowance, in management’s judgment, to cover anticipated losses from
        customer accounts and sales returns. Such accounts are charged to the allowance
        when collection appears doubtful. Any subsequent recoveries are credited
        to the
        allowance account. The Company believes that the allowance for doubtful accounts
        is consistent with industry standards in the PRC based on the products that
        are
        being sold. Notes receivable
        represent bank drafts that are non-interest bearing and due within six months.
        Such bank drafts have been arranged with third-party financial institutions
        by
        certain customers to settle their purchases from us.
 
 ***Employee
        Advances*** -
        Employee advances are presented net of an estimated allowance for doubtful
        advances. As time passes from when advances are made to employees for travel
        and
        related expenses, the Company will create an allowance for these older
        receivables as the likelihood of collection from each particular employee
        decreases as their respective advances age. Long-term employee advances are
        not
        expected to be realized in the current operating period.
 
 ***Advances
        to Suppliers and Advances from Customers*** - As is
        customary in the PRC, the Company will often make advanced payments to suppliers
        for materials, which may include provisions that set the purchase price and
        delivery date of raw materials, or receive advance payments from
        customers.
 
 ***Basic
        and Diluted Earnings per Share*** - Basic
        and diluted earnings per share are calculated by dividing net earnings
        attributable to common stockholders by the weighted-average number of shares
        of
        common stock outstanding during the year. Diluted earnings per share are
        calculated to give effect to potentially issuable dilutive common shares.
        Potentially dilutive securities as of June 30, 2008 are comprised of warrants
        to
        purchase 40,000 shares of common stock at an exercise price of $4.20 and
        warrants to purchase 6,000 shares of common stock at an exercise price of
        $3.50.
        The effect of these warrants is excluded as the effect is antidilutive due
        to
        the exercise price exceeding the market price. Potentially dilutive securities
        as of June 30, 2007 are comprised of warrants to purchase 100,000 shares
        of
        common stock at an exercise price of $2.50 per share and warrants to purchase
        40,000 shares of common stock at an exercise price of $4.20.
 
 ***Comprehensive
        Income (Loss)*** - Other
        comprehensive income (loss) presented in the condensed consolidated financial
        statements consists of cumulative foreign currency translation adjustments.
 
 ***Advertising
        Expense*** -
        The
        Company expenses advertising costs as incurred. Advertising costs for the
        three
        months ended June 30, 2008 and 2007 were $1,395,146 and $22,380,
        respectively.
 
 ***Business
        Condition and Liquidity*** -
        Although the Company
        has a history of positive income, working capital and retained earnings,
        the
        Company incurred losses during the six months ended June 30, 2008 of $2,390,129
        which has resulted in a use of cash from operations of $556,090 The Company
        has
        expended significant efforts to expand its revenues by assisting it sales
        representatives and increasing its marketing in fiscal 2008. In addition,
        the
        Company has been forced to give significant attention to the
        internal investigation conducted by the Audit Committee and may have to
        address purported class action lawsuits that have been commenced due to the
        Company’s failure to file its second quarterly report with the Securities and
        Exchange Commission. The Company believes that it will remedy these matters
        and
        will be able to return to its normal operations in the near future, including
        being in full compliance with the Securities and Exchange Commission filing
        requirements and the rules of the American Stock Exchange, but the Company
        can
        not give any assurance that this will be the case.
  7
  **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 ***Recently
        Enacted Accounting Standards*** - In
        September 2006, the Financial Accounting Standards Board (FASB) issued
        SFAS No. 157, *Fair
        Value Measurements* ,
        which
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles and expands disclosures about fair
        value measurements. SFAS No. 157 is effective for fiscal years beginning
        after November 15, 2007, and interim periods within those fiscal years. In
        February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
        extended the effective date for certain nonfinancial assets and nonfinancial
        liabilities to fiscal years beginning after November 15, 2008. The adoption
        of
        the portions of SFAS No. 157 that were not postponed by (FSP FIN) No. 157-2
        did
        not have a material impact on our consolidated financial statements. The
        Company
        does not expect the adoption of the postponed portions of SFAS No. 157 to
        have a material impact on our consolidated financial statements.
 
 In
        December 2007, the FASB issued SFAS No. 141(R), *Business
        Combinations* ,
        and
        SFAS No. 160, *Noncontrolling
        Interests in Consolidated Financial Statements.* SFAS
        No. 141(R) requires an acquirer to measure the identifiable assets
        acquired, the liabilities assumed and any non-controlling interest in the
        acquiree at their fair values on the acquisition date, with goodwill being
        the
        excess value over the net identifiable assets acquired. SFAS No. 160
        clarifies that a non-controlling interest in a subsidiary should be reported
        as
        equity in the consolidated financial statements, consolidated net income
        shall
        be adjusted to include the net income attributed to the non-controlling interest
        and consolidated comprehensive income shall be adjusted to include the
        comprehensive income attributed to the non-controlling interest. The calculation
        of earnings per share will continue to be based on income amounts attributable
        to the Parent. SFAS No. 141(R) and SFAS No. 160 are effective for
        financial statements issued for fiscal years beginning after December 15,
        2008. Early adoption is prohibited. SFAS No. 141(R) and SFAS No. 160 are
        not
        expected to
        have a
        material impact on our results of operations or financial position.
 
 On
        January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities - Including an Amendment of FASB
        Statement No. 115” (“ FAS 159”). FAS 159
        permits entities to choose to measure many financial instruments and certain
        other items at fair value. Entities that elect the fair value option will
        report
        unrealized gains and losses in earnings at each subsequent reporting date.
        The
        fair value option may be elected on an instrument-by-instrument basis, with
        few
        exceptions. FAS 159
        also
        establishes presentation and disclosure requirements to facilitate comparisons
        between companies that choose different measurement attributes for similar
        assets and liabilities. The adoption of FAS 159
        did
        not have an effect on our financial condition or results of operations as
        we did
        not elect this fair value option, nor is it expected to have a material impact
        on future periods as the election of this option for our financial instruments
        is expected to be limited.
 
 In
        March
        2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
        and Hedging Activities", an amendment of SFAS No. 133. SFAS 161 applies to
        all
        derivative instruments and non-derivative instruments that are designated
        and
        qualify as hedging instruments pursuant to paragraphs 37 and 42 of SFAS 133
        and
        related hedged items accounted for under SFAS 133. SFAS 161 requires entities
        to
        provide greater transparency through additional disclosures about how and
        why an
        entity uses derivative instruments, how derivative instruments and related
        hedged items are accounted for under SFAS 133 and its related interpretations,
        and how derivative instruments and related hedged items affect an entity's
        financial position, results of operations, and cash flows. SFAS 161 is effective
        as of the beginning of an entity's first fiscal year that begins after November
        15, 2008. The Company does not expect SFAS 161 to have a material impact
        on its
        results of operations or financial position.
  8
  **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 In
        May
        2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
        Accounting Principles.” SFAS 162 will provide framework for selecting accounting
        principles to be used in preparing financial statements that are presented
        in
        conformity with U.S. generally accepted accounting principles (GAAP) for
        nongovernmental entities. SFAS 162 will be effective 60 days following the
        Securities and Exchange Commission’s approval of the Public Company Accounting
        Oversight Board (PCAOB) amendments to AU Section 411. The Company does not
        expect the adoption of SFAS 162 will have a material impact on its financial
        condition or results of operation.
 
 
 **NOTE
        4 - INVENTORY**
 
 Inventory
        is stated at weighted average cost and consisted of the following:
  **June
                    30,**
                
                **December
                    31,****2008**
                
                **2007**Raw
                    materials
                
                $
                1,221,305
                
                $
                871,425Work-in-process
                
                
                1,282,795
                
                
                1,797,379Finished
                    goods
                
                
                719,006
                
                
                786,235Product
                    on consignment
                
                
                913,068
                
                
                806,513Total
                    Inventory
                
                
                4,136,174
                
                
                4,261,552Less:
                    Provision for obsolescence
                
                
                (166,872
                )
                
                (136,359
                )Net
                    Inventory
                
                $
                3,969,302
                
                $
                4,125,193
  **NOTE
        5 - RELATED PARTY TRANSACTIONS**
 
 At
        June
        30, 2008 and December 31, 2007, the Company had payables due to related parties
        in the amount of $50,561 and $94,939, respectively. These amounts are due
        on
        demand and do not accrue interest.
 
 
 **NOTE
        6 - INCOME TAXES**
 
 The
        Company is not subject to any income taxes in the United States, but is subject
        to corporate income tax in the PRC. The Parent is located in a special region
        and has a 15% corporate income tax rate and has been granted a “tax holiday”
during which it will pay no income taxes through December 31, 2008. On March 16,
        2007, the National People’s Congress of China passed the new Enterprise Income
        Tax Law, (“EIT Law”), and on December 6, 2007, the State Council of China issued
        the Implementation Regulations for the EIT Law which took effect on
        January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
        unified EIT of 25% on all domestic-invested enterprises and Foreign Invested
        Entities, or FIEs, unless they qualify under certain limited exceptions.
  9
 **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 As
        a
        result of the above change in the income tax laws, the Parent will continue
        to
        have a 15% rate with a tax holiday for 2008 and will have a favorable rate
        of
        50% of the tax rates in effect during fiscal 2009 through 2011 as determined
        by
        the PRC government and the regional tax authorities. Medicine, Import/Export,
        Cosmetics, Beisheng and Pingbian Shenghuo are taxed at the new 25% rate
        effective January 1, 2008.
 
 The
        Company recognizes deferred tax assets and liabilities for future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and the respective tax
        bases
        and any tax credit carry forwards available. Deferred tax assets and liabilities
        are measured using enacted tax rates expected to apply to taxable income
        in the
        years in which those temporary differences are expected to be recovered or
        settled. The effect on deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment date.
        The Company has established a valuation allowance for all deferred income
        tax
        assets of Cosmetics and Medicine due to the uncertainty of their realization.
        Income taxes payable are included in taxes and related payables on the
        accompanying balance sheets. Income taxes are not required to be paid to
        the PRC
        until after the end of the Company’s fiscal year.
 
 Undistributed
        earnings of the Company’s foreign subsidiaries since acquisition amounted to
        approximately $3.1 million at June 30, 2008. Those earnings, as well as the
        investment in the subsidiaries of approximately $6.1 million are considered
        to
        be indefinitely reinvested and, accordingly, no U.S. federal and state income
        taxes have been provided thereon. Upon distribution of those earnings in
        the
        form of dividends or otherwise, the Company would be subject to both U.S.
        income
        taxes (subject to an adjustment for foreign tax credits) and withholding
        taxes
        payable to the PRC. The Company has U.S. net operating loss carryforwards
        of
        approximately $2.4 million that, if unused begin to expire in 2026.
        Determination of the amount of unrecognized deferred U.S. income tax liability
        is not practical because of the complexities associated with its hypothetical
        calculation; however, unrecognized foreign tax credits may be available to
        reduce a portion of the U.S. tax liability.
 
 **NOTE
        7 - NOTES PAYABLE**
 
 The
        Company’s notes payable consist of short and long-term debt that is payable to
        banks, governmental financial bureaus, municipalities and a company.
 
 The
        following schedule summarizes the Company’s debt obligations and respective
        balances:
  10
  **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 **June
                    30,**
                
                **December
                    31,****2008**
                
                **2007**Short-term
                    note payable to a municipality, interest at 1.8%,due
                    on demand, unsecured
                
                $
                72,761
                
                $
                68,360Short-term
                    note payable to a finance bureau, interest at4.5%,
                    matured January 2003, unsecured
                
                
                74,990
                
                
                70,455Short-term
                    note payable to a bank, interest at 7.47%, maturesApril
                    2009, secured by property
                
                
                3,638,057
                
                
                -Short-term
                    note payable to a bank, interest at 6.57%, maturesNovember
                    2008, secured by property
                
                
                727,611
                
                
                -Short-term
                    note payable to a bank, interest at 6.12%, maturedMarch
                    2008, secured by land use rights
                
                
                -
                
                
                1,367,222Short-term
                    note payable to a bank, interest at 6.39%, maturedMarch
                    2008, secured by property
                
                
                
                
                
                3,418,056Short-term
                    note payable to a government development zoneinterest
                    at 2.43%, matured November 2007, secured by property
                
                
                218,283
                
                
                410,167Total
                    short-term notes payable
                
                $
                4,731,702
                
                $
                5,334,260
   **June
                    30,**
                
                **December
                    31,****2008**
                
                **2007**Long-term
                    note payable to a bank, interest at 7.72%, maturesAugust
                    2009, secured by shareholder
                
                $
                6,694,025
                
                $
                6,836,111Long-term
                    note payable to a bank, interest at 8.316%, maturesApril,
                    2010
                
                
                1,455,223
                
                
                -Long-term
                    note payable to a bank, interest at 6.57%, maturesMarch
                    2010, secured by property
                
                
                2,910,446
                
                
                4,101,667Total
                    long-term debt
                
                
                11,059,693
                
                
                10,937,778Less
                    current maturities of long-term debt
                
                
                2,910,446
                
                
                4,101,667Long-term
                    notes payable, net of current portion
                
                $
                8,149,248
                
                $
                6,836,111Past
                    due notes payable
                
                $
                3,931,330
                
                $
                480,622
  **NOTE
        8 - COMMITMENTS AND CONTINGENCIES**
 
 ***Economic
        environment*** - Since
        all of the Company’s operations are conducted in the PRC, the Company is subject
        to special considerations and significant risks not typically associated
        with
        companies operating in the United States of America. These risks include,
        among
        others, the political, economic and legal environments and foreign currency
        exchange rate fluctuations. The Company’s operational results may be adversely
        affected by changes in the political and social conditions in the PRC, and
        by
        changes in governmental policies with respect to medical reforms, environmental
        reforms and other laws and regulations, anti-inflationary measures, currency
        conversion and remittance abroad, and rates and methods of taxation, among
        other
        things. In addition, all of the Company’s revenue is denominated in the PRC’s
        currency CNY, which must be converted into other currencies before remittance
        out of the PRC. Both the conversion of CNY into foreign currencies and the
        remittance of foreign currencies abroad require approval of the PRC government.
        Due to changes in current worldwide economic conditions, the Company’s ability
        to raise capital or borrow funds may be limited.
  11
 **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **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.
 
 
 **NOTE
        9 - STOCKHOLDERS EQUITY**
 
 ***Statutory
        Reserves -*** **** According
        to the Articles of Association, the Company is required to transfer a certain
        portion of its net profits to Statutory Reserves, as determined under PRC
        accounting regulations, from net income to both the surplus reserve fund
        and the
        public welfare fund. Accordingly, the Company has recorded an aggregate of
        $147,023 in the Statutory Reserves account in the equity section of the
        accompanying balance sheet as of June 30, 2008 and December 31, 2007.
 
 The
        following summarizes the outstanding warrants as of June 30, 2008:
  **Weighted-Average****Exercise**
                
                **Warrants**
                
                **Remaining
                    Contractual**
                
                **Number****Price**
                
                **Outstanding**
                
                **Life
                    (Years)**
                
                **Exercisable**$3.50
                
                
                6,000
                
                
                4.3
                
                
                6,000$4.20
                
                
                40,000
                
                
                4.0
                
                
                40,00043,000
                
                
                
                
                
                43,000
  **NOTE
        10 - SUBSEQUENT EVENTS**
 
 As
        a
        result of the investigation into the investigation by the Audit Committee
        of the
        Board of Directors of the errors in the accounting for accounts receivable
        and
        employee advances as discussed in Note 1, the Company failed to timely file
        its
        Quarterly report on Form 10-Q for the quarter ended June 30, 2008 with the
        Securities and Exchange Commission, on August
        21, 2008 it received a deficiency letter from the American Stock Exchange
        (“AMEX”) stating that the Company was no longer in compliance with their listing
        standards. In order to maintain its AMEX listing, the Company had to submit
        a
        plan by September 12, 2008, outlining actions the Company had taken, or will
        take, to regain compliance with the continued listing standards of AMEX,
        including submission of all required Securities and Exchange Commission filings,
        by no later than November 19, 2008.
 
 Pursuant
        to the Deficiency Letter, if AMEX were to determine that the Company made
        a
        reasonable demonstration in the Plan of an ability to regain compliance with
        all
        applicable continued listing standards by November 19, 2008, AMEX would accept
        the Plan. The Plan was submitted by the Company and AMEX accepted the Plan
        on
        November 5, 2008. If the Company does not make adequate progress and complete
        the actions outlined in the Plan by November 19, 2008, AMEX will initiate
        delisting proceedings against the Company. The Company can provide no assurances
        that it will regain compliance with AMEX’s continued listing requirements, and
        its failure to do so could result in the delisting of the Company’s common stock
        from AMEX.
  12
  **CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 ***Class
        Action Lawsuits -*** Putative
        class action lawsuits have been asserted against the Company and certain
        of its
        officers and directors in the United States District Court for the Southern
        District of New York (the “Court”). Only one complaint, Beni Varghese v. China
        Shenghuo Pharmaceutical Holdings, Inc., Gui Hua Lan, Qiong Hua Gao, Gene
        Michael
        Bennett, And Yunhong Guan, Index No. 08 CIV. 7422 (the “Varghese Action”) has
        been served on the Company thus far.
 
 The
        complaints allege, among other things, that certain of the Company’s SEC filings
        and other public statements contained false and misleading statements which
        resulted in damages to the plaintiffs and the members of the purported class
        when they purchased the Company’s securities. On the basis of those allegations,
        plaintiffs in each of the actions seek an unspecified amount of damages under
        Sections 10(b) and 20(a) of the Exchange Act.
 
 On
        October 20, 2008, the Company and counsel to the plaintiff in the Varghese
        Action filed a stipulation with the Court in which the parties agreed that
        the
        plaintiff may file a consolidated, amended complaint within 60 days after
        the
        entry of an order appointing and approving lead counsel, and that the Company’s
        time to answer that complaint is extended until 60 days after the filing
        of the
        consolidated complaint.
 
 The
        Company believes the allegations in the complaint are without merit, and
        intends
        to vigorously defend the lawsuits. The Company does not believe that the
        outcome
        of these suits will have a material, adverse effect on the Company.
 
 13
  **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, 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 the root of a greyish-brown or greyish-yellow
      plant that only grows in a few geographic locations on Earth, among which is
      the
      Yunnan Province in southwest China, where we are located; this province accounts
      for 90% of the total global production. The main 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
      65% of our sales for the six months ended June 30, 2008.





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





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.




14




Xuesaitong
      Soft Capsules, which are subject to wholesale and retail price controls by
      the
      Chinese government, are primarily sold in China, but the product is also sold
      in
      various developing countries, including Malaysia, Indonesia and Kyrgyzstan.
      Sales of the product in China
      are
      regulated by the SFDA as a prescription drug and therefore must be sold to
      consumers through hospital pharmacies and cannot be advertised, thus limiting
      the ability of the Company to market the brand. Less than 5% of sales of
      Xuesaitong Soft Capsules are sold to military hospitals through China’s military
      procurement system, while over 95% of sales are made to non-military hospitals
      through distributors. Our three largest distributors are Yunnan Province
      Pharmaceutical, LTD., Beijing Ai’xin Weiye Medicine, LTD, and Nanyang Jikang
      Medicine LTD, all of which accounted for 6.52%, 5.92% and 5.88% of our sales,
      respectively, for the six months ended June 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 410 sales representatives. We intend to grow our
      internal marketing and sales function and increase our relationships with other
      national distributors to expand the distribution and presence of our
      non-prescription brands and cosmetics.





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





We
      believe that among the most important economic or industry-wide factors relevant
      to our growth in the short term are reform of the medical system in China and
      the adjustment of medicine prices, which will affect the sale of our main
      product, Xuesaitong Soft Capsules, in hospitals. In order to increase long-term
      growth, we 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.





We
      do
      face certain challenges and risks, including our relatively high debt ratio,
      which is one of our main risks. If we fail to raise capital in overseas markets,
      we will encounter great difficulties as a result of the shortage of working
      capital 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 declining slightly. We will benefit from
      this trend if it continues.





**Recent
      Events**





During
      August 2008, the Company was informed by its auditing firm that the December
      31,
      2007 consolidated financial statements needed to be revised to correct certain
      errors related to accounts and notes receivable and advances to employees.
      The
      Audit Committee of the Board of Directors (the “Audit Committee”) commenced an
      internal investigation which focused on the reported errors.




15




On
      August
      22, 2008 and September 12, 2008, the Company issued Current Reports on Form
      8-K
      and Form 8-K/A, respectively, announcing a pending internal investigation being
      conducted by the Audit Committee based on preliminary information received
      from
      Hansen, Barnett & Maxwell, P.C. (“HBM”), the independent registered public
      accounting firm of the Company, regarding errors in the accounting for certain
      sales representative commission advances and trade receivables, the Company’s
      internal controls, the Company’s personnel involved and related matters. The
      errors concern cash transaction journal entries in which uncollected trade
      accounts and notes receivables were credited (i.e., deemed paid) and
      corresponding cash debits (i.e., cash deemed received) were recorded, and in
      connection therewith, corresponding cash credits (deemed decreases) and debits
      (deemed increases) to other receivables from sales representatives were
      recorded. The effect of the incorrect entries was to improperly reflect the
      aging of the Company’s trade accounts and notes receivables and to understate
      the Company’s bad debt allowance. These errors resulted in the understatement of
      general and administrative expenses (the line item that includes bad debt
      allowance) and the resultant overstatement of net income and earnings per share.
      The errors also resulted in an overstatement of the deferred tax asset, which
      could adversely affect future operations and profit levels on a continuing
      basis.





As
      a
      result of the investigation by the Audit Committee of the errors in the
      accounting for accounts receivable and employee advances, the Company failed
      to
      timely file its Quarterly report on Form 10-Q for the quarter ended June 30,
      2008 with the Securities and Exchange Commission. On August 21, 2008, the
      Company received a deficiency letter from the American Stock Exchange (“AMEX”)
      stating that the Company was no longer in compliance with their listing
      standards. In order to maintain its AMEX listing, the Company had to submit
      a
      plan by September 12, 2008, outlining actions the Company had taken, or will
      take, to regain compliance with the continued listing standards of AMEX,
      including submission of all required Securities and Exchange Commission filings,
      by no later than November 19, 2008.





Pursuant
      to the Deficiency Letter, if AMEX were to determine that the Company made a
      reasonable demonstration in the Plan of an ability to regain compliance with
      all
      applicable continued listing standards by November 19, 2008, AMEX would accept
      the Plan. The Plan was submitted by the Company and AMEX accepted the Plan
      on
      November 5, 2008. If the Company does not make adequate progress and complete
      the actions outlined in the Plan by November 19, 2008, AMEX will initiate
      delisting proceedings against the Company. The Company can provide no assurances
      that it will regain compliance with AMEX’s continued listing requirements, and
      its failure to do so could result in the delisting of the Company’s common stock
      from AMEX.





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





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





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




16




**Critical
      Accounting Policies and Estimates**





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





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





***Cash
      and Cash Equivalents*** - Our
      cash
      and cash equivalents are maintained in bank deposit accounts. We have not
      experienced any losses with respect to these deposits. Cash and cash equivalents
      include interest bearing and non-interest bearing bank deposits, money market
      accounts and short-term certificates of deposit with original maturities of
      three months or less. We do not have any restricted cash as of June 30, 2008.
      We
      did not enter into any hedge contracts during any of the periods presented.





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





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





***Advertising
      Expense -*** We
      expense advertising costs as incurred.




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





***Basic
      and Diluted Earnings (Loss) per Share -*** Basic
      and
      diluted earnings (loss) per share are calculated by dividing net earnings
      attributable to common stockholders by the weighted-average number of shares
      of
      common stock outstanding during the year. Diluted earnings per share are
      calculated to give effect to potentially issuable dilutive common shares.
      Potentially dilutive securities as of June 30, 2008 are comprised of warrants
      to
      purchase 40,000 shares of common stock at an exercise price of $4.20 and
      warrants to purchase 6,000 shares of common stock at an exercise price of $3.50.
      The effect of these warrants is excluded as the effect is antidilutive due
      to
      losses to our company. Potentially dilutive securities as of June 30, 2007
      are
      comprised of warrants to purchase 100,000 shares of common stock at an exercise
      price of $2.50 per share and warrants to purchase 40,000 shares of common stock
      at an exercise price of $4.20.




17




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





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





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





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





In
      March
      2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
      and Hedging Activities", an amendment of SFAS No. 133. SFAS 161 applies to
      all
      derivative instruments and non-derivative instruments that are designated and
      qualify as hedging instruments pursuant to paragraphs 37 and 42 of SFAS 133
      and
      related hedged items accounted for under SFAS 133. SFAS 161 requires entities
      to
      provide greater transparency through additional disclosures about how and why
      an
      entity uses derivative instruments, how derivative instruments and related
      hedged items are accounted for under SFAS 133 and its related interpretations,
      and how derivative instruments and related hedged items affect an entity's
      financial position, results of operations, and cash flows. SFAS 161 is effective
      as of the beginning of an entity's first fiscal year that begins after November
      15, 2008. The Company does not expect SFAS 161 to have a material impact on
      its
      results of operations or financial position.





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles.” SFAS 162 will provide the framework for selecting
      accounting principles to be used in preparing financial statements that are
      presented in conformity with U.S. generally accepted accounting principles
      (GAAP) for nongovernmental entities. SFAS 162 will be effective 60 days
      following the Securities and Exchange Commission’s approval of the Public
      Company Accounting Oversight Board (PCAOB) amendments to AU Section 411. The
      Company does not expect the adoption of SFAS 162 will have a material impact
      on
      its financial condition or results of operation.





18





**Results
      of Operations**




The
      following table sets forth our statements of operations for the three months
      ended June 30, 2008 and 2007 in U.S. dollars (unaudited):




**For
                the three months**
            
            **Change**
            
            **Variance****ended
                June 30,****2008**
            
            **2007***(in
                thousands, except earnings per share and share
                amounts)***Sale
                of Products**
            
            $
            8,591
            
            $
            6,356
            
            $
            2,235
            
            
            35.16
            %**Cost
                of Products Sold**
            
            
            2,988
            
            
            1,580
            
            
            1,408
            
            
            89.11
            %**Gross
                profit**
            
            
            5,603
            
            
            4,776
            
            
            827
            
            
            17.32
            %**Operating
                Expenses:**Selling
                expenses
            
            
            4,036
            
            
            2,032
            
            
            2,004
            
            
            98.62
            %General
                and administrative expenses
            
            
            2,714
            
            
            1,389
            
            
            1,325
            
            
            95.39
            %Research
                and development expenses
            
            
            70
            
            
            2
            
            
            68
            
            
            3400
            %**Total
                Operating Expenses**
            
            
            6,820
            
            
            3,423
            
            
            3,397
            
            
            99.24
            %**Income
                (Loss) from operations**
            
            
            (1,217
            )
            
            1,353
            
            
            (2,570
            )
            
            -190
            %**Other
                Income (expenses):**Interest
                income
            
            
            2
            
            
            3
            
            
            (1
            )
            
            -33.33
            %Non-operating
                income
            
            
            76
            
            
            80
            
            
            (4
            )
            
            -5.00
            %Interest
                expense
            
            
            (435
            )
            
            (210
            )
            
            (225
            )
            
            107
            %Non-operating
                expenses
            
            
            (65
            )
            
            (0
            )
            
            (65
            )
            
            -
            %**Net
                Other Income (Expense)**
            
            
            (422
            )
            
            (127
            )
            
            (295
            )
            
            232
            %**Income
                (Loss) Before Income Taxes**
            
            
            (1,639
            )
            
            1,226
            
            
            (2,865
            )
            
            -234
            %Benefit
                from (provision for) income taxes
            
            
            2
            
            
            173
            
            
            (171
            )
            
            -98.84
            %Minority
                interest in income of subsidiaries
            
            
            100
            
            
            (81
            )
            
            181
            
            
            -223
            %**Net
                Income**
            
            
            (1,537
            )
            
            1,318
            
            
            (2,855
            )
            
            -217
            %Foreign
                currency translation adjustments
            
            
            217
            
            
            189
            
            
            28
            
            
            14.81
            %**Comprehensive
                Income (Loss)**
            
            $
            (1,320
            )
            $
            1,507
            
            $
            (2827
            )
            
            -188
            %**Earnings
                (Loss) Per Share**Basic
            
            $
            (0.08
            )
            $
            0.07
            
            $
            (0.15
            )
            
            -214
            %Diluted
            
            $
            (0.08
            )
            $
            0.07
            
            
            (0.15
            )
            
            -214
            %**Weighted-average
                Shares Outstanding**Basic
            
            
            19,679,400
            
            
            19,175,004
            
            
            504,396
            
            
            2.63
            %Diluted
            
            
            19,679,400
            
            
            19,228,838
            
            
            450,562
            
            
            2.34
            %




19




***Sale
      of products:*** Sale
      of
      products for the three months ended June 30, 2008 was approximately $8.6
      million, an increase of approximately $2.2 million, or 35 %, from $6.4 million
      for the three months ended June 30, 2007. The increase in sale of products
      was
      primarily due to the increase of $0.7 million in the sales of other brand’s
      non-prescription pharmaceuticals, and approximately $1.5 million
      increase in the sales of Xusaitong Soft Capsules, cosmetic products, and
      export of our products.





***Cost
      of products sold:*** Our
      costs
      of products sold for the three months ended June 30, 2008 was approximately
      $2.99 million, an increase of $1.4 million, or 89%, from approximately $1.58
      million for the three months ended June 30, 2007. The increase of cost of
      products sold is primarily due to the increase in the sales volume of our
      product. However, the higher purchasing price of other brand’s non-prescription
      pharmaceuticals caused the total cost of products sold to increase at a rate
      higher than the increase in sales.




***Gross
      profit:*** Our
      gross
      profit for the three months ended June 30, 2008 was approximately $5.6 million
      as compared with approximately $4.8 million for the three months ended June
      30,
      2007. Gross profit as a percentage of revenues was approximately 65% for the
      three months ended June 30, 2008, a decrease of 10 % from 75% for the three
      months ended June 30, 2007. The decrease in gross margin percentage was
      primarily due to the portion of above-mentioned sales of other brand’s product
      which have a higher purchasing price and thus generated a smaller profit margin.
      Purchases of these other brand’s products were terminated in the second quarter
      of 2008.




***Selling
      expense:*** Selling expenses were approximately $4.03 million for the three months ended
      June 30, 2008, an increase of $2 million, or 99%, from $2.03 million for the
      three months ended June 30, 2007. The primary reasons for the increase were
      the $1.3
      million increase in marketing and advertising of our cosmetic product, the
      $0.4
      million increase in commission paid to sales representatives, and approximately
      $0.3 million increase in expenses relating to setting up operating centers
      in
      major areas.





***General
      and administrative expense:*** General
      and administrative expenses were approximately $2.7 million for the three months
      ended June 30, 2008, an increase of $1.3 million, or 95%, from approximately
      $1.4 million for the three months ended June 30, 2007. The increase was
      primarily due to the increase of approximately $0.5 million expense related
      to
      our status as a public company with its securities traded on a U.S. national
      exchange, approximately $0.5 million increase in allowance for doubtful accounts
      due to the increase of trade receivables aging over one to two years for the
      three months ended June 30, 2007, and approximately $0.3 million increase in
      expenses relating to business expansion.




20




***Research
      and development expense:*** Research
      and development expense for the three months ended June 30, 2008 was $70,213
      as
      compared to $2,472 for the period ended June 30, 2007. The increase was
      primarily due to enhanced new product development.





***Net
      other expense:*** Net other expense, which includes interest income, income from research and
      development activities, interest expense and non-operating expenses, was
      $423,015 for the three months ended June 30, 2008 and $126,868 for the three
      months ended June 30, 2007. The increase in net other expenses was primarily
      due
      to an increase in the interest expenses on the long term loans.





***Net
      income:*** Net
      loss
      increased to $1.5 million for the three months ended June 30, 2008 as compared
      to net income of $1.3 million for the three months ended June 30, 2007.
      Considering the foreign currency translation adjustments of $217,091 and
      $189,062, for the three months ended June 30, 2008 and 2007, respectively,
      comprehensive loss of $1.3 million and comprehensive income of $1.5 million
      was
      realized for the three months ended June 30, 2008 and 2007, respectively.





***Six
      Months Ended June 30, 2008 and 2007***





The
      following table sets forth our statements of operations for the six months
      ended
      June 30, 2008 and 2007 in U.S. dollars (unaudited):




21




**For
                the six months**
            
            **Change**
            
            **Variance****ended
                June 30,****2008**
            
            **2007***(in
                thousands, except earnings per share and share
                amounts)***Sale
                of Products**
            
            $
            14,078
            
            $
            10,683
            
            $
            3,394
            
            
            31.77
            %**Cost
                of Products Sold**
            
            
            5,088
            
            
            2,722
            
            
            2,365
            
            
            86.89
            %**Gross
                profit**
            
            
            8,990
            
            
            7,961
            
            
            1,029
            
            
            12.93
            %**Operating
                Expenses:**Selling
                expenses
            
            
            5,677
            
            
            3,634
            
            
            2,043
            
            
            56.22
            %General
                and administrative expenses
            
            
            5,182
            
            
            2,363
            
            
            2,819
            
            
            119
            %Research
                and development expenses
            
            
            189
            
            
            5
            
            
            184
            
            
            3680
            %**Total
                Operating Expenses**
            
            
            11,048
            
            
            6,002
            
            
            5,046
            
            
            84.07
            %**Income
                (Loss) from operations**
            
            
            (2058
            )
            
            1,959
            
            
            (4,017
            )
            
            -205
            %**Other
                Income (expenses):**Interest
                income
            
            
            5
            
            
            9
            
            
            (4
            )
            
            -44.44
            %Non-operating
                income
            
            
            339
            
            
            81
            
            
            258
            
            
            319
            %Interest
                expense
            
            
            (691
            )
            
            (389
            )
            
            (302
            )
            
            77.64
            %Non-operating
                expenses
            
            
            (139
            )
            
            
            
            
            (139
            )**Net
                Other Income (Expense)**
            
            
            (486
            )
            
            (299
            )
            
            (187
            )
            
            62.54
            %**Income
                (Loss) Before Income Taxes**
            
            
            (2,544
            )
            
            1,660
            
            
            (4,204
            )
            
            -253
            %Benefit
                from (provision for) income taxes
            
            
            -
            
            
            1,310
            
            
            (1,310
            )
            
            -100
            %Minority
                interest in income of subsidiaries
            
            
            154
            
            
            (179
            )
            
            333
            
            
            -186
            %**Net
                Income**
            
            $
            (2,390
            )
            $
            2,791
            
            $
            (5,181
            )
            
            -186
            %Foreign
                currency translation adjustments
            
            
            690
            
            
            275
            
            
            415
            
            
            151
            %**Comprehensive
                Income (Loss)**
            
            $
            (1,700
            )
            $
            3,066
            
            $
            (4,766
            )
            
            -155
            %**Earnings
                (Loss) Per Share**Basic
            
            $
            (0.12
            )
            $
            0.15
            
            $
            (0.27
            )
            
            -180
            %Diluted
            
            $
            (0.12
            )
            $
            0.15
            
            $
            (0.27
            )
            
            -180
            %**Weighted-average
                Shares Outstanding**Basic
            
            
            19,679,400
            
            
            19,147,356
            
            
            532,044
            
            
            2.78
            %Diluted
            
            
            19,679,400
            
            
            19,200,691
            
            
            478,709
            
            
            2.49
            %




22




***Sale
      of products:*** Sale
      of
      products for the six months ended June 30, 2008 was approximately $14.08
      million, an increase of approximately $3.38 million, or 32 %, from approximately
      $10.7 million for the six months ended June 30, 2007. The increase in sale
      of
      products was primarily due to the increase of the sales of our primary product,
      other brand’s non-prescription pharmaceuticals and cosmetic products, and the
      increase in the export of our products.





***Cost
      of products sold:*** Our
      costs of products sold for the six months ended June 30, 2008 was approximately
      $5.09 million, an increase of approximately $2.37 million, or 87%, from
      approximately $2.72 million for the six months ended June 30, 2007. The increase
      of cost of products sold is primarily due to the increase in the sales volume
      of
      our product. However, as mentioned above, the higher purchasing price of other
      brand’s non-prescription pharmaceuticals caused the total cost of products sold
      to increase at a rate higher than the increase in sales.





***Gross
      profit:*** Our
      gross
      profit for the six months ended June 30, 2008 was approximately $8.99 million
      as
      compared with approximately $7.96 million for the six months ended June 30,
      2006. Gross profit as a percentage of revenues was approximately 64% for the
      six
      months ended June 30, 2008, a decrease of approximately 11 % from 75% for the
      six months ended June 30, 2007. The decrease in gross margin percentage was
      primarily due to the portion of above-mentioned sales of other brand’s product
      which have a higher purchasing price and thus generated a smaller profit margin.
      Purchases of these other brand’s products were terminated in the second quarter
      of 2008.





***Selling
      expense:*** Selling expenses were approximately $5.68 million for the six months ended
      June
      30, 2008, an increase of $2.04 million, or 56%, from approximately $3.63 million
      for the six months ended June 30, 2007. The
      primary reasons for the increase were the $1.3
      million increase in marketing and advertising of our cosmetic product and the
      $0.4 million increase in commission paid to sales representatives.





***General
      and administrative expense:*** General
      and administrative expenses were $5.18 million for the six months ended June
      30,
      2008, an increase of $2.8 million, or 119%, from approximately $2.36 million
      for
      the six months ended June 30, 2007. The increase was primarily due to the
      increase of the expenses related to our status as a public company with its
      securities traded on a U.S. national exchange, the expenses relating to
      business expansion, and the allowance for doubtful accounts due to the
      increase of trade receivables aging over one to two years for the six months
      ended June 30, 2007.





***Research
      and development expense:*** Research
      and development expense for the six months ended June 30, 2008 was $189,189
      as
      compared to $5,349 for the six months ended June 30, 2007. The increase was
      primarily due to enhance new product development.




23




***Net
      other expense:*** Net other expense, which includes interest income, income from research and
      development activities, interest expense and non-operating expenses, was
      approximately $485,940 for the six months ended June 30, 2008 as compared to
      approximately $299,371 for the six months ended June 30, 2007. The increase
      in
      net other expense was primarily due to an increase in the interest expenses
      on
      the long term loans, offset by increased income from research and development
      activities.





***Benefits
      from (Provision for) income taxes:*** There
      is
      almost no benefits from income taxes for the six months ended June 30, 2008
      as
      compared to a provision for income tax of approximately $1.31 million for the
      six months ended June 30, 2007. On March 15, 2007, one of our major
      subsidiaries, Shenghuo Medicine Co., Ltd., was granted an approval of their
      application by the PRC government for relief of income taxes for the years
      ended
      December 31, 2006 and 2005. As a result, Shenghuo Medicine Co., Ltd. recognized
      an aggregate of $1,099,401 in income taxes that are no longer payable as of
      March 15, 2007. The amount has been recognized under the caption “Benefit from
      (provision for) income taxes” in the accompanying Condensed Consolidated
      Statement of Operations and Comprehensive Income for the six months ended June
      30, 2007.





***Net
      income:*** Net
      loss
      increased to $2.39 million for the six months ended June 30, 2008 as compared
      to
      approximately $2.79 million net income for the six months ended June 30, 2007.
      Considering the foreign currency translation adjustments of $690,073 and
      $274,797, for the six months ended June 30, 2008 and 2007, respectively,
      comprehensive loss of $1.7 million and comprehensive income of $3.07
      million was realized for the six-months ended June 30, 2008 and 2007,
      respectively.





**Liquidity
      and Capital Resources**





***General
      -*** As
      of
      June 30, 2008, we had cash and cash
      equivalents of $744,575. We have historically financed our business operations
      through bank loans. As of June 30, 2008, we had borrowed from banks and other
      institutions and had amounts of approximately $4.7 million in short-term notes
      payable. As of June 30, 2008, we had also borrowed $2.9 million in our current
      portion of long-term debt. All loans are secured by land, buildings and
      machinery as collateral except the loan from the Agricultural Bank of China
      mentioned below which is secured by a pledge by Lan's International Medicine
      Investment Co Ltd. (“LIMI”) of its shareholding in China Shenghuo (KUN). For the
      six months ending June 30, 2008, the net decrease in cash and cash equivalents
      was $2 million as compared to June 30, 2007.





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




24




**June
                  30,**
              
              **December
                  31,****2008**
              
              **2007**Short-term
                  note payable to a municipality, interest at 1.8%,due
                  on demand, unsecured
              
              $
              72,761
              
              $
              68,360Short-term
                  note payable to a finance bureau, interest at4.5%,
                  matured January 2003, unsecured
              
              
              74,990
              
              
              70,455Short-term
                  note payable to a bank, interest at 7.47%, maturesApril
                  2009, secured by property
              
              
              3,638,057
              
              
              -Short-term
                  note payable to a bank, interest at 6.57%, maturesNovember
                  2008, secured by property
              
              
              727,611
              
              
              -Short-term
                  note payable to a bank, interest at 6.12%, maturedMarch
                  2008, secured by land use rights
              
              
              -
              
              
              1,367,222Short-term
                  note payable to a bank, interest at 6.39%, maturedMarch
                  2008, secured by property
              
              
              
              
              
              3,418,056Short-term
                  note payable to a government development zoneinterest
                  at 2.43%, matured November 2007, secured by property
              
              
              218,283
              
              
              410,167Total
                  short-term notes payable
              
              $
              4,731,702
              
              $
              5,334,260
   **June
                  30,**
              
              **December
                  31,****2008**
              
              **2007**Long-term
                  note payable to a bank, interest at 7.72%, maturesAugust
                  2009, secured by shareholder
              
              $
              6,694,025
              
              $
              6,836,111Long-term
                  note payable to a bank, interest at 8.316%, maturesApril,
                  2010
              
              
              1,455,223
              
              
              -Long-term
                  note payable to a bank, interest at 6.57%, maturesMarch
                  2010, secured by property
              
              
              2,910,446
              
              
              4,101,667Total
                  long-term debt
              
              
              11,059,693
              
              
              10,937,778Less
                  current maturities of long-term debt
              
              
              2,910,446
              
              
              4,101,667Long-term
                  notes payable, net of current portion
              
              $
              8,149,248
              
              $
              6,836,111Past
                  due notes payable
              
              $
              3,931,330
              
              $
              480,622




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




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




25




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





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




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




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





The
      following table provides summary information about net cash flow for the six
      months ended June 30, 2008 and 2007:




**Cash
                Flow****Six
                months ended June 30,****2008**
            
            **2007****(unaudited,
                in thousands)**Net
                cash provided by (used in) operating activities
            
            $
            (556
            )
            $
            (2,458
            )Net
                cash provided by (used in) investing activities
            
            
            (50
            )
            
            (208
            )Net
                cash provided by (used in) financing activities
            
            
            (1,579
            )
            
            799**Cash
                and Cash Equivalents at End of Period**
            
            $
            745
            
            $
            1,878




**Operating
      Activities:** Net
      cash
      used in operating activities for the six months ended June 30, 2008 was
      $556,090, as compared to cash used in operating activities of $2,457,601 for
      the
      six months ended June 30, 2007. These results are comprised of: (i) cash flow
      generated from a decrease in accounts and notes receivable, employee advances
      and inventory, and an increase from taxes and related payables; (ii) cash used
      because of net loss, excluding non-cash and other reconciling items, which
      include the add-back of depreciation and amortization, deferred income taxes,
      and other non-cash items (primarily the provision for doubtful accounts and
      periodic pension costs), and a decrease in accrued expenses.




26




**Investing
      Activities:** Net
      cash
      used in investing activities was $49,856 for the six months ended June 30,
      2008,
      as compared to net cash provided of $207,687 for the six months ended June
      30,
      2007. The increase in net cash used was primarily a result of increase in
      capital expenditure.





**Financing
      Activities:** Net
      cash
      used in financing activities was $1.58 million for the six months ended June
      30,
      2008 compared to net cash $798,667 provided by financing activities for the
      six
      months ended June 30, 2007. The decrease in cash provided was primarily due
      to
      decreased proceeds from short and long-term loans and issuance of common stock
      offset by lower payments on short and long-term loans during the six months
      ended June 30, 2008.





***Working
      Capital***





As
      of
      June 30, 2008, our accounts receivable (less allowance for doubtful accounts
      of
      $6.47 million) were $ 9.23 million, a decrease of $1.34 million, or 13% over
      accounts receivable of $10.57 million as of December 31, 2007. The collection
      period typically runs from six months to one year, considering the relatively
      long collection period in our industry.





Our
      company normally requires one to two months to deliver products once the order
      is placed. Inventory
      has slightly decreased by $155,891 for the six months ended June 30, 2008.
      Our
      payment cycle is considerably shorter than our receivable cycle, since we
      typically pay our suppliers all or a portion of the purchase price in advance
      and for some suppliers we must maintain a deposit for future orders. We require
      our customers to pay a certain percentage of the sales price as deposit before
      we ship products to them. The percentage varies from customer to customer.
      During the course of business, we reduce the deposit requirement for some
      customers with good credit.





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





In
      addition, in the course of our business, we must make significant deposits
      to
      our suppliers when we place an order. As of June 30, 2008, our advance payments
      to our suppliers totaled approximately $681,391. We are confident that our
      available funds and cash generated from operations will provide us with
      sufficient capital for a
      sustainable operation; however, we may require additional capital for
      acquisitions or for the operation of the combined companies. We
      cannot
      assure that such funding will be available. As
      of
      June 30, 2008, we had no material commitments for capital expenditures other
      than for those expenditures incurred in the ordinary course of business.





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




27




Current
      and long-term employee advances (net of allowances for doubtful accounts) were
      approximately $9.47 million at June 30, 2008 and $8.76 million as of December
      31, 2007, an increase of approximately $0.71 million or 8%. The increase was
      due
      to us advancing more money to sales representatives to encourage them to expand
      their markets and increase sales. As of June 30, 2008, the gross amount of
      employee advances was approximately $11.6 million and as of December 31, 2007
      it
      was approximately $11.21 million, an increase of approximately $0.4 million
      in
      that six-month period. Beginning in September 2006, we began to employ more
      sales representatives and, as a result, we made more advances to sales
      representatives in an attempt to encourage and assist sales representatives
      to
      expand into new selling markets and gain new customers. Because of the increase
      in the balance of employee advances, we, in compliance with our established
      policy to reserve an allowance for specific percentages of our aged receivables,
      accrued a larger allowance for the increased employee advances in order to
      consistently apply our established allowance policy.





The
      table
      below sets forth the outstanding gross and net amount of outstanding balances
      of
      current and long-term employee advances for the years ended December 31, 2007
      and 2006 and the six months ended June 30, 2008.




**For the year ended
                December 31, 2006**
            
            **For
                the year ended December 31, 2007**
            
            **For
                the six months ended June 30, 2008**Gross
                amount of employee accounts
            
            $
            4,559,471
            
            $
            11,210,921
            
            $
            11,609,017Allowance
                for doubtful accounts
            
            
            1,429,426
            
            
            2,447,073
            
            
            2,142,902Net
                amount
            
            $
            3,130,045
            
            $
            8,763,848
            
            $
            9,466,115




**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.




28




**Interest
      Rate Risk**





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





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




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




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




·
            our
                reliance on one product for over 72% of our
                revenues;


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


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


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


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


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


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




29




·
            development
                of a public trading market for our
                securities;


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


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





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




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




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




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




Not
      Applicable.




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




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




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





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




30




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





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




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




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




31




**PART
      II - OTHER INFORMATION**




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





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





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





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





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





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





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




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




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




None.





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




None.




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




None.




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





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




32




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




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




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




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







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




33




**SIGNATURES**




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


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




34