|                                                                                         
|-----------------------------------------------------------------------------------------
|UNITED STATES                                                                            
|SECURITIES AND EXCHANGE COMMISSION                                                       
|WASHINGTON, D.C. 20549                                                                   
|                                                                                         
|FORM 10-Q                                                                                
|                                                                                         
|xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
|                                                                                         
|For the quarterly period ended March 31, 2009                                            
|                                                                                         
|OR                                                                                       
|                                                                                         
|oTRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|                                                                                         
|For the transition period from ______________ to
 ______________                         
|                                                                                         
|Commission file number 001-33537                                                         
|                                                                                         
|CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.                                             
|(Exact Name of Registrant as Specified in Its Charter)                                   

|                                                                |  |                                    
|--------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                        |  | 20-2903562                         
|(State or Other Jurisdiction of Incorporation or
 Organization) |  | (IR.S. Employer Identification No.)
|                                                                |  |                                    
|No. 2, Jing You Road,                                           |  |                                    
|Kunming National Economy &                                      |  |                                    
|Technology Developing District                                  |  |                                    
|Peoples Republic of China 650217                               |  | N/A                                
|(Address of Principal Executive Offices)                        |  | (Zip Code)                         
|                                                                |  |                                    
|0086-871-728-2628                                              
|(Registrants Telephone Number, Including Area Code)           

|                                                                                                                                                                                                                                                                                                                                                              
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Indicate by check mark
 whether the registrant: (1) has filed all reports required to be filed by
 Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
 preceding 12 months (or for such shorter period that the registrant was
 required to file such reports), and (2) has been subject to such filing
 requirements for the past 90 days.
|Yes
 x
 No o                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                              
|Indicate by check mark
 whether the registrant is a large accelerated filer, an accelerated filer, a
 non-accelerated filer, or a smaller reporting company. See the definitions of
 large accelerated filer, accelerated filer and smaller reporting
 company in Rule 12b-2 of the Exchange Act.                                                       

Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller Reporting Company x

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

There were 19,679,400 shares
outstanding of the issuers common stock, par value $.0001 per share, as of May
1, 2009.

---



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

TABLE OF CONTENTS

|                                |  |                                                                                                                                           |  |      | 
|------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|                                |  |                                                                                                                                           |  | Page
|                                |  |                                                                                                                                           |  |     
|PART I -
 FINANCIAL INFORMATION |  | 1                                                                                                                                        
|                                |  |                                                                                                                                           |  |     
|ITEM 1.                         |  | FINANCIAL
 STATEMENTS                                                                                                                     |  | 1   
|                                |  |                                                                                                                                           |  |     
|                                |  | Condensed
 Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008
 (Unaudited)                                            |  | 1   
|                                |  |                                                                                                                                           |  |     
|                                |  | Condensed
 Consolidated Statements of Operations and Comprehensive Income for the Three
 Months Ended March 31, 2008 and 2008 (Unaudited) |  | 2   
|                                |  |                                                                                                                                           |  |     
|                                |  | Condensed
 Consolidated Statements of Cash Flows for the Three Months Ended March 31,
 2009 and 2008 (Unaudited)                          |  | 3   
|                                |  |                                                                                                                                           |  |     
|                                |  | Notes to
 Condensed Consolidated Financial Statements (Unaudited)                                                                         |  | 4   
|                                |  |                                                                                                                                           |  |     
|ITEM 2.                         |  | MANAGEMENTS
 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                    |  | 11  
|                                |  |                                                                                                                                           |  |     
|ITEM 3.                         |  | QUANTITATIVE
 AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                               |  | 20  
|                                |  |                                                                                                                                           |  |     
|ITEM 4T.                        |  | CONTROLS
 AND PROCEDURES                                                                                                                  |  | 20  
|                                |  |                                                                                                                                           |  |      | 
|PART II -
 OTHER INFORMATION    |  | 22                                                                                                                                       
|                                |  |                                                                                                                                          
|ITEM 1.                         |  | LEGAL PROCEEDINGS                                                                                                                         |  | 22  
|                                |  |                                                                                                                                           |  |     
|ITEM 1A.                        |  | RISK
 FACTORS                                                                                                                             |  | 22  
|                                |  |                                                                                                                                           |  |     
|ITEM 2.                         |  | UNREGISTERED
 SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                              |  | 22  
|                                |  |                                                                                                                                           |  |     
|ITEM 3.                         |  | DEFAULTS
 UPON SENIOR SECURITIES                                                                                                          |  | 22  
|                                |  |                                                                                                                                           |  |     
|ITEM 4.                         |  | SUBMISSION
 OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                      |  | 22  
|                                |  |                                                                                                                                           |  |     
|ITEM 5.                         |  | OTHER
 INFORMATION                                                                                                                        |  | 22  
|                                |  |                                                                                                                                           |  |     
|ITEM 6.                         |  | EXHIBITS                                                                                                                                  |  | 23  
|                                |  |                                                                                                                                           |  |     
|SIGNATURES                      |  |                                                                                                                                          

---



PART I - FINANCIAL INFORMATION


|        |                      
|------- | ---------------------
|ITEM 1. | FINANCIAL
 STATEMENTS

|                                            
|--------------------------------------------
|CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.
|                                            
|CONDENSED CONSOLIDATED BALANCE SHEETS       
|                                            
|(unaudited)                                 

|                                                                                                                      |  |                 |            |                    |   |            |  
|--------------------------------------------------------------------------------------------------------------------- |  | --------------- | ---------- | ------------------ | - | ---------- | -
|                                                                                                                      |  | March 31,
 2009 |            | December 31,
 2008 |  
|                                                                                                                      |  |                 |            |                    |  
|ASSETS:                                                                                                               |  |                 |            |                    |   |            |  
|                                                                                                                     
|Current Assets:                                                                                                       |  |                 |            |                    |   |            |  
|                                                                                                                     
|Cash and cash equivalents                                                                                             |  | $               | 908,596    |                    | $ | 1,612,054  |  
|                                                                                                                     
|Accounts and notes receivable, less allowance for
doubtful accounts
 of $4,949,009 and $4,834,745, respectively       |  |                 | 10,490,378 |                    |   | 9,108,703  |  
|                                                                                                                     
|Sales representative advances, less allowance for
doubtful accounts
 of $3,026,086 and $2,955,516, respectively       |  |                 | 7,453,244  |                    |   | 8,637,653  |  
|                                                                                                                     
|Advances to suppliers                                                                                                 |  |                 | 508,627    |                    |   | 446,168    |  
|                                                                                                                     
|Inventory, net of reserve for obsolescence of
$148,163 and $147,978,
 respectively                                    |  |                 | 3,784,385  |                    |   | 4,287,462  |  
|                                                                                                                     
|Other current assets                                                                                                  |  |                 | 31,714     |                    |   | 41,177     |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|Total Current Assets                                                                                                  |  |                 | 23,176,944 |                    |   | 24,133,217 |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|                                                                                                                     
|                                                                                                                     
|Property, plant and equipment, net of accumulated
depreciation of
 $5,531,158 and $5,341,933, respectively            |  |                 | 7,438,145  |                    |   | 7,581,664  |  
|                                                                                                                     
|Intangible assets, net of accumulated amortization
of $125,572 and
 $71,456, respectively                             |  |                 | 612,769    |                    |   | 665,959    |  
|                                                                                                                     
|Long-term sales representative advances, less
allowance for doubtful
 accounts of $667,647 and $664,532, respectively |  |                 | 1,288,088  |                    |   | 663,433    |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|TOTAL ASSETS                                                                                                          |  | $               | 32,515,946 |                    | $ | 33,044,273 |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                 |  |                 |            |                    |   |            |  
|                                                                                                                     
|Current Liabilities:                                                                                                  |  |                 |            |                    |   |            |  
|                                                                                                                     
|Accounts payable                                                                                                      |  | $               | 1,896,131  |                    | $ | 1,293,460  |  
|                                                                                                                     
|Accrued expenses                                                                                                      |  |                 | 6,861,907  |                    |   | 2,721,082  |  
|                                                                                                                     
|Deposits                                                                                                              |  |                 | 5,219,941  |                    |   | 5,550,502  |  
|                                                                                                                     
|Payable to related parties                                                                                            |  |                 | 42,836     |                    |   | 148,575    |  
|                                                                                                                     
|Short-term notes payable                                                                                              |  |                 | 11,323,378 |                    |   | 9,850,211  |  
|                                                                                                                     
|Advances from customers                                                                                               |  |                 | 269,730    |                    |   | 222,609    |  
|                                                                                                                     
|Taxes and related payables                                                                                            |  |                 | 1,006,165  |                    |   | 1,236,574  |  
|                                                                                                                     
|Current portion of long-term debt                                                                                     |  |                 |           |                    |   | 3,245,685  |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|Total Current Liabilities                                                                                             |  |                 | 26,620,088 |                    |   | 24,268,698 |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|Long-Term Debt                                                                                                        |  |                 | 1,460,792  |                    |   | 1,131,193  |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|Total Liabilities                                                                                                     |  |                 | 28,080,880 |                    |   | 25,399,891 |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|Stockholders Equity:                                                                                                 |  |                 |            |                    |   |            |  
|                                                                                                                     
|Common stock, $0.0001 par value, 100,000,000 shares
authorized,
 19,679,400 and 19,679,400 outstanding, respectively  |  |                 | 1,968      |                    |   | 1,968      |  
|                                                                                                                     
|Additional paid-in capital                                                                                            |  |                 | 6,193,927  |                    |   | 6,193,927  |  
|                                                                                                                     
|Statutory reserves                                                                                                    |  |                 | 147,023    |                    |   | 147,023    |  
|                                                                                                                     
|Retained deficit                                                                                                      |  |                 | (3,564,844 | )                  |   | (603,572   | )
|                                                                                                                     
|Accumulated other comprehensive income, foreign
currency translation                                                  |  |                 | 1,656,992  |                    |   | 1,656,812  |  
|                                                                                                                     
|Noncontrolling Interest                                                                                               |  |                 |           |                    |   | 248,224    |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|Total Stockholders Equity                                                                                            |  |                 | 4,435,066  |                    |   | 7,644,382  |  
|                                                                                                                      |  |                 |            |                    |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                            |  | $               | 32,515,946 |                    | $ | 33,044,273 |  
|                                                                                                                      |  |                 |            |                    |   |            |  

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

1

---



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

|                                                 |  |                 |            |                 |   |            |  
|------------------------------------------------ |  | --------------- | ---------- | --------------- | - | ---------- | -
|                                                 |  | March 31,
 2009 |            | March 31,
 2008 |  
|                                                 |  |                 |            |                 |  
|                                                 |  |                 |            |                 |   |            |  
|Sale of Products                                 |  | $               | 6,770,526  |                 | $ | 5,486,468  |  
|Cost of Products Sold                            |  |                 | 2,301,525  |                 |   | 2,099,462  |  
|                                                 |  |                 |            |                 |   |            |  
|Gross Profit                                     |  |                 | 4,469,001  |                 |   | 3,387,006  |  
|                                                 |  |                 |            |                 |   |            |  
|                                                 |  |                 |            |                 |   |            |  
|Operating Expenses:                              |  |                 |            |                 |   |            |  
|Selling expense                                  |  |                 | 6,395,577  |                 |   | 1,641,502  |  
|General and administrative expense               |  |                 | 1,046,442  |                 |   | 2,467,578  |  
|Research and development expense                 |  |                 | 7,281      |                 |   | 118,976    |  
|                                                 |  |                 |            |                 |   |            |  
|Total Operating Expenses                         |  |                 | 7,449,300  |                 |   | 4,228,056  |  
|                                                 |  |                 |            |                 |   |            |  
|                                                 |  |                 |            |                 |   |            |  
|Loss from Operations                             |  |                 | (2,980,299 | )               |   | (841,050   | )
|                                                 |  |                 |            |                 |   |            |  
|                                                 |  |                 |            |                 |   |            |  
|Other Income (Expense):                          |  |                 |            |                 |   |            |  
|Interest income                                  |  |                 | 881        |                 |   | 3,265      |  
|Income from research and development
activities  |  |                 | 25,568     |                 |   | 263,037    |  
|Interest expense                                 |  |                 | (251,690   | )               |   | (256,082   | )
|Non-operating expenses                           |  |                 | (4,054     | )               |   | (73,145    | )
|                                                 |  |                 |            |                 |   |            |  
|Net Other (Expense)                              |  |                 | (229,295   | )               |   | (62,925    | )
|                                                 |  |                 |            |                 |   |            |  
|                                                 |  |                 |            |                 |   |            |  
|Loss Before Income Taxes                         |  |                 | (3,209,594 | )               |   | (903,975   | )
|Income tax expense                               |  |                 |           |                 |   | (2,176     | )
|Net loss attributable to noncontrolling interest |  |                 | 248,322    |                 |   | 53,491     |  
|                                                 |  |                 |            |                 |   |            |  
|Net Loss                                         |  | $               | (2,961,272 | )               | $ | (852,660   | )
|Foreign currency translation adjustment          |  |                 | 182        |                 |   | 472,982    |  
|                                                 |  |                 |            |                 |   |            |  
|Comprehensive Loss                               |  | $               | (2,961,090 | )               | $ | (379,678   | )
|                                                 |  |                 |            |                 |   |            |  
|                                                 |  |                 |            |                 |   |            |  
|Loss Per Share                                   |  |                 |            |                 |   |            |  
|Basic                                            |  | $               | (0.15      | )               | $ | (0.04      | )
|                                                 |  |                 |            |                 |   |            |  
|Diluted                                          |  | $               | (0.15      | )               | $ | (0.04      | )
|                                                 |  |                 |            |                 |   |            |  
|Weighted-Average Shares Outstanding              |  |                 |            |                 |   |            |  
|Basic                                            |  |                 | 19,679,400 |                 |   | 19,679,400 |  
|                                                 |  |                 |            |                 |   |            |  
|Diluted                                          |  |                 | 19,679,400 |                 |   | 19,679,400 |  
|                                                 |  |                 |            |                 |   |            |  

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

2

---



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

|                                                                                 |  |                               |            |      |   |            |  
|-------------------------------------------------------------------------------- |  | ----------------------------- | ---------- | ---- | - | ---------- | -
|                                                                                 |  |                               |            |      |   |            |  
|                                                                                 |  | Three months ended
 March 31, |           
|                                                                                 |  | 2009                          |            | 2008 |  
|                                                                                 |  |                               |            |      |  
|                                                                                 |  |                               |            |      |   |            |  
|Cash Flows from Operating Activities:                                            |  |                               |            |      |   |            |  
|Net loss                                                                         |  | $                             | (2,961,272 | )    | $ | (852,660   | )
|Adjustments to reconcile net loss to net cash provided by operating
 activities: |  |                               |            |      |   |            |  
|Depreciation and amortization                                                    |  |                               | 236,507    |      |   | 199,872    |  
|Noncontrolling interest in loss of
subsidiaries                                  |  |                               | (248,322   | )    |   | (53,491    | )
|Change in current assets and liabilities:                                        |  |                               |            |      |   |            |  
|Accounts and notes receivable                                                    |  |                               | (1,478,208 | )    |   | 1,320,069  |  
|Sales representative advances                                                    |  |                               | 502,229    |      |   | (1,037,336 | )
|Advances to suppliers                                                            |  |                               | (61,890    | )    |   | (574,171   | )
|Inventory                                                                        |  |                               | 508,390    |      |   | (181,623   | )
|Other current assets                                                             |  |                               | 9,513      |      |   | 76,870     |  
|Accounts payable                                                                 |  |                               | 600,959    |      |   | 937,166    |  
|Accrued expenses                                                                 |  |                               | 4,127,669  |      |   | (325,048   | )
|Deposits                                                                         |  |                               | (337,485   | )    |   | 451,037    |  
|Advances from customers                                                          |  |                               | 46,835     |      |   | (18,041    | )
|Taxes and related payables                                                       |  |                               | (231,929   | )    |   | (334,524   | )
|                                                                                 |  |                               |            |      |   |            |  
|Net Cash Provided by (Used in) Operating Activities                              |  |                               | 890,299    |      |   | (391,880   | )
|                                                                                 |  |                               |            |      |   |            |  
|                                                                                 |  |                               |            |      |   |            |  
|Cash Flows from Investing Activities:                                            |  |                               |            |      |   |            |  
|Capital expenditures                                                             |  |                               | (29,467    | )    |   | (72,119    | )
|Receivable from related parties                                                  |  |                               |           |      |   | 1,942      |  
|                                                                                 |  |                               |            |      |   |            |  
|Net Cash (Used in) Provided by Investing Activities                              |  |                               | (29,467    | )    |   | (70,177    | )
|                                                                                 |  |                               |            |      |   |            |  
|                                                                                 |  |                               |            |      |   |            |  
|Cash Flows from Financing Activities:                                            |  |                               |            |      |   |            |  
|Payable to related parties                                                       |  |                               | (105,643   | )    |   | (15,170    | )
|Payments on short and long-term loans                                            |  |                               | (1,460,581 | )    |   | (1,393,596 | )
|                                                                                 |  |                               |            |      |   |            |  
|Net Cash (Used in) Provided by Financing Activities                              |  |                               | (1,566,215 | )    |   | (1,408,766 | )
|                                                                                 |  |                               |            |      |   |            |  
|                                                                                 |  |                               |            |      |   |            |  
|Effect of exchange rate changes on cash                                          |  |                               | 1,926      |      |   | 75,515     |  
|Net Decrease in Cash and Cash Equivalents                                        |  |                               | (703,458   | )    |   | (1,795,308 | )
|Cash and Cash Equivalents at Beginning of Period                                 |  |                               | 1,612,054  |      |   | 2,800,641  |  
|                                                                                 |  |                               |            |      |   |            |  
|Cash and Cash Equivalents at End of Period                                       |  | $                             | 908,596    |      | $ | 1,005,333  |  
|                                                                                 |  |                               |            |      |   |            |  
|                                                                                 |  |                               |            |      |   |            |  
|Supplemental Information                                                         |  |                               |            |      |   |            |  
|Cash paid for interest                                                           |  | $                             | 300,237    |      | $ | 256,082    |  
|Cash paid for income taxes                                                       |  |                               | 11,399     |      |   |           |  

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

3

---



NOTE 1  BASIS OF
PRESENTATION

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

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

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

NOTE 2  ORGANIZATION AND NATURE OF
OPERATIONS

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

Organization
 The Company owns a 94.95% equity interest of Kunming Shenghuo Pharmaceuticals
Co., Ltd. (Shenghuo). Shenghuo owns a 99% equity interest in Kunming Shenghuo
Medicine Co., Ltd. (Medicine) and Kunming Pharmaceutical Importation and
Exportation Co., Ltd. (Import/Export), a 98.18% interest in Kunming Shenghuo
Cosmetics Co., Ltd. (Cosmetic). All of these entities are formed in and
operate within the PRC. No minority interest is presented at March 31, 2009 due
to accumulated losses of the Company.

NOTE 3  SELECTED SIGNIFICANT ACCOUNTING
POLICIES

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

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

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

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

4

---



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

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

Notes
receivable were $219,440 and $750,877 as of March 31, 2009 and December 31,
2008, respectively. The notes represent bank drafts that have been arranged
with third-party financial institutions by certain customers to settle their
purchases from us. These bank drafts are non-interest bearing and are due
within six months. Such sales and purchasing arrangements are consistent with
industry practices in the PRC.

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

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

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

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

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

Deposits and Accrued
Expenses Accrued expenses consists of accrued
commission expense, accrued payroll expense, and accrued welfare expense.
Deposits consist of funds paid by the sales representatives to obtain the Companys
products to sell. The Company retains these deposits during the time the sales
representatives provide services to the Company. When the Company receives full payment from the
customer or the sales representatives terminate sales services, the deposits
are returned to the sales representatives. The Company records deposits from
sales representatives when payments are received.

Advances to
Suppliers and Advances from Customers  The
Company will often make advanced payments to suppliers for materials, or
receive advance payments from customers in the normal course of business.
Advances to suppliers were $508,627 and $446,168 as of March 31, 2009 and
December 31, 2008, respectively. Advances to suppliers are recorded when
payment is made by the Company and relieved against inventory when goods are
received. The advance payments to suppliers may include provisions that set the
purchase price and delivery date of raw materials. Advances from customers were
$269,730 and $222,609 as of March 31, 2009 and December 31, 2008, respectively
and are recognized in revenue when delivery has occurred.

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

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

5

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

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

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

Advertising  Advertising expense was $19,240 and
$392,496 for the three months ended March 31, 2009 and 2008, respectively.

Basic and Diluted
Earnings per Share  The computation of basic and diluted earning per share is based on
the weighted-average number of shares outstanding during the periods presented.
Potentially dilutive securities for the three months ended March 31, 2009 and
2008 include 46,000 warrants which were antidilutive due to losses of the
Company.

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

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

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

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

Business Condition
and Liquidity Although the Company has had a
history prior to 2008 of positive income, working capital and retained
earnings, the Company has incurred a net loss for the three months ended March
31, 2009 of $2.9 million and net cash provided by operating activities of $0.9
million and used funds in financing activities of $1.6 million. As a result
during the three months ended March 31, 2009, the cash and cash equivalents
have decreased $0.7 million. In addition, the Company had an accumulated
deficit of $3.5 million as of March 31, 2009, primarily due to the losses in
the quarter ended March 31, 2009 and the loss of $4.6 million for fiscal 2008.
As shown in Note 6, the Company has $11.3 million in short term loans that
mature in 2009. Additionally, as discussed in Note 10, putative class action
lawsuits have been asserted against the Company and the Company is undergoing
an voluntary investigation by the Securities and Exchange Commission.

The Company
has expended significant efforts to expand its revenues by assisting its sales
representatives and increasing its marketing efforts during the quarter ended
March 31, 2009 and during fiscal 2008. The net loss for the three months ended
March 31, 2009 was primarily caused by increased selling expenses, legal,
auditing, expenses related to assisting sales representatives and marketing
expenses. In addition, the Company may be forced to give significant attention
to the class action lawsuits noted above. The Company believes that it will
remedy these matters and will be able to return to its normal operations in the
near future but the Company can not give any assurance that this will be the
case.

Recently Enacted
Accounting Standards  In September 2006, the
Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 was 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 an
effect 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 its 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

6

---



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.

In April 2008,
the FASB issued FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets(FSB FAS 142-3). FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The
intent of this FSP is to improve the consistency between the useful life of a
recognized intangible asset under FAS 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS No. 141(R) and other
generally accepted accounting principles. FSP FAS 142-3 is effective for fiscal
years, and interim periods within those fiscal years, beginning after December
15, 2008. The Company does not expect the adoption of FSP FAS 142-3 to have a
material impact on our consolidated financial statements.

NOTE 4  INVENTORY

Inventory
consisted of the following:

|                                 |  |                 |           |                    |   |           |  
|-------------------------------- |  | --------------- | --------- | ------------------ | - | --------- | -
|                                 |  | March 31,
 2009 |           | December 31,
 2008 |  
|                                 |  |                 |           |                    |  
|                                
|Raw
 materials                   |  | $               | 815,200   |                    | $ | 1,061,465 |  
|Work-in-process                  |  |                 | 1,758,241 |                    |   | 2,003,825 |  
|Finished
 goods                  |  |                 | 346,350   |                    |   | 648,074   |  
|Product on
 consignment          |  |                 | 1,012,757 |                    |   | 722,076   |  
|                                 |  |                 |           |                    |   |           |  
|Total Inventory                  |  | $               | 3,932,548 |                    | $ | 4,435,440 |  
|Less: Provision for obsolescence |  |                 | (148,163  | )                  |   | (147,978  | )
|                                 |  |                 |           |                    |   |           |  
|Net Inventory                    |  | $               | 3,784,385 |                    | $ | 4,287,462 |  
|                                 |  |                 |           |                    |   |           |  

NOTE 5  RELATED PARTY TRANSACTIONS

At March 31,
2009 and December 31, 2008 the amounts payable to officers were $42,836 and
$148,575, respectively. These amounts are due on demand and do not accrue
interest.

During 2007 the
Company entered into a loan agreement with a bank which is secured by shares of
the Company owned by the Companys principal shareholder. See Note 6.

NOTE 6  NOTES PAYABLE

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

|                                                                                                                |  |                 |            |                    |   |           | 
|--------------------------------------------------------------------------------------------------------------- |  | --------------- | ---------- | ------------------ | - | --------- | 
|                                                                                                                |  | March 31,
 2009 |            | December 31,
 2008 |  
|                                                                                                                |  |                 |            |                    |  
|Short-term note payable to a municipality,
 interest at 1.8%, due on demand, unsecured                          |  | $               | 73,040     |                    | $ | 72,948    | 
|                                                                                                               
|Short-term note payable to a finance
 bureau, interest at 4.5%, due on demand, unsecured                        |  |                 | 75,277     |                    |   | 75,182    | 
|                                                                                                               
|Short-term note payable to a bank, interest
 at 7.47%, matures April 2009, secured by property                  |  |                 | 3,651,981  |                    |   | 3,647,399 | 
|                                                                                                               
|Short-term note payable to a bank, interest
 at 6.57%, matures April 2009, secured by property                  |  |                 | 1,460,792  |                    |   |          | 
|                                                                                                               
|Short-term note payable to a government
 development zone interest at 2.43%, due on demand, secured by property |  |                 | 219,119    |                    |   | 218,844   | 
|                                                                                                               
|Short-term note payable to a bank, interest
 at 7.72%, matures August 2009, secured by shareholder              |  |                 | 5,843,168  |                    |   | 5,835,838 | 
|                                                                                                               
|                                                                                                                |  |                 |            |                    |   |           | 
|Total short-term notes payable                                                                                  |  | $               | 11,323,378 |                    | $ | 9,850,211 | 
|                                                                                                                |  |                 |            |                    |   |           | 

7

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|                                                                                                   |  |                 |           |                    |   |           | 
|-------------------------------------------------------------------------------------------------- |  | --------------- | --------- | ------------------ | - | --------- | 
|                                                                                                   |  | March 31,
 2009 |           | December 31,
 2008 |  
|                                                                                                   |  |                 |           |                    |  
|Long-term note payable to a bank, interest
 at 8.316%, matures April 2010, secured by property     |  |                 | 1,460,792 |                    |   | 1,458,959 | 
|Long-term note payable to a bank, interest
 at 6.57%, matures March 2010, due on demand, unsecured |  |                 |          |                    |   | 2,917,919 | 
|                                                                                                   |  |                 |           |                    |   |           | 
|                                                                                                  
|Total long-term debt                                                                               |  |                 | 1,460,792 |                    |   | 4,376,878 | 
|                                                                                                  
|Less current maturities of long-term debt                                                          |  |                 |          |                    |   | 3,245,685 | 
|                                                                                                   |  |                 |           |                    |   |           | 
|Long-term notes payable, net of current
 portion                                                   |  | $               | 1,460,792 |                    | $ | 1,131,193 | 
|                                                                                                   |  |                 |           |                    |   |           | 
|                                                                                                  
|Past due notes payable                                                                             |  | $               | 294,395   |                    | $ | 294,026   | 
|                                                                                                   |  |                 |           |                    |   |           | 

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

NOTE 7 STOCKHOLDERS EQUITY

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

The following
summarizes the outstanding warrants as of March 31, 2009:

|                |   |                       |  |                                                        |  |                     |  |  |     |  |  |        | 
|--------------- | - | --------------------- |  | ------------------------------------------------------ |  | ------------------- |  |  | --- |  |  | ------ | 
|Exercise
 Price |   | Warrants
 Outstanding |  | Weighted-Average
 Remaining
 Contractual
 Life (Years) |  | Number
 Exercisable | 
|                |   |                       |  |                                                        |  |                     | 
|                | $ | 3.50                  |  |                                                        |  | 6,000               |  |  | 3.4 |  |  | 6,000  | 
|                | $ | 4.20                  |  |                                                        |  | 40,000              |  |  | 3.2 |  |  | 40,000 | 
|                |   |                       |  |                                                        |  |                     |  |  |     |  |  |        | 
|                |   |                       |  |                                                        |  | 46,000              |  |  |     |  |  | 46,000 | 
|                |   |                       |  |                                                        |  |                     |  |  |     |  |  |        | 

NOTE 8  INCOME AND OTHER TAXES

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

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

The Company is
not subject to any income taxes in the United States, but was subject to
corporate income tax in the PRC at a combined rate of

8

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25% for 2008
and 30% and a local income tax rate of 3% for 2007. However, because the Parent
is located in a special region, it has a 15% corporate income tax rate and has
been granted a tax holiday during which it will pay no income taxes through
December 31, 2008. On March 16, 2007, the National Peoples Congress of China passed the
new Enterprise Income Tax Law, (EIT Law), and on December 6, 2007, the State
Council of China issued the Implementation Regulations for the EIT Law which
took effect on January 1, 2008. The EIT Law and Implementation Regulations
Rules impose a unified EIT of 25% on all domestic-invested enterprises and
Foreign Invested Entities, or FIEs, unless they qualify under certain limited
exceptions.

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

The Company had no undistributed earnings of
the Companys foreign subsidiaries since acquisition at March 31, 2009. The
investment in subsidiaries of approximately $8.73 million is considered to be
indefinitely reinvested and, accordingly, no U.S. federal and state income
taxes have been provided thereon. The Company has U.S. net
operating loss carryforwards of approximately $2.86 million that, if unused
begin to expire in 2026. Determination
of the amount of unrecognized deferred U.S. income tax liability is not
practical because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credits may be available to
reduce a portion of the U.S. tax liability.

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

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

NOTE 9  COMMITMENTS AND CONTINGENCIES

Class Action
Lawsuits In 2008, putative class action lawsuits
were asserted against the Company and certain other parties in the United
States District Court for the Southern District of New York (the Court). On
February 12, 2009, an amended complaint was served on the Company by new lead
counsel for the class, consolidating the putative class actions and bearing the
caption Beni Varghese, Individually and on Behalf of All Other Similarly
Situated v. China Shenghuo Pharmaceutical Holdings, Inc., et al., Index No.
1:08 CIV. 7422. The defendants include the Company, the Companys controlling
shareholders, Lans International Medicine Investment Co., Limited, the
Companys chief executive officer, Gui Hua Lan, the Companys former chief financial
officer, Qiong Hua Gao, and the Companys independent registered public
accounting firm, Hansen, Barnett & Maxwell, P.C. During the second quarter
of 2009, the Company plans to file motions to dismiss the complaint.

The amended
consolidated complaint alleges that the Company failed to take adequate steps
to ensure its financial reporting comported with U.S. Generally Accepted
Accounting Principles (GAAP) and, as a result, the Company was required to
restate what are alleged to be materially false and misleading financials for
accounting periods during the alleged class period from August 2007 through
August 20, 2008. The amended consolidated complaint further alleges, among
other things, that certain of the Companys SEC filings and other public statements
contained false and misleading statements which resulted in damages to the
plaintiffs and the members of the purported class when they purchased the
Companys securities. On the basis of those allegations, plaintiffs in each of
the actions seek an unspecified amount of damages under Sections 10(b) and
20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

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

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

Due to changes in current
worldwide economic conditions, the Companys ability to raise capital or borrow
funds may be limited and may also adversely affect the Companys operations.

9

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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 the best prices available and may on occasion make advance
payments to suppliers that include provisions for setting the purchase price
and delivery date. However, the Company is not reliant on a single source or
supplier in order to obtain the Sanchi.

NOTE 10 - GEOGRAPHIC
INFORMATION

The Company
derives its sales from China and from other various countries. Operations in
China make up the majority of the Companys sales, with a very small portion
from other various countries. No revenues from external customers attributed to
any individual foreign country are material. The following table summarizes
sales by geographic location for the years ended December 31, 2008 and 2007:

|                            |  |                               |           |      |   |           | 
|--------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | 
|                            |  | Three months ended
 March 31, |          
|                            |  |                               |          
|                            |  | 2009                          |           | 2008 |  
|                            |  |                               |           |      |  
|Sales from
 China           |  | $                             | 6,702,090 |      | $ | 5,284,219 | 
|Sales from
 other countries |  |                               | 68,436    |      |   | 202,249   | 
|                            |  |                               |           |      |   |           | 
|Total Sales                 |  | $                             | 6,770,526 |      | $ | 5,486,468 | 
|                            |  |                               |           |      |   |           | 

NOTE 11 
CONCENTRATIONS

For the three
months ended March 31, 2009 the Company had concentrations of purchases from
one vendor accounting for 37.84% of total purchases.

NOTE 12  SUBSEQUENT
EVENTS

In April of
2009 the note payable with an interest rate of 7.47% and a balance of
$3,651,981 as of March 31, 2009 was refinanced. The new note payable is due in
one year and bears interest at a rate of 5.31%

10

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

SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

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

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

| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our reliance
 on one product for over 87% of our revenues;                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                            
| |  | our reliance
 on limited suppliers for Sanchi, a scarce plant that is the primary
 ingredient in almost all of our products;                                                                                                               
| |   |                                                                                                                                                                                                                                            
| |  | replacement
 of our primary product by other medicines or the removal of our primary
 product from Chinas Insurance Catalog;                                                                                                              
| |   |                                                                                                                                                                                                                                            
| |  | our ability
 to raise additional capital needed for working capital, future operations and
 research and development;                                                                                                                      
| |   |                                                                                                                                                                                                                                            
| |  | our ability
 to collect on advances to sales representatives;                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                            
| |  | our reliance
 on our three largest customers for a significant percentage of our sales;                                                                                                                                                    
| |   |                                                                                                                                                                                                                                            
| |  | our ability
 to effectively grow management;                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                            
| |  | our
 dependence on key personnel;                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                            
| |  | our ability
 to establish and maintain a strong brand;                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                            
| |  | the ability
 of our products to effectively compete with those of our competitors;                                                                                                                                                         
| |   |                                                                                                                                                                                                                                            
| |  | continued
 receipt and maintenance of regulatory approvals, certificates, permits and
 licenses required to conduct business in China;                                                                                                     
| |   |                                                                                                                                                                                                                                            
| |  | our ability
 to collect on trade receivables;                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                            
| |  | our ability
 to develop and market new products, including those with high profit margins;                                                                                                                                                 
| |   |                                                                                                                                                                                                                                            
| |  | subjection
 of additional products to price controls by the Chinese government;                                                                                                                                                            
| |   |                                                                                                                                                                                                                                            
| |  | our ability
 to obtain all necessary government certifications and/or licenses to conduct
 our business;                                                                                                                                   
| |   |                                                                                                                                                                                                                                            
| |  | protection
 of our intellectual property rights;                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                            
| |  | loss of
 certain tax concessions;                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                            
| |  | our lack of
 insurance to cover losses due to fire, casualty or theft;                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                            
| |  | changes in
 the laws of the PRC that affect our operations;                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                            
| |  | changes in
 the foreign currency exchange rate between U.S. dollars and Renminbi;                                                                                                                                                          
| |   |                                                                                                                                                                                                                                            
| |  | cost of
 complying with current and future governmental regulations and the impact of
 any changes in the regulations on our operations;                                                                                                   
| |   |                                                                                                                                                                                                                                            
| |  | the effect
 on our operations of costs associated with the Restatement, including
 litigation costs;                                                                                                                                       
| |   |                                                                                                                                                                                                                                            
| |  | a downturn
 in the economy of the PRC or inflation in the PRC;                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                            
| |  | our ability
 to establish and maintain adequate management, legal and financial controls,
 including effective internal controls over financial reporting;                                                                                 
| |   |                                                                                                                                                                                                                                            
| |  | volatility
 of the market for our common stock;                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                            
| |  | the
 possibility of substantial sales of our common stock;                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                            
| |  | influence of
 our principal stockholder;                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                            
| |  | cooperation
 of the minority shareholder of our principal operating subsidiary; and                                                                                                                                                        
| |   |                                                                                                                                                                                                                                            
| |  | other
 factors listed from time to time in our filings with the Securities and
 Exchange Commission, including without limitation, our Annual Report on Form
 10-K for the year ended December 31, 2008 and subsequent reports on Form 8-K.

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

You should not
rely upon forward-looking statements as predictions of future events. We cannot
assure you that the events and circumstances reflected in the forward-looking
statements will be achieved or occur. Although we believe that the expectations
reflected in the forward-

11

---



looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assume responsibility for the accuracy and completeness of the
forward-looking statements. Except as required by law, we undertake no
obligation to update publicly any forward-looking statements for any reason
after the date of this report to conform these statements to actual results or
to changes in our expectations.

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

Overview

We are
primarily engaged in the research, development, manufacture, and marketing of
pharmaceutical, nutritional supplement and cosmetic products. Almost all of our
products are derived from the medicinal herb Panax notoginseng, also known as
Sanqi, Sanchi or Tienchi. Panax notoginseng is the root of the greyish-brown or
greyish-yellow plant that only grows in a few geographic locations, 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
83% of our sales for the period ended March 31, 2009.

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

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

Xuesaitong
Soft Capsules, which has been listed in the National Insurance Catalogue and is
subject to wholesale and retail price controls by the Chinese government, are
primarily sold in China, but the product is also sold in various developing
countries, including Malaysia, Indonesia and Kyrgyzstan. Sales of the product
in China are regulated by the SFDA as a prescription drug and therefore must be
sold to consumers through hospital pharmacies and cannot be advertised, thus
limiting the ability of the company to market the brand. We sell to hospital
pharmacies in cities through regional distributors in the area. No single
distributor accounts for over 10% of our sales as of March 31, 2009.

As of March
31, 2009, our medicine marketing team maintains sales offices or agents in
approximately 31 provinces throughout China. The sales network covers
approximately 210 cities and is staffed by approximately 600 sales
representatives. We intend to grow our internal marketing and sales function
and increase our relationships with other national distributors to expand the
distribution and presence of our non-prescription brands and cosmetics.

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

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

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

12

---



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

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

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

We hope to
stabilize the sales channel into hospitals and widen the reach of sales in
urban and rural communities at the same time. Large increases in medicine sales
at an average lower price will ensure the growth of general medicinal sales
over the next few years.

Our 12 Ways
Chinese Traditional Medicine Beauty Salon Series, or 12 Ways, cosmetic products
are sold to a number of cities and provinces outside our local region. We have
opened a number of retail specialty counters to offer our cosmetic products at
pharmacies throughout Eastern China, eventually expanding our retail presence
across China. As of March 31, 2009, we have opened about 608 retail specialty
counters in more than 30 cities in 22 provinces throughout China. In addition,
we opened a 12 Ways Chinese Herbal Beauty Salon in Kunming that will feature
approximately ten traditional Chinese medicine practitioners and beauticians
that provide a variety of services, including acupuncture, body massage, foot
massage and other services. All products used in the salon will be supplied by
us. Management hopes that the opening of this salon and the opening of retail
counters will allow us to increase our brand recognition and strengthen
marketing. Our ability to effectively open and operate new retail locations
depends on several factors, including, among others, our ability to identify
suitable counter locations, the availability of which is outside our control;
our ability to prepare counters for opening within budget; our ability to hire,
train and retain personnel; our ability to secure required governmental permits
and approvals; our ability to contain payroll costs; and our ability to
generate sufficient operating cash flows or secure adequate capital on
commercially reasonable terms to fund short term cash needs and our expansion
plans.

There is
potential for growth in production and sales due to the growth of new products
and expansion of new channels into urban and rural communities. However, it
will be uncertain which of our new products will pass the applicable tests and
get clinical approval without difficulty because of the uncertainty of test
results and clinical approvals. Over the last three years, the price of the
main raw material we use - Sanchi  has fluctuated and is now rising, which
will likely increase our cost of product sold. In addition, our expected
increased expenses for research and development, marketing and sales may have
an adverse affect on future profit levels and available cash resources.

Critical Accounting Policies and Estimates

The discussion
and analysis of our financial condition and results of operations are based
upon our 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 March 31, 2009. We did not enter into any
hedge contracts during any of the periods presented.

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

13

---



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

Prior to 2009,
we made significant cash advances to our sales representatives to assist and
encourage them to expand the marketing and sales of our products into new
markets and gain new customers. From and after January 1, 2009, the Company
changed its policy of advancing sales representatives their selling and
marketing expenses to reimbursing them for such expenditure when they present proper
expense vouchers. We accrue a fixed amount of selling expense for each sale
when the revenue is recognized.

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. Advertising costs for the three months ended March 31, 2009 and 2008
were $19,240 and $392,496, respectively. The decrease in our advertising
expense is due primarily to the termination of an advertising agreement for cosmetic products executed by the
Company with a national
television network. The Company is now focused on a marketing and advertising
strategy tailored to regional markets, which we believe is more effective and
cost efficient.

Research and
Development Expense - We expense research and
development expenses as incurred. Research and development expense for the
three months ended March 31, 2009 and 2008 was $7,281 and $118,976,
respectively. The decrease was primarily due to a decrease in the cost of
researching materials as we shifted our research and development focus to a few
innovative pharmaceuticals instead of a number of generic drugs.

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. The computation of basic
and diluted earning per share is based on the weighted-average number of shares
outstanding during the periods presented. Potentially dilutive securities for
the three months ended March 31, 2009 and 2008 include 46,000 warrants which
were antidilutive due to losses of the Company.

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

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

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

In April 2008,
the FASB issued FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets (FSB
FAS 142-3 ). FSP FAS 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, Goodwill and
Other Intangible Assets.
The intent of this FSP is to improve the consistency between the useful life of
a recognized intangible asset under FAS 142 and the period of expected cash
flows used to measure the fair value of the asset

14

---



under SFAS No.
141(R) and other generally accepted accounting principles. FSP FAS 142-3 is
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2008. The Company does not expect the adoption of
FSP FAS 142-3 to have a material impact on our consolidated financial
statements.

Results of Operations

Three Months Ended
March 31 2009 and 2008

The following
table sets forth our statements of operations for the three months ended March
31, 2009 and 2008 in U.S. dollars (unaudited):

|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|-------------------------------------------------- |  | ------------------------------------------------- | ---------- | ---- | - | ---------- | - | ------------ | ------- | - |  | ------ | -
|                                                   |  | For the three months
 ended March 31,             |            |      |   |            |  
|                                                   |  |                                                   |            |      |   |            |  
|                                                   |  | 2009                                              |            | 2008 |   | Change ($) |   | Variance (%) |        
|                                                   |  |                                                   |            |      |   |            |   |              |        
|                                                   |  | (in thousand, except share and per share
amounts) |           
|                                                  
|Sale of Products                                   |  | $                                                 | 6,771      |      | $ | 5,486      |   |              | 1,285   |   |  | 23.42  | %
|                                                  
|Cost of Products Sold                              |  |                                                   | 2,302      |      |   | 2,099      |   |              | 203     |   |  | 9.67   | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                  
|Gross Profit                                       |  |                                                   | 4,469      |      |   | 3,387      |   |              | 1,082   |   |  | 31.95  | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|Operating Expenses:                                |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                  
|Selling expenses                                   |  |                                                   | 6,396      |      |   | 1,642      |   |              | 4,754   |   |  | 289.52 | %
|                                                  
|General and administrative expenses                |  |                                                   | 1,046      |      |   | 2,468      |   |              | (1,422  | ) |  | -57.61 | %
|                                                  
|Research and development expenses                  |  |                                                   | 7          |      |   | 118        |   |              | (111    | ) |  | -94.07 | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                  
|Total Operating Expenses                           |  |                                                   | 7,449      |      |   | 4,228      |   |              | 3,221   |   |  | 76.18  | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|Loss from Operations                               |  |                                                   | (2,980     | )    |   | (841       | ) |              | (2,139  | ) |  | 254.34 | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|Other Income (Expenses):                           |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                  
|Interest income                                    |  |                                                   | 1          |      |   | 3          |   |              | (2      | ) |  | -66.67 | %
|                                                  
|Income from research and development
 activities   |  |                                                   | 26         |      |   | 263        |   |              | (237    | ) |  | -90.14 | %
|                                                  
|Interest expense                                   |  |                                                   | (252       | )    |   | (256       | ) |              | 4       |   |  | -1.56  | %
|                                                  
|Non-operating expenses                             |  |                                                   | (4         | )    |   | (73        | ) |              | 69      |   |  | -94.52 | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                  
|Net Other Expense                                  |  |                                                   | (229       | )    |   | (63        | ) |              | (166    | ) |  | 263.49 | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|Loss Before Income Taxes                           |  |                                                   | (3,209     | )    |   | (904       | ) |              | (2,305  | ) |  | 254.98 | %
|                                                  
|Income tax expense                                 |  |                                                   | 0          |      |   | (2         | ) |              | 2       |   |  | -100   | %
|                                                  
|Net loss attributable to noncontrolling
 interests |  |                                                   | 248        |      |   | 53         |   |              | 195     |   |  | 367.92 | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                  
|Net Loss                                           |  |                                                   | (2,961     | )    |   | (853       | ) |              | (2,108  | ) |  | 247.13 | %
|                                                  
|Foreign currency translation adjustments           |  |                                                   | 0          |      |   | 473        |   |              | (473    | ) |  | -100   | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                  
|Comprehensive Loss                                 |  | $                                                 | (2,961     | )    | $ | (380       | ) |              | (2,581  | ) |  | 679.21 | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|Loss Per Share                                     |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                  
|Basic                                              |  | $                                                 | (0.15      | )    | $ | (0.04      | ) |              | (0.11   | ) |  | 247.3  | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                  
|Diluted                                            |  | $                                                 | (0.15      | )    | $ | (0.04      | ) |              | (0.11   | ) |  | 247.3  | %
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                   |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|Weighted-Average Shares Outstanding                |  |                                                   |            |      |   |            |   |              |         |   |  |        |  
|                                                  
|Basic                                              |  |                                                   | 19,679,400 |      |   | 19,679,400 |   |              | 560,000 |   |  | 2.93   | %
|                                                  
|Diluted                                            |  |                                                   | 19,679,400 |      |   | 19,679,400 |   |              | 560,000 |   |  | 2.93   | %

15

---



Sale of products:Sale
of products for the three months ended March 31, 2009 was approximately $6.77
million, an increase of approximately $1.28 million, or 23.4%, from
approximately $5.49 million for the three months ended March 31, 2008. The
increase in sales is due to the sales of primary product, Xuesaitong Soft
Capsule, which increased by $1.46 million and our sales of cosmetic products,
which increased by $0.12 million. The increase in sales was partially offset
    by the reduction of $0.7 million in sales of other companies non-prescription
medicine and the decrease in export of $0.13 million because of the recession
in the world economy. The foreign exchange rate fluctuation also impacted the
sales revenue by $0.53 million.

Cost of products
sold: Our cost of products sold for the three
months ended March 31, 2009 was approximately $2.3 million, an increase of
approximately $0.2 million or 9.62%, from approximately $2.10 million for the
three months ended March 31, 2008. The increase in cost of products sold was
due primarily to the increase in sales volume of primary products, including
one of the Company and cosmetic products and the increase in price of certain
major raw materials, including Sanchi, one of the Companys primary raw
materials, since December 31, 2008.

Gross profit:.
Our gross profit for the three months ended March 31, 2009 was approximately $4.47
million as compared with approximately $3.39 million for the three months ended
March 31, 2008. Gross profit as a percentage of revenues was approximately 66%
for the three months ended March 31, 2009, increased from 61.7% for the three
months ended March 31, 2008. The increase in gross margin percentage was due
primarily to the increase of high profit margin products in 2009 and the
reduced sale of certain of other companies non-prescription medicine, which had
generated a poor profit margin for the period ended March 31, 2008.

Selling expense:
Selling expenses were approximately $6.40 million for the three months ended
March 31, 2009, an increase of approximately $4.75 million, or 290%, from
approximately $1.64 million for the three months ended March 31, 2008. The Companys main product has been sold to patients
through hospitals developed by sales representatives, however, the Company believes it is in its best long term interest to grow its
operations in the OTC market, which will produce higher profit margins and has decided to
expand into the OTC market in 2009. In connection with the Company moving its operations
towards the OTC market, the Company has adopted a policy to absorb a significantly higher
percentage of costs incurred by sales representatives than in the past in order to get sales
representatives' cooperation in developing the OTC market. The costs to each sale to be borne
by the Company are being accrued in Selling Expenses.

General and
administrative expense: General and administrative
expenses were approximately $1.05 million for the three months ended March 31,
2009, a decrease of approximately $1.4 million, or 57.59%, from approximately $2.47
million for the three months ended March 31, 2008. The decrease was due primarily
to the decrease in bad debt expenses on accounts receivables and sales
representative advances. Beginning in 2009, however, instead of advancing sales
representatives money to sustain or develop a particular market, we reimburse
those sales representatives selling
and marking expenses when they present proper expense vouchers. Management
believes this change gives the Company better control over the risk of incurrence of bad debts.

Research and
development expense: We expense research and
development expenses as incurred. Research and development expense for the
three months ended March 31, 2009 and 2008 was $7,281 and $118,976,
respectively. The decrease was primarily due to a decrease in the cost of
researching materials as we shifted our research and development focus to a few
innovative pharmaceuticals instead of a number of generic drugs.

Net other expense:Net
other expense, which includes interest income, income from research and
development activities, interest expense and non-operating expenses, was $229,295
for the three months ended March 31, 2009 as compared to $62,925 for the three
months ended March 31, 2008, an increase of $166,370, or 264%. The increase in
net other expense was primarily due to the decrease in income from research and
development activities and the decrease in interest income.

Benefits from
(provision for) income taxes:Provision for income
taxes was $0 for the three months ended March 31, 2009 as compared to a provision
for income tax of approximately $2,176 for the three months ended March 31, 2008.
The Company is not currently subject to any US income tax because all the
Companys operations are located in China. In China, each of our subsidiary
entity files its own individual tax

16

---



return in the
PRC. The Company pays tax on all profits realized by each subsidiary, and that
losses can only be carried forward and utilized in the same legal entity. Determination
of the amount of unrecognized deferred US
income tax liability is not practical because of the complexities
associated with its hypothetical calculation.

Net (loss) income:We
incurred a net loss of $2.96 million for the three months ended March 31, 2009
as compared to a net loss of $852,660 million for the three months ended March
31, 2008, an increase in net loss of approximately $2.1 million. Considering
the foreign currency translation adjustments of $182 and $472,982, for the
three months ended March 31, 2009 and 2008, respectively, comprehensive loss of
$2.96 million, and $379,678 was realized for the three months ended March 31,
2009 and 2008, respectively.

Liquidity and Capital Resources

General -
As of March 31, 2009, we had cash and cash equivalents of $908,596. We have
historically financed our business operations through bank loans, in addition
to equity offerings. As of March 31, 2009, we had borrowed from banks and other
institutions and had amounts of approximately $11.32 million in short-term
notes payable after making $1.46 million in loan payments in March of 2009. 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 three months ending March 31, 2009
and 2008, the net decrease in cash and cash equivalents was approximately $703,458
and $1.8 million.

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

|                                                                                                                |  |                 |            |                    |   |           | 
|--------------------------------------------------------------------------------------------------------------- |  | --------------- | ---------- | ------------------ | - | --------- | 
|                                                                                                                |  | March 31,
 2009 |            | December 31,
 2008 |  
|                                                                                                                |  |                 |            |                    |  
|                                                                                                               
|Short-term note payable to a municipality,
 interest at 1.8%, due on demand, unsecured                          |  | $               | 73,040     |                    | $ | 72,948    | 
|                                                                                                               
|Short-term note payable to a finance
 bureau, interest at 4.5%, due on demand, unsecured                        |  |                 | 75,277     |                    |   | 75,182    | 
|                                                                                                               
|Short-term note payable to a bank, interest
 at 7.47%, matures April 2009, secured by property                  |  |                 | 3,651,981  |                    |   | 3,647,399 | 
|                                                                                                               
|Short-term note payable to a bank, interest
 at 6.57%, matures April 2009, secured by property                  |  |                 | 1,460,792  |                    |   |          | 
|                                                                                                               
|Short-term note payable to a government
 development zone interest at 2.43%, due on demand, secured by property |  |                 | 219,119    |                    |   | 218,844   | 
|                                                                                                               
|Short-term note payable to a bank, interest
 at 7.72%, matures August 2009, secured by shareholder              |  |                 | 5,843,168  |                    |   | 5,835,838 | 
|                                                                                                               
|                                                                                                                |  |                 |            |                    |   |           | 
|Total short-term notes payable                                                                                  |  | $               | 11,323,378 |                    | $ | 9,850,211 | 
|                                                                                                                |  |                 |            |                    |   |           | 
|                                                                                                                |  |                 |            |                    |   |           | 
|                                                                                                                |  | March 31,
 2009 |            | December 31,
 2008 |  
|                                                                                                                |  |                 |            |                    |  
|Long-term note payable to a bank, interest
 at 8.316%, matures April 2010, secured by property                  |  |                 | 1,460,792  |                    |   | 1,458,959 | 
|Long-term note payable to a bank, interest
 at 6.57%, matures March 2010, due on demand, unsecured              |  |                 |           |                    |   | 2,917,919 | 
|                                                                                                                |  |                 |            |                    |   |           | 
|                                                                                                               
|Total long-term debt                                                                                            |  |                 | 1,460,792  |                    |   | 4,376,878 | 
|                                                                                                               
|Less current maturities of long-term debt                                                                       |  |                 |           |                    |   | 3,245,685 | 
|                                                                                                                |  |                 |            |                    |   |           | 
|Long-term notes payable, net of current
 portion                                                                |  | $               | 1,460,792  |                    | $ | 1,131,193 | 
|                                                                                                                |  |                 |            |                    |   |           | 
|                                                                                                                |  |                 |            |                    |   |           | 
|Past due notes payable                                                                                          |  | $               | 294,395    |                    | $ | 294,026   | 
|                                                                                                                |  |                 |            |                    |   |           | 

17

---



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 |  | $ | 665,109   | 
|    
|2008 |  |   | 1,995,328 | 
|    
|2009 |  |   | 3,990,657 | 
|     |  |   |           | 
|    
|     |  |   | 6,651,094 | 

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

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

Also in April
2008, we obtained a loan of $3,560,138 from Heping Branch of Construction Bank
of China at an interest rate of 7.47% secured by property. The loan was due on
April 3, 2009 and was refinanced with the same bank for a term of one year at
an annual interest rate of 5.31%.

The following
table provides summary information about net cash flow for the three months
ended March 31, 2009 and 2008:

Cash Flow
Three months ended March 31,

|                                                |  |                           |        |      |   |        |  
|----------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | -
|                                                |  | 2009                      |        | 2008 |  
|                                                |  | (unaudited, in thousands) |       
|                                               
|Net
 provided by (used in) operating activities |  | $                         | 890    |      | $ | (392   | )
|                                               
|Net cash
 used in investing activities          |  |                           | (29    | )    |   | (70    | )
|                                               
|Net cash
 used in financing activities          |  |                           | (1,566 | )    |   | (1,409 | )
|                                               
|Cash and Cash Equivalents at End of Period      |  | $                         | 909    |      | $ | 1,005  |  

Operating Activities:
Net cash provided from operating activities for the three months ended March
31, 2009 was $890,299, as compared to net cash used in operating activities of
$391,880 for the three months ended March 31, 2008. These results are comprised
of: (i) net loss; (ii) cash used in taxes and related payables, accounts
and notes receivable, advances to suppliers and deposits; (ii) cash
generated in accrued expenses, advances to sales representatives,
inventory, accounts payable and deposits from customers.

Investing Activities:
Net cash used in investing activities was $29,467 for the three months ended
March 31, 2009, as compared to net cash used in the amount of $70,177 for the
three months ended March 31, 2008. The decrease in net cash used by investing
activities was primarily due to a decrease in capital expenditure.

Financing Activities:
Net cash used by financing activities was approximately $1.57 million for the
three months ended March 31, 2009 compared to net cash used in the amount of
$1.41 million for the three months ended March 31, 2008. The increase in cash
used was primarily due to repayment of related party debt and bank loans. The
Company is currently in discussions with certain lenders regarding securing a
new credit facility secured by the Companys accounts receivable, which is
currently unencumbered. The Company believes that based on discussion with
these lenders to date, the Company should be able to secure financing which
will address the short term needs of the Company.

18

---



Working Capital

As of March
31, 2009, our accounts receivable and notes receivable (less allowance for
doubtful accounts of approximately $4.95 million) were approximately $10.49
million, an increase of approximately $1.38 million, or 15% from accounts
receivable of approximately $9.11 million (net of allowance for doubtful
accounts of $4.83 million) as of December 31, 2008. The collection period
typically runs from nine months to one year, considering the relatively long
collection period in our industry.

Our company
normally requires one to two months to deliver products once the order is
placed with workshop. Inventory decreased during the three month period ended
March 31, 2009 by $503,077, a decrease of 11.7% over inventory as of December
31, 2008. The decrease in inventory was primarily due to faster moving
inventory to meet an increase in sales.

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 March 31, 2009, our advance payments to
our suppliers totaled approximately $508,627. We are confident that our available
funds and cash generated from operations will provide us with sufficient
capital for a sustainable operation; however, we may require additional capital
for acquisitions, for expanding business to related fields, or for the
operation of the combined companies. We cannot assure that such funding will be
available.

Before 2009,
we made significant cash advances to our sales representatives to assist and
encourage them to expand the marketing and sales of our products into new
markets and 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 sales
representative advances. Nonetheless, there are some sales representative
advances that have aged so significantly that, based on prior experience, we do
not expect to collect on every outstanding advance and have estimated the
uncollectible balance based on the age of the advances. Beginning in 2009,
instead of advancing sales representatives money to sustain or develop a
particular market, we reimburse those sales representatives any selling and
marking expenses when they present proper expense vouchers. Management believes
this change gives the Company better control over bad debt allowances.

Current and
long-term employee advances (net of allowances for doubtful accounts) were
approximately $8.74 million at March 31, 2009 and $9.3 million as of December
31, 2008, a decrease of approximately $.56 million or 6%. The decrease was due
to a change in the Companys policy, whereby the Company no longer advances
money to its sales representatives for selling and marketing expenses, but
reimburses them expenses incurred when properly presented in the expense
vouchers. As of March 31, 2009, the gross amount of employee advances was
approximately $12.4 million and as of December 31, 2008 it was approximately $12.92
million, a decrease of approximately $.52 million in that three-month period.
In compliance with our established policy to reserve an allowance for specific
percentages of our aged receivables, we accrued a larger allowance for the
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 2008 and the three months ended March 31, 2009.

|                                   |  |                                        |            |                                        |   |                                             |  |   |            | 
|---------------------------------- |  | -------------------------------------- | ---------- | -------------------------------------- | - | ------------------------------------------- |  | - | ---------- | 
|                                   |  | For the year ended 
 December 31, 2007 |            | For the year ended 
 December 31, 2008 |   | For the three months 
 ended March 31, 2009 | 
|                                  
|Gross amount
 of employee accounts |  | $                                      | 11,210,921 |                                        | $ | 12,921,134                                  |  | $ | 12,435,065 | 
|                                  
|Allowance
 for doubtful accounts   |  |                                        | 2,447,073  |                                        |   | 3,620,048                                   |  |   | 3,693,733  | 
|                                   |  |                                        |            |                                        |   |                                             |  |   |            | 
|Net amount                         |  | $                                      | 8,763,848  |                                        | $ | 9,301,086                                   |  | $ | 8,741,332  | 

19

---



Off-Balance Sheet Arrangements

None.

Foreign Currency Risk

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

Interest Rate Risk

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

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

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of
disclosure controls and procedures

As of March
31, 2009, 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, management
concluded that because of the material weaknesses in internal control over
financial reporting described below, our disclosure controls and procedures
were not effective as of March 31, 2009.

Managements Report
on Internal Control over Financial Reporting

Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act. Our management is also required to assess and report
on the effectiveness of our internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404).
Management assessed the effectiveness of our internal control over financial
reporting as of March 31, 2009. In making this assessment, we used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework. In the course of
its audit and review work for 2008 and 2009, our accountants identified
significant deficiencies, resulting in material weaknesses in our financial
reporting process described below and management identified additional
significant deficiencies. These matters were reported to our Board of
Directors and Audit Committee by management in March 2009. The information
below shows the status of our remediation to date:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Material
 adjustments related to the prior year audits were not recorded in the
 companys accounting records that were necessary to reconcile the retained
 earnings to the prior year balances, which is a material weakness.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   | Due to the
 complexities of applying the audit adjustments to sub-ledgers, to date, only
 material audit adjustments to general ledgers were tracked, but the detailed
 adjustments to sub-ledgers still needs to be tracked.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   | Remediation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   | In addition
 to keeping Chinese GAAP books as a statutory requirement in China, our financial
 department is working with our auditors to identify the detailed supporting information
 of prior year adjustments to sub-ledgers for all audit adjustments. We are
 considering whether or not to continue a separate, second set of US GAAP
 books since the adjustments from our statutory books to US GAAP are not
 extensive and the complexities of maintaining the sub-ledgers in US GAAP
 books, which
 require double-loaded manual work, are difficult with the software we
 are currently using and our limited resources. We will analyze this situation
 over the next few
 months and determine the best approach.

20

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Remediation
 is in process at this date.                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Multiple
 material adjustments were made as a result of audit procedures performed,
 which is a material weakness.                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Remediation:                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Our financial
 department has improved our book keeping procedures and closing procedures to
 improve financial reporting quality and reduce material adjustments to be
 made by the auditor. We expect this weakness to be remediated in the next few
 months.                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Remediation
 is in process at this date.                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Sales
 department and warehouse department failed to follow the policy of returned
 goods to timely handle the returned goods from customers, which is a material
 weakness.                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Remediation:                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   | The sales department
 and warehouse department are now understand their responsibilities to our
 profit centers. We have accomplished this through training regarding our
 policies and monitoring performance. We have instituted operational and management
 reviews of quarterly inventory reports to identify slow moving inventory to take
 necessary actions based on those procedures.
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Remediation
 is completed at this date.                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Capital
 expenditures were discussed and approved at management meetings which some
 directors of the board of directors attended but no formal board approval
 procedures were followed, which is a significant deficiency.                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Remediation:                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   | We have
 established a new policy regarding capital expenditures which requires
 executed board of directors approval of material capital expenditures.                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Remediation
 is completed at this date.                                                                                                                                                                                                                                                                                                                                                      

Regarding the
duties of the cashiers in our financial department were not properly
segregated, which is a significant deficiency in our internal controls, we have
separated the bank reconciliation work from the cashiers duties.

The
remediation of this deficiency is completed at this date.

In addition,
we have allocated significant financial and human resources to strengthen our
internal control structure.

We believe
that the foregoing steps have helped us remediate the material weakness and
significant deficiencies identified above and we will continue to monitor the
effectiveness of these steps and make any changes that our management deems
appropriate.

A material
weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency,
or a combination of deficiencies, in internal control over financial reporting
such that there is a reasonable possibility that a material misstatement of our
annual or interim financial statements will not be prevented or detected on a
timely basis. A significant deficiency is a deficiency, or a combination of
deficiencies, in internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit attention by those
responsible for oversight of the companys financial reporting.

Our management
is not aware of any material weakness in our internal control over financial
reporting that causes them to believe that any material inaccuracies or errors
existed in our financial statements as of March 31, 2009. Nor are we aware of
any instance where such reportable conditions or other identified areas of
weakness have resulted in a material misstatement of omission in any report we
have filed with or submitted to the Commission, other than those that were
corrected in connection with the Restatement to address the accounting errors
in the financial statements for the fiscal year ended December 31, 2007 and the
fiscal quarter ended March 31, 2008.

Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.

21

---



Changes in internal
control over financial reporting

Except as
described in this Item, there were no changes in our internal controls over
financial reporting during the first fiscal quarter of 2009 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

To improve
performance, in 2009, the Company under the direction of the Board of Directors
reorganized the company structure to set up independent responsibility centers
or profit centers. Each center is required to keep its own set of accounts
which generate income statement and balance sheet information for evaluation of
the centers performance. Due to the limitations of our software, the
accounting for the centers has to be manually tracked. Due to these
limitations and the need for better management decision making information, as
discussed above, we are considering whether or not to continue a separate,
second set of US GAAP books since the adjustments from our statutory books to
US GAAP are not extensive but the manual work required to keep a set of US GAAP books is
extensive. We will analyze this situation over the next few months and
determine the best approach.

PART II -
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Class Action Lawsuit
In 2008, putative class action lawsuits were
asserted against the Company and certain other parties in the United States
District Court for the Southern District of New York (the Court). On February
12, 2009, an amended complaint was served on the Company by new lead counsel
for the class, consolidating the putative class actions and bearing the caption
Beni Varghese, Individually and on Behalf of All Other Similarly Situated v.
China Shenghuo Pharmaceutical Holdings, Inc., et al., Index No. 1:08 CIV. 7422.
The defendants include the Company, the Companys controlling shareholders,
Lans International Medicine Investment Co., Limited, the Companys chief
executive officer, Gui Hua Lan, the Companys former chief financial officer,
Qiong Hua Gao, and the Companys independent registered public accounting firm,
Hansen, Barnett & Maxwell, P.C. During the second quarter of 2009, the Company
plans to file motions to dismiss the complaint.

The amended
consolidated complaint alleges that the Company failed to take adequate steps
to ensure its financial reporting comported with U.S. Generally Accepted
Accounting Principles (GAAP) and, as a result, the Company was required to
restate what are alleged to be materially false and misleading financials for
accounting periods during the alleged class period from August 2007 through
August 20, 2008. The amended consolidated complaint further alleges, among
other things, that certain of the Companys SEC filings and other public
statements contained false and misleading statements which resulted in damages
to the plaintiffs and the members of the purported class when they purchased
the Companys securities. On the basis of those allegations, plaintiffs in each
of the actions seek an unspecified amount of damages under Sections 10(b) and
20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder.

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

ITEM 1A. RISK FACTORS

Except as
reflected in this Form 10-Q, there have been no material changes from the risk
factors previously disclosed in Item 1A of our Annual Report on Form 10-K for
the year ended December 31, 2008.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

22

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ITEM 6. EXHIBITS

|                |  |                                                                                                                   
|--------------- |  | ------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Description
 of Exhibit                                                                                           
|                |  |                                                                                                                   
|                |  |                                                                                                                   
|31.1            |  | Certification
 of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or
 15d-14(a).              
|                |  |                                                                                                                   
|31.2            |  | Certification
 of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or
 15d-14(a).              
|                |  |                                                                                                                   
|32.1            |  | Certification
 pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
 Sarbanes Oxley Act of 2002.*

---

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

23

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SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

|                |                                              |                                                   
|--------------- | -------------------------------------------- | --------------------------------------------------
|                | CHINA SHENGHUO PHARMACEUTICAL HOLDINGS, INC.
|                | (Registrant)                                
|                |                                              |                                                   
|March 31,
 2009 | By:                                          | /s/ Gui Hua
 Lan                                  
|                |                                              |                                                   
|                |                                              | Gui Hua Lan                                       
|                |                                              | Chief
 Executive Officer and Chairman of the Board

24

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EXHIBIT INDEX

|                |  |                                                                                                                   
|--------------- |  | ------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Description
 of Exhibit                                                                                           
|                |  |                                                                                                                   
|                |  |                                                                                                                   
|31.1            |  | Certification
 of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or
 15d-14(a).              
|                |  |                                                                                                                   
|31.2            |  | Certification
 of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or
 15d-14(a).              
|                |  |                                                                                                                   
|32.1            |  | Certification
 pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
 Sarbanes Oxley Act of 2002.*

---

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

25

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