**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**




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


**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended March 31, 2008**




**OR**




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


**SECURITIES
      EXCHANGE ACT OF 1934**




**Commission
      File Number**


**001-33537**




**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


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




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





**0086-871-728-2628**


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




Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days.
 Yes x No o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer” and “large accelerated filer” 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, 2008.
  Transitional
        Small Business Disclosure Format (check one): Yes o No x












**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**


**FORM
      10-Q QUARTERLY REPORT**





**TABLE
      OF CONTENTS**





**Page**PART
                I - FINANCIAL INFORMATION
            1ITEM
                1.
            FINANCIAL
                STATEMENTS
            1Condensed
                Consolidated Balance Sheets as of March 31, 2008 and December 31,
                2007
                (Unaudited)
            1Condensed
                Consolidated Statements of Operations and Comprehensive Income for
                the
                Three Months Ended March 31, 2008 and 2007 (Unaudited)
            2Condensed
                Consolidated Statements of Cash Flows for the Three Months Ended
                March 31,
                2008 and 2007 (Unaudited)
            3Notes
                to Condensed Consolidated Financial Statements (Unaudited)
            4ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            12ITEM
                3.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            22ITEM
                4.
            CONTROLS AND
              PROCEDURES
            22PART
                II - OTHER INFORMATION
            23ITEM
                1.
            LEGAL
                PROCEEDINGS
            23ITEM
                1A.
            RISK
                FACTORS
            23ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            23ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            24ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            24ITEM
                5.
            OTHER
                INFORMATION
            24ITEM
                6.
            EXHIBITS
            24SIGNATURES
            25





**PART
      I - FINANCIAL INFORMATION**




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




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


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(Unaudited)**





**March 31,**
            
            **December 31,****2008**
            
            **2007****ASSETS:****Current
                Assets:**Cash
                and cash equivalents
            
            $
            1,005,333
            
            $
            2,800,641Restricted
                cash
            
            
            -
            
            
            -Accounts
                receivable, less allowance for doubtful accounts of $2,744,277 and
                $2,083,561, respectively
            
            
            8,532,652
            
            
            9,651,304Employee
                advances, less allowance for doubtful accounts of $1,628,854 and
                $883,815,
                respectively
            
            
            12,727,818
            
            
            10,147,415Advances
                to suppliers
            
            
            1,284,423
            
            
            669,858Inventory,
                net of reserve for obsolescence of $126,992 and $136,359,
                respectively
            
            
            4,482,262
            
            
            4,125,193Receivable
                from related parties
            
            
            35,967
            
            
            27,555Other
                current assets
            
            
            83,493
            
            
            159,657**Total
                Current Assets**
            
            
            **28,151,948**
            
            
            **27,581,623**Property,
                plant and equipment, net of accumulated depreciation of $4,624,115
                and
                $4,247,993, respectively
            
            
            7,762,163
            
            
            7,573,204Intangible
                assets, net of accumulated amortization of $49,443 and $42,957,
                respectively
            
            
            670,330
            
            
            648,090Long-term
                employee advances, less allowance for doubtful accounts of $1,108,512
                and
                $1,717,078, respectively
            
            
            523,799
            
            
            514,042Deferred
                income taxes
            
            
            1,487,729
            
            
            1,593,159**TOTAL
                ASSETS**
            
            **$**
            **38,595,969**
            
            **$**
            **37,910,118****LIABILITIES
                AND STOCKHOLDERS' EQUITY:****Current
                Liabilities:**Accounts
                payable
            
            $
            1,734,154
            
            $
            745,514Accrued
                expenses
            
            
            1,769,458
            
            
            2,017,748Deposits
            
            
            4,043,789
            
            
            3,439,892Payable
                to related parties
            
            
            83,384
            
            
            94,939Short-term
                notes payable
            
            
            4,131,940
            
            
            5,334,260Advances
                from customers
            
            
            105,810
            
            
            119,287Taxes
                and related payables
            
            
            735,612
            
            
            855,084Current
                portion of long-term debt
            
            
            2,848,110
            
            
            4,101,667**Total
                Current Liabilities**
            
            
            **15,452,257**
            
            
            **16,708,391****Long-Term
                Debt**
            
            
            **8,544,331**
            
            
            **6,836,111****Total
                Liabilities**
            
            
            **23,996,588**
            
            
            **23,544,502****Minority
                Interest in Net Assets of Subsidiaries**
            
            
            **637,065**
            
            
            **655,962****Stockholders'
                Equity:**Preferred
                stock, $0.0001 par value, 10,000,000 shares authorized, 0 shares
                outstanding
            
            
            -
            
            
            -Common
                stock, $0.0001 par value, 100,000,000 shares authorized, 19,679,400
                and
                19,679,400 outstanding , respectively
            
            
            1,968
            
            
            1,968Additional
                paid-in capital
            
            
            6,193,927
            
            
            6,193,927Statutory
                reserves
            
            
            147,023
            
            
            147,023Retained
                earnings
            
            
            5,997,249
            
            
            6,335,590Accumulated
                other comprehensive income, foreign currency translation
            
            
            1,622,149
            
            
            1,031,146**Total
                Stockholders' Equity**
            
            
            **13,962,316**
            
            
            **13,709,654****TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **38,595,969**
            
            **$**
            **37,910,118**


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


1


**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES** **CONDENSED** **CONSOLIDATED
        STATEMENTS OF OPERATIONS**


**AND
      COMPREHENSIVE INCOME**


**(Unaudited)**





**Three Months Ended****March 31,****2008**
            
            **2007****Sale
                of Products**
            
            $
            5,486,468
            
            $
            4,327,125**Cost
                of Products Sold**
            
            
            2,099,462
            
            
            1,141,698**Gross
                Profit**
            
            
            3,387,006
            
            
            3,185,427**Operating
                Expenses:**Selling
                expense
            
            
            1,641,502
            
            
            1,602,824General
                and administrative expense
            
            
            1,571,115
            
            
            973,605Research
                and development expense
            
            
            118,976
            
            
            2,877**Total
                Operating Expenses**
            
            
            3,331,593
            
            
            2,579,306**Income
                from Operations**
            
            
            55,413
            
            
            606,121**Other
                Income (Expense):**Interest
                income
            
            
            3,265
            
            
            6,462Income
                from research and development activities
            
            
            263,037
            
            
            1,218Interest
                expense
            
            
            (256,082
            )
            
            (180,183
            )Non-operating
                expenses
            
            
            (73,145
            )
            
            -**Net
                Other Expense**
            
            
            (62,925
            )
            
            (172,503
            )**(Loss)
                Income Before Income Taxes**
            
            
            (7,512
            )
            
            433,618Benefit
                from (provision for) income taxes
            
            
            (352,981
            )
            
            1,137,478Minority
                interest in loss (income) of subsidiaries
            
            
            22,152
            
            
            (97,920
            )**Net
                (Loss) Income**
            
            $
            (338,341
            )
            $
            1,473,176Foreign
                currency translation adjustment
            
            
            591,003
            
            
            85,735**Comprehensive
                Income**
            
            $
            252,662
            
            $
            1,558,911**Earnings
                Per Share****Basic**
            
            $
            (0.02
            )
            $
            0.08**Diluted**
            
            $
            (0.02
            )
            $
            0.08**Weighted-Average
                Shares Outstanding****Basic**
            
            
            19,679,400
            
            
            19,119,400**Diluted**
            
            
            19,679,400
            
            
            19,119,400


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


2





**CHINA
      SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES** **CONDENSED** **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**


**(Unaudited)**





**Three Months Ended****March 31,****2008**
            
            **2007****Cash
                Flows from Operating Activities:**Net
                income
            
            $
            (338,341
            )
            $
            1,473,176Adjustments
                to reconcile net income to net cash from operating
                activities:Depreciation
                and amortization
            
            
            199,872
            
            
            166,155Deferred
                income taxes
            
            
            167,983
            
            
            (37,177
            )Minority
                interest in (loss) income of subsidiaries
            
            
            (22,152
            )
            
            97,920Change
                in current assets and liabilities:Accounts
                receivable
            
            
            1,487,331
            
            
            (1,861,831
            )Employee
                advances
            
            
            (2,101,062
            )
            
            (863,563
            )Advances
                to suppliers
            
            
            (574,171
            )
            
            (251,294
            )Inventory
            
            
            (181,623
            )
            
            109,494Other
                current assets
            
            
            76,870
            
            
            4,048Accounts
                payable
            
            
            937,166
            
            
            28,511Accrued
                expenses and deposits
            
            
            (325,048
            )
            
            1,170,727Deposits
            
            
            451,037
            
            
            -Advances
                from customers
            
            
            (18,041
            )
            
            (55,780
            )Taxes
                and related payables
            
            
            (151,701
            )
            
            (1,034,633
            )**Net
                Change in Operating Activities**
            
            
            (391,880
            )
            
            (1,054,247
            )**Cash
                Flows from Investing Activities:**Receivable
                from related parties
            
            
            1,942
            
            
            (579,050
            )Restricted
                cash
            
            
            -
            
            
            371,186Capital
                expenditures
            
            
            (72,119
            )
            
            (42,233
            )**Net
                Change in Investing Activities**
            
            
            (70,177
            )
            
            (250,097
            )**Cash
                Flows from Financing Activities:**Payable
                to related parties
            
            
            (15,170
            )
            
            (323,676
            )Proceeds
                from short and long-term loans
            
            
            -
            
            
            8,470,252Payments
                on short and long-term loans
            
            
            (1,393,596
            )
            
            (8,843,200
            )**Net
                Change in Financing Activities**
            
            
            (1,408,766
            )
            
            (696,624
            )Effect
                of exchange rate changes on cash
            
            
            75,515
            
            
            28,645Net
                Change in Cash and Cash Equivalents
            
            
            (1,795,308
            )
            
            (1,972,323
            )Cash
                and Cash Equivalents at Beginning of Period
            
            
            2,800,641
            
            
            3,691,438**Cash
                and Cash Equivalents at End of Period**
            
            $
            1,005,333
            
            $
            1,719,115**Supplemental
                Information**Cash
                paid for interest
            
            $
            256,082
            
            $
            180,183


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




3




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




**NOTE
        1 - BASIS OF PRESENTATION**
 
 The
        accompanying unaudited condensed consolidated financial statements of China
        Shenghuo Pharmaceutical Holdings, Inc. (formerly known as SRKP 8, Inc.) (the
        “Company” or the “Parent”) 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 believes that the following disclosures are adequate
        to make the information presented not misleading. These condensed consolidated
        financial statements should be read in conjunction with the audited consolidated
        financial statements and the notes thereto included in the Company’s Form 10-KSB
        for the year ended December 31, 2007.
 
 These
        unaudited condensed consolidated financial statements reflect all adjustments
        (consisting only of normal recurring adjustments) that, in the opinion of
        management, are necessary to present fairly the consolidated financial position
        and results of operations of the Company for the periods presented. Operating
        results for the three months ended March 31, 2008 are not necessarily indicative
        of the results that may be expected for the year ending December 31,
        2008.
 
 ***Translating
        Financial Statements*** - The
        consolidated financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        The
        functional currency of the operating subsidiaries in the People’s Republic of
        China (“PRC”) is the Chinese Yuan Renminbi (“CNY”); however, the condensed
        consolidated financial statements have been expressed in United States Dollars
        (“USD”). The accompanying condensed consolidated balance sheets have been
        translated into USD at the exchange rates prevailing at each balance sheet
        date.
        The condensed consolidated statements of operations have been translated
        using
        the weighted average exchange rates prevailing during the operating periods
        of
        each statement.
 
 **NOTE
        2 - ORGANIZATION AND NATURE OF OPERATIONS**
 
 ***Nature
        of Business*** - The
        Company and its subsidiaries design, develop, market, export and sell
        pharmaceutical, nutritional supplements and cosmetic products throughout
        the PRC
        and abroad. The Company also conducts research and development for third
        parties
        as well as for itself using the medicinal herb Panax notoginseng, also known
        as
        Sanqi, Sanchi, or Tienchi and sells pharmaceutical, nutritional supplements
        and
        cosmetic products that contain this herb, which is grown in two provinces
        in the
        PRC. Sales from the cosmetic products represent less than 10% of total Company
        sales and revenue. The Company does not maintain accounting records by line
        of
        business as the Company’s subsidiaries sell products from multiple lines of
        business and management evaluates each subsidiary as a separate
        entity.
 
 ***Organization*** **** -
        The
        Company was organized under the laws of the State of Delaware on May 24,
        2005.
        On August 31, 2006, the Company consummated a share exchange agreement, as
        amended (the “Agreement”), with Lan’s Int’l Medicine Investment Co., a Hong Kong
        corporation, and a shareholder holding 93.75% of the equity interest of Kunming
        Shenghuo Pharmaceuticals Co., Ltd. (“Shenghuo”) whereby the Company, in exchange
        for 15,213,000 shares of its common stock, acquired 93.75% of Shenghuo’s
        shares.


4


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


In
        addition, the Company agreed to cancel 2,036,000 shares of its common stock;
        issue 1,242,400 shares of its common stock and warrants to purchase 100,000
        shares of its common stock (the “Warrants”) for services rendered, and issue
        2,000,000 shares for $1,800,000 cash (less costs of $535,304).
 
 There
        was
        no written agreement for the services to be performed in connection with
        the
        1,242,400 shares of common stock or the 100,000 warrants. The shares issued
        for
        services were valued at $0.90 per share. This value was taken from the value
        of
        the shares issued for cash on the same day. In accordance with FAS 123(R),
        as
        the fair value of the common shares could more reliably be measured than
        the
        fair value of the services, the fair value of the shares was used to measure
        the
        transaction. In accordance with EITF 96-18, the measurement date was determined
        to be the date of the Agreement as there was no contract that specifically
        outlined the commitment date or the performance date for the shares issued
        for
        services. Further, in accordance with the guidance given in EITF 00-18, the
        shares were expensed on the date of the agreement as all shares vested
        immediately.
 
 As
        part
        of several agreements, the Company agreed to register the 1,242,400 shares
        of
        its common stock and the Warrants. The Company also agreed to register the
        2,000,000 shares of common stock that were to be issued for cash and the
        664,000
        shares of common stock that were held by the Company’s shareholders immediately
        prior to the Agreement.
 
 Because
        the shares issued by the Company to Shenghuo’s shareholders in the
        aforementioned transaction represented a controlling interest, the transaction
        has been accounted for as a recapitalization or reverse merger with Shenghuo
        being considered the acquirer. The accompanying consolidated financial
        statements have been restated on a retroactive basis to present the capital
        structure of Shenghuo as though it were the reporting entity.
 
 In
        October 1995, Shenghuo was formed under the laws of the PRC and subsequently
        acquired an 80% interest in both Kunming Shenghuo Medicine Co., Ltd.
        (“Medicine”) and Kunming Pharmaceutical Importation and Exportation Co., Ltd.
        (“Import/Export”), and a 98.18% interest in Kunming Shenghuo Cosmetics Co., Ltd.
        (“Cosmetic”). All of these entities were also formed in and operate within the
        PRC. Stockholder’s equity was represented by share capital and no shares were
        outstanding prior to August 31, 2006. Share capital of Shenghuo prior to
        the
        consummation of the Agreement was $2,660,760. On August 30, 2006, the minority
        shareholders of Medicine agreed to transfer 19% of their 20% interest to
        Shenghuo for $249,800. Also on August 30, 2006, the minority shareholders
        of
        Import/Export agreed to transfer 19% of their 20% interest to Shenghuo for
        $24,980. Subsequent to these transfers, Shenghuo owns 99% of the equity
        interests in Medicine and Import/Export.
 
 In
        September 2006, Shenghuo, which is the 93.75%-owned subsidiary of the Company,
        formed Kunming Beisheng Science and Technology Development Company, Ltd.
        (“Beisheng”), under the laws of the PRC as its partially owned subsidiary for
        the purpose of doing research and development on bio-tech products, health-care
        products and cosmetics, the importation and exportation of medicines and
        equipment and the development of pharmaceutical technologies. Upon formation,
        Shenghuo owned 70% of Beishing. In August 2007, Shenghuo established a new
        subsidiary named Pingbian Shenghuo Nanyao Development Co., LTD. (“Pingbian
        Shenghuo”). Pingbian Shenghuo was organized under the laws of the PRC, has a
        registered capital of RMB 1,000,000 and Shenghuo holds 100% of the equity
        interest of Pingbian Shenghuo. The scope of operation of Pingbian Shenghuo
        is to
        produce and refine the raw materials, such as Sanchi, that are needed to
        produce
        our products. There were no material operations for Beisheng or Pingbian
        Shenghuo for the three months ended March 31, 2008.





5


**CHINA
          SHENGHUO PHARMACEUTICAL HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **** **(Unaudited)**
 **NOTE
          3 - SELECTED SIGNIFICANT ACCOUNTING POLICIES**
 
 ***Cash
          and Cash Equivalents*** - The
          Company’s cash and cash equivalents are maintained in bank deposit accounts. The
          Company has not experienced any losses with respect to these deposits.
          Cash and
          cash equivalents include interest bearing and non-interest bearing bank
          deposits, money market accounts, and short-term certificates of deposit
          with
          original maturities of three months or less. The Company did not enter
          into any
          hedge contracts during any of the periods presented.
 
 ***Accounts
          Receivable and 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. Customers that have outstanding balances for longer
          than
          three months have their credit curtailed. 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.
 
 ***Employee
          Advances*** -
          Employee advances are presented net of an estimated allowance for doubtful
          advances. As time passes from when advances are made to employees for travel
          and
          related expenses, the Company will create an allowance for these older
          receivables as the likelihood of collection from each particular employee
          decreases as their respective advances age. Long-term employee advances
          are not
          expected to be realized in the current operating period.
 
 ***Advances
          to Suppliers and Advances from Customers*** - As is
          customary in the PRC, the Company will often make advance payments to suppliers
          for materials, which may include provisions that set the purchase price
          and
          delivery date of raw materials, or receive advance payments from
          customers.
 
 ***Basic
          and Diluted Earnings per Share*** - Basic
          and diluted earnings per share are calculated by dividing net earnings
          attributable to common stockholders by the weighted-average number of shares
          of
          common stock outstanding during the year. Diluted earnings per share are
          calculated to give effect to potentially issuable dilutive common shares.
          Potentially dilutive securities as of March 31, 2008 are comprised of warrants
          to purchase 40,000 shares of common stock at an exercise price of $4.20
          and
          warrants to purchase 6,000 shares of common stock at an exercise price
          of $3.50.
          The effect of these warrants is excluded as the effect is antidilutive
          due to
          losses of the Company. Potentially dilutive securities as of March 31,
          2007 are
          comprised of warrants to purchase 100,000 shares of common stock at an
          exercise
          price of $2.50 per share. The effect of these warrants is excluded from
          the
          computation of diluted net income per share because the exercise price
          of the
          warrants is greater than the fair value of the underlying shares on March
          31,
          2007.
 
 ***Comprehensive
          Income (Loss)*** - Other
          comprehensive income (loss) presented in the condensed consolidated financial
          statements consists of cumulative foreign currency translation adjustments.
 
 ***Advertising
          Expense*** -
          The
          Company expenses advertising costs as incurred. Advertising costs for the
          three
          months ended March 31, 2008 and 2007 were $392,496 and $17,114,
          respectively.





6


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




***Recently
        Enacted Accounting Standards*** - In
        September 2006, the Financial Accounting Standards Board (FASB) issued
        SFAS No. 157, *Fair
        Value Measurements* ,
        which
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles and expands disclosures about fair
        value measurements. SFAS No. 157 is effective for fiscal years beginning
        after November 15, 2007, and interim periods within those fiscal years. In
        February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
        extended the effective date for certain nonfinancial assets and nonfinancial
        liabilities to fiscal years beginning after November 15, 2008. The adoption
        of
        the portions of SFAS No. 157 that were not postponed by (FSP FIN) No. 157-2
        did
        not have a material impact on our consolidated financial statements. The
        Company
        does not expect the adoption of the postponed portions of SFAS No. 157 to
        have a material impact on our consolidated financial statements.
 
 In
        December 2007, the FASB issued SFAS No. 141(R), *Business
        Combinations* ,
        and
        SFAS No. 160, *Noncontrolling
        Interests in Consolidated Financial Statements.* SFAS
        No. 141(R) requires an acquirer to measure the identifiable assets
        acquired, the liabilities assumed and any non-controlling interest in the
        acquiree at their fair values on the acquisition date, with goodwill being
        the
        excess value over the net identifiable assets acquired. SFAS No. 160
        clarifies that a non-controlling interest in a subsidiary should be reported
        as
        equity in the consolidated financial statements, consolidated net income
        shall
        be adjusted to include the net income attributed to the non-controlling interest
        and consolidated comprehensive income shall be adjusted to include the
        comprehensive income attributed to the non-controlling interest. The calculation
        of earnings per share will continue to be based on income amounts attributable
        to the Parent. SFAS No. 141(R) and SFAS No. 160 are effective for
        financial statements issued for fiscal years beginning after December 15,
        2008. Early adoption is prohibited. SFAS No. 141(R) and SFAS No. 160 are
        not
        expected to
        have a
        material impact on our results of operations or financial position.
 
 On
        January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities - Including an Amendment of FASB
        Statement No. 115” (“ FAS 159”). FAS 159
        permits entities to choose to measure many financial instruments and certain
        other items at fair value. Entities that elect the fair value option will
        report
        unrealized gains and losses in earnings at each subsequent reporting date.
        The
        fair value option may be elected on an instrument-by-instrument basis, with
        few
        exceptions. FAS 159
        also
        establishes presentation and disclosure requirements to facilitate comparisons
        between companies that choose different measurement attributes for similar
        assets and liabilities. The adoption of FAS 159
        did
        not have an effect on our financial condition or results of operations as
        we did
        not elect this fair value option, nor is it expected to have a material impact
        on future periods as the election of this option for our financial instruments
        is expected to be limited.




7


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


**NOTE
        4 - INVENTORY**
 
 Inventory
        is stated at weighted average cost and consisted of the
        following:





**March 31,**
            
            **December 31,****2008**
            
            **2007**Raw
                materials
            
            $
            951,597
            
            $
            871,425Work-in-process
            
            
            1,738,754
            
            
            1,797,379Finished
                goods
            
            
            980,692
            
            
            786,235Product
                on consignment
            
            
            938,211
            
            
            806,513Total
                Inventory
            
            
            4,609,254
            
            
            4,261,552Less:
                Provision for obsolescence
            
            
            (126,992
            )
            
            (136,359
            )Net
                Inventory
            
            $
            4,482,262
            
            $
            4,125,193




**NOTE
        5 - RELATED PARTY TRANSACTIONS**
 
 At
        March
        31, 2008 and December 31, 2007, the Company had payables due to related parties
        in the amount of $83,384 and $94,939, respectively. These amounts are due
        on
        demand and do not accrue interest.
  **NOTE
        6 - INCOME TAXES**
 
 The
        Company is not subject to any income taxes in the United States, but is subject
        to corporate income tax in the PRC. The Parent is located in a special region
        and has a 15% corporate income tax rate and has been granted a “tax holiday”
during which it will pay no income taxes through December 31, 2008. On March
        16,
        2007, the National People’s Congress of China passed the new Enterprise Income
        Tax Law, (“EIT Law”), and on December 6, 2007, the State Council of China issued
        the Implementation Regulations for the EIT Law which took effect on
        January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
        unified EIT of 25% on all domestic-invested enterprises and Foreign Invested
        Entities, or FIEs, unless they qualify under certain limited exceptions.
 
 As
        a
        result of the above change in the income tax laws, the Parent will continue
        to
        have a 15% rate with a tax holiday for 2008 and will have a favorable rate
        of
        50% of the tax rates in effect during fiscal 2009 through 2011 as determined
        by
        the PRC government and the regional tax authorities. Medicine, Import/Export,
        Cosmetics, Beisheng and Pingbian Shenghuo are taxed at the new 25% rate
        effective January 1, 2008.
 
 The
        Company recognizes deferred tax assets and liabilities for future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and the respective tax
        bases
        and any tax credit carry forwards available. Deferred tax assets and liabilities
        are measured using enacted tax rates expected to apply to taxable income
        in the
        years in which those temporary differences are expected to be recovered or
        settled. The effect on deferred tax assets and liabilities of a change in
        tax
        rates is recognized in income in the period that includes the enactment date.


8


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


The
        Company has established a valuation allowance for all deferred income tax
        assets
        of Cosmetics and Medicine due to the uncertainty of their realization. Income
        taxes payable are included in taxes and related payables on the accompanying
        balance sheets. Income taxes are not required to be paid to the PRC until
        after
        the end of the Company’s fiscal year.
 
 Undistributed
        earnings of the Company’s foreign subsidiaries since acquisition amounted to
        approximately $7.7 million at March 31, 2008. Those earnings, as well as
        the investment in the subsidiaries of approximately $6.1 million are considered
        to be indefinitely reinvested and, accordingly, no U.S. federal and state
        income
        taxes have been provided thereon. Upon distribution of those earnings in
        the
        form of dividends or otherwise, the Company would be subject to both U.S.
        income
        taxes (subject to an adjustment for foreign tax credits) and withholding
        taxes
        payable to the PRC. The Company has U.S. net operating loss carryforwards
        of
        approximately $1.9 million that, if unused begin to expire in 2026.
        Determination of the amount of unrecognized deferred U.S. income tax liability
        is not practical because of the complexities associated with its hypothetical
        calculation; however, unrecognized foreign tax credits may be available to
        reduce a portion of the U.S. tax liability.
 
 **NOTE
        7 - NOTES PAYABLE**
 
 The
        Company’s notes payable consist of short and long-term debt that is payable to
        banks, governmental financial bureaus, municipalities and a company. The
        following schedule summarizes the Company’s debt obligations and respective
        balances:




**March 31,**
              
              **December 31,****2008**
              
              **2007**Short-term
                  note payable to a bank, interest at 6.12%, matures March 2008,
                  secured by
                  land use rights
              
              $
              -
              
              $
              1,367,222Short-term
                  note payable to a municipality, interest at 1.8%, payable on demand,
                  unsecured
              
              
              71,202
              
              
              68,360Short-term
                  note payable to a finance bureau, interest at 4.5%, payable on
                  demand,
                  unsecured
              
              
              73,383
              
              
              70,455Short-term
                  note payable to a bank, interest at 6.39%, matures March 2008,
                  secured by
                  property
              
              
              3,560,138
              
              
              3,418,056Short-term
                  note payable to a government development zone interest at 2.43%,
                  matured
                  November 2007, secured by property
              
              
              427,217
              
              
              410,167Total
                  short-term notes payable
              
              $
              4,131,940
              
              $
              5,334,260





9


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


**March 31,**
              
              **December 31,****2008**
              
              **2007**Long-term
                  note payable to a bank, interest at 7.72%, matures August 2009,
                  secured by
                  shareholder
              
              $
              8,544,331
              
              $
              6,836,111Long-term
                  note payable to a bank, interest at 6.57%, matures March 2010,
                  secured by
                  property
              
              
              2,848,110
              
              
              4,101,667Total
                  long-term debt
              
              
              11,392,441
              
              
              10,937,778Less
                  current maturities of long-term debt
              
              
              2,848,110
              
              
              4,101,667Long-term
                  notes payable, net of current portion
              
              $
              8,544,331
              
              $
              6,836,111Past
                  due notes payable
              
              $
              3,987,355
              
              $
              410,167




**NOTE
        8 - COMMITMENTS AND CONTINGENCIES**
 
 ***Economic
        environment*** - Since
        all of the Company’s operations are conducted in the PRC, the Company is subject
        to special considerations and significant risks not typically associated
        with
        companies operating in the United States of America. These risks include,
        among
        others, the political, economic and legal environments and foreign currency
        exchange rate fluctuations. The Company’s operational results may be adversely
        affected by changes in the political and social conditions in the PRC, and
        by
        changes in governmental policies with respect to medical reforms, environmental
        reforms and other laws and regulations, anti-inflationary measures, currency
        conversion and remittance abroad, and rates and methods of taxation, among
        other
        things. In addition, all of the Company’s revenue is denominated in the PRC’s
        currency CNY, which must be converted into other currencies before remittance
        out of the PRC. Both the conversion of CNY into foreign currencies and the
        remittance of foreign currencies abroad require approval of the PRC
        government.
 
 ***Dependence
        on a single raw material*** - The
        primary ingredient in all of the Company’s products is Sanchi, an herb grown in
        two provinces of the PRC. The Company relies on its in-house purchasing
        department to acquire sufficient Sanchi at reasonable prices and may on occasion
        make advance payments to suppliers that include provisions setting the purchase
        price and delivery date. However, the Company is not reliant on a single
        source
        or supplier in order to obtain the Sanchi.
 
 ***Contingent
        Liability*** -The
        Company was sued by a former employee for violation of his contract and the
        courts entered a judgment in favor of the employee in 2003 for $128,978,
        which
        included litigation costs. The Company accrued the liability for this loss
        at
        December 31, 2003 and paid the amount of the judgment on April 27, 2004.
        In
        2006, the plaintiff asked the court to have the Company pay a penalty for
        not
        paying the judgment timely in the amount of $100,000. The court had frozen
        a
        bank account that had $105,284. During the fourth quarter of 2006, the court
        rejected the request for the penalty and released the funds back to us. The
        employee has now asserted claims for allegedly ruining the employee’s reputation
        and causing mental anguish. The lawsuit was settled in January 2008, which
        resulted in our payment of $65,136.





10


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


**NOTE
        9 - STOCKHOLDERS EQUITY**
 
 ***Statutory
        Reserves -*** **** According
        to the Articles of Association, the Company is required to transfer a certain
        portion of its net profits to Statutory Reserves, as determined under PRC
        accounting regulations, from net income to both the surplus reserve fund
        and the
        public welfare fund. Accordingly, the Company has recorded an aggregate of
        $147,023 in the Statutory Reserves account in the equity section of the
        accompanying balance sheet as of March 31, 2008 and December 31, 2007.
 
 The
        following summarizes the outstanding warrants as of March 31,
        2008:





**Weighted-Average****Exercise**
            
            **Warrants**
            
            **Remaining Contractual**
            
            **Number****Price**
            
            **Outstanding**
            
            **Life (Years)**
            
            **Exercisable**$3.50
            
            
            6,000
            
            
            4.5
            
            
            6,000$4.20
            
            
            40,000
            
            
            4.3
            
            
            40,00046,000
            
            
            
            
            
            46,000




**NOTE
        10 - SUBSEQUENT EVENTS**
  In
        April
        2008, the Company 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 the Company obtained a loan of $3,560,138 from Heping Branch of
        Construction Bank of China at an interest rate of 7.47% secured by property.
        The
        loan is due and payable on April 3, 2009.
  Proceeds
        from the above mentioned loans were used to retire existing loans that had
        matured.


11


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




**Forward-Looking
      Statements**




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




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




**Overview**




We
      are
      primarily engaged in the research, development, manufacture, and marketing
      of
      pharmaceutical, nutritional supplement and cosmetic products. Almost all of
      our
      products are derived from the medicinal herb Panax notoginseng, also known
      as
      Sanqi, Sanchi or Tienchi. Panax notoginseng is a greyish-brown or greyish-yellow
      plant that only grows in a few geographic locations on Earth, one of which
      is
      Yunnan Province in southwest China, where we are located. The main root of
      Panax
      notoginseng is cylindrical shaped and is most commonly one to six
      centimeters long and one to four centimeters in diameter. Panax notoginseng
      saponins (PNS), the active ingredients in Panax notoginseng, are extracted
      from
      the plant using high-tech equipment and in accord with Good Manufacturing
      Practice (GMP) standards. Our main product, Xuesaitong Soft Capsules, accounted
      for more than 72% of our sales for the three months ended March 31,
      2008.




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




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


12


Xuesaitong
      Soft Capsules, which are subject to wholesale and retail price controls by
      the
      Chinese government, are primarily sold in China, but the product is also sold
      in
      various developing countries, includi n g
      Malaysia, Indonesia and Kyrgyzstan. Sales of the product in China are regulated
      by the SFDA as a prescription drug and therefore must be sold to consumers
      through hospital pharmacies and cannot be advertised, thus limiting the ability
      of the company to market the brand. Approximately 4.3% of sales of Xuesaitong
      Soft Capsules are sold to hospitals directly while approximately 95.7% of sales
      are made to distributors. Our three largest customers are Yunnan Province
      Pharmaceutical, LTD; Nanyang Jikang Medicine LTD; and Beijing Ai’xin Weiye
      Medicine, LTD; all of which accounted for approximately 6.6%, 6.4% and 6.2%
      of
      our sales, respectively, for the three months ended March 31, 2008.




As
      of
      March 31, 2008, our marketing team maintained sales offices or agents in
      approximately 26 provinces throughout China. The sales network covers
      approximately 235 cities and is staffed by approximately 4 50 sales
      represen t atives.
      We intend to grow our internal marketing and sales function and increase our
      relationships with other national distributors to expand the distribution and
      presence of our non-prescription brands and cosmetics.




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




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




In
      September 2007, we expanded the geographic region in which our 12Ways cosmetic
      products were sold from our native Yunnan Province to a number of cities and
      provinces outside our local region. We 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, 2008,
      we
      have opened about 234 retail specialty counters in Beijing, Shanghai, Hangzhou,
      Dongwan, Shengzhen and Shaoguang. **** In
      addition, we have opened two 12Ways Chinese Herbal Beauty Salons in Kunming
      that
      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 salons will
      be supplied by us. Our management team hopes that the opening of these salons
      and the opening of retail counters will allow us to increase our brand
      recognition and strengthen marketing. Our ability to effectively open and
      operate new retail locations depends on several factors, including, among
      others, our ability to identify suitable counter locations, the availability
      of
      which is outside our control; prepare counters for opening within budget; hire,
      train and retain personnel; secure required governmental permits and approvals;
      contain payroll costs; and generate sufficient operating cash flows or secure
      adequate capital on commercially reasonable terms to fund our expansion
      plans.




**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.


13


***Basis
      of Presentation and Translating Financial Statements -*** The
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America. The
      functional currency of the operating subsidiaries in the 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, 2008.
      We did not enter into any hedge contracts during any of the periods
      presented.




***Accounts
      Receivable, Employee Advances 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. Customers that have outstanding balances
      for
      longer than three months have their credit curtailed. Employee advances consist
      of business advances to employees for travel and related expenses and various
      prepaid expenses. As time passes from when advances are made to employees for
      travel and related expenses, we will create an allowance for these older
      receivables as the likelihood of collection from each particular employees
      decreases as their respective advances age. We believe that the allowance for
      doubtful accounts is consistent with industry standards in the PRC based on
      the
      products that are being sold. The allowance for doubtful accounts at March
      31,
      2008 for trade accounts receivable and current and long-term employee advances
      was $2,744,277 and $2,737,366, respectively, and at December 31, 2007, was
      $2,083,561 and $2,600,893, respectively.




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




***Basic
      and Diluted Earnings per Share -*** Basic
      and
      diluted earnings per share are calculated by dividing net earnings attributable
      to common stockholders by the weighted-average number of shares of common stock
      outstanding during the year. Diluted earnings per share are calculated to give
      effect to potentially issuable dilutive common shares. Potentially dilutive
      securities as of March 31, 2008 are comprised of warrants to purchase 40,000
      shares of common stock at an exercise price of $4.20 and warrants to purchase
      6,000 shares of common stock at an exercise price of $3.50. The effect of these
      warrants is excluded as the effect is antidilutive due to losses to our company.
      Potentially dilutive securities as of March 31, 2007 are comprised of warrants
      to purchase 100,000 shares of common stock at an exercise price of $2.50 per
      share. The effect of these warrants is excluded from the computation of diluted
      net income per share because the exercise price of the warrants is greater
      than
      the fair value of the underlying shares on March 31, 2007.




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




***Advertising
      Expense -*** We
      expense advertising costs as incurred. Advertising costs for the three months
      ended March 31, 2008 and 2007 were $392,496 and $17,114, respectively.




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


14





***New
      Accounting Pronouncements -*** 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. We do
      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 us. 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.




**Results
      of Operations for the Fiscal Quarter Ended March 31, 2008 and 2007**




The
      following table sets forth our statements of operations for the three months
      ended March 31, 2008 and 2007 in U.S. dollars (unaudited):




**For
                  the three monthsended March 31,****2008**
              
              **2007**
              
              **Change
                  ($)**
              
              **Variance
                  (%)***(in
                  thousand, except share and per share amounts)***Sale
                  of Products**
              
              
              5,486
              
              
              4,327
              
              
              1,159
              
              
              26.79
              %**Cost
                  of Products Sold**
              
              
              2,099
              
              
              1,142
              
              
              957
              
              
              83.80
              %**Gross
                  Profit**
              
              
              3,387
              
              
              3,185
              
              
              202
              
              
              6.34
              %**Operating
                  Expenses:**Selling
                  expenses
              
              
              1,642
              
              
              1,603
              
              
              39
              
              
              2.43
              %General
                  and administrative expenses
              
              
              1,571
              
              
              974
              
              
              597
              
              
              61.29
              %Research
                  and development expenses
              
              
              119
              
              
              3
              
              
              116
              
              
              3,866.67
              %**Total
                  Operating Expenses**
              
              
              3,332
              
              
              2,579
              
              
              753
              
              
              29.20
              %**Income
                  from Operations**
              
              
              55
              
              
              606
              
              
              (551
              )
              
              -90.92
              %**Other
                  Income (Expenses):**Interest
                  income
              
              
              3
              
              
              6
              
              
              (3
              )
              
              -50
              %Income
                  from research and development activities
              
              
              263
              
              
              1
              
              
              262
              
              
              26,200
              %Interest
                  expense
              
              
              (256
              )
              
              (180
              )
              
              (76
              )
              
              42.22
              %Non-operating
                  expenses
              
              
              (73
              )
              
              -
              
              
              (73
              )
              
              -**Net
                  Other Expense**
              
              
              (63
              )
              
              (173
              )
              
              110
              
              
              63.58
              %**Income
                  Before Income Taxes**
              
              
              (8
              )
              
              434
              
              
              (442
              )
              
              -101.84
              %Benefit
                  from (provision for) income taxes
              
              
              (353
              )
              
              1,137
              
              
              (1,490
              )
              
              -131.05
              %Minority
                  interest in income of subsidiaries
              
              
              22
              
              
              (98
              )
              
              120
              
              
              122.45
              %**Net
                  (Loss) Income**
              
              
              (338
              )
              
              1,473
              
              
              (1,811
              )
              
              -122.95
              %Foreign
                  currency translation adjustments
              
              
              591
              
              
              86
              
              
              505
              
              
              587.21
              %**Comprehensive
                  Income** $
              
              
              253
              
              
              1,559
              
              
              (1,306
              )
              
              -83.77
              %**Earnings
                  Per Share**Basic $
              
              
              (0.02
              )
              
              0.08
              
              
              (0.10
              )
              
              -125
              %Diluted $
              
              
              (0.02
              )
              
              0.08
              
              
              (0.10
              )
              
              -125
              %**Weighted-Average
                  Shares Outstanding**Basic
              
              
              19,679,400
              
              
              19,119,400
              
              
              560,000
              
              
              2.93
              %Diluted
              
              
              19,679,400
              
              
              19,119,400
              
              
              560,000
              
              
              2.93
              %


15


***Sale
      of products:*** Sale
      of
      products for the three months ended March 31, 2008 was approximately $5.49
      million, an increase of approximately $1.16 million, or 26.8%, from
      approximately $4.33 million for the three months ended March 31, 2007. The
      increase was primarily due to us amending our sales policies in an attempt
      to
      streamline our sales teams, realign sales teams to specific hospitals as opposed
      to geographic regions and to integrate business channels. Due to these amended
      sales policies, we began to optimize our standardized and sustainable operation
      in the first quarter of 2008 and stimulate sales. In addition, we are developing
      distribution networks over a majority of the 29 provinces or regions in China,
      which we believe will improve our customer base and financial results in future
      periods.





***Cost
      of products sold:*** Our
      cost
      of products sold for the three months ended March 31, 2008 was approximately
      $2.10 million, an increase of approximately $0.96 million or 83.8%, from
      approximately $1.14 million for the three months ended March 31, 2007. The
      increase was primarily due to an increase in the sale of products of
      approximately 26.8% f or
      the
      three months ended March 31, 2008 as compared to the sale of products for the
      three months ended March 31, 2007, as well as an increase in the sale of common
      medicines as a percentage of revenue of approximately 23.2% for the three months
      ended March 31, 2008, as
      compared to the three months ended March 31, 2007 ,
      which
      higher sales volume was offset by the higher cost of raw materials that are
      used
      in a majority of our products, including our common medicines. In addition
      to
      the higher costs of raw materials for our products, the unit price of packaging
      materials as well as labor costs also increased significantly during the first
      quarter of 2008, which resulted in an increase of cost of products sold. In
      an attempt to counter these higher costs, we are developing new methods geared
      to decreasing the overall cost of production, as well as developing broader
      distribution networks as discussed above, which we believe will further
      stimulate sales and overcome the negative effects of higher production
      costs.




***Gross
      profit:*** Our
      gross
      profit for the three months ended March 31, 2008 was approximately $3.39 million
      as compared with approximately $3.19 million for the three months ended March
      31, 2007. Gross profit as a percentage of revenues was approximately 61.7%
      for
      the three months ended March 31, 2008, a decrease of approximately 11.9% from
      73.6% for the three months ended March 31, 2007. The decrease in gross margin
      was primarily due to the increase in cost of raw materials and packaging
      materials for our products, as well as higher labor costs, which led to an
      increase in cost of products sold. In an attempt to counter these higher costs,
      we are developing new methods geared to decreasing the overall cost of
      production, as well as developing broader distribution networks as discussed
      above, which we believe will further stimulate sales and overcome the negative
      effects of higher production costs.




***Selling
      expense:*** Selling
      expenses were approximately $1.64 million for the three months ended March
      31,
      2008, an increase of approximately $0.39 million, or 2.4%, from approximately
      $1.60 million for the three months ended March 31, 2007. As a percentage of
      total revenue, selling expense decreased by approximately 7.1% for the three
      months ended March 31, 2008 as compared to approximately 37% for the three
      months ended March 31, 2007. The primary reason for the increase in selling
      expenses was due to an increase in marketing and advertising of new products,
      particularly in our cosmetics line. The decrease in selling expenses as a
      percentage of total revenue was primarily due to an increase in the sale of
      common medicines as a percentage of revenue of approximately 23.2% for the
      three
      months ended March 31, 2008, as
      compared to the three months ended March 31, 2007, the selling expenses of
      which
      are lower than the rest of our products and carry no commissions to sales
      representatives and sales offices .
      We also
      amended our sale policies in an attempt to streamline our sales teams,
      re-aligning sales teams to specific hospitals as opposed to geographic
      regions.


16


***General
      and administrative expense:*** General
      and administrative expenses were approximately $1.57 million for the three
      months ended March 31, 2008, an increase of approximately $0.60 million, or
      61.3%, from approximately $0.97 million for the three months ended March 31,
      2007. As a percentage of total revenue, general and administrative expense
      increased by approximately 6.1% from approximately 22.5% for the three months
      ended March 31, 2007 to approximately 28.6% for the three months ended March
      31,
      2008. The increase in dollar amount and as a percentage of revenue was primarily
      a result of expenses related to our status as a public company with its
      securities traded on a U.S. national exchange. These fees and expenses are
      related to professional fees, including auditing, legal, investor relations,
      as
      well as AMEX fees and the cost of compliance with federal securities laws.




***Research
      and development expense:*** Research
      and development expense for the three months ended March 31, 2008 was $118,976
      as compared to $2,877 for the three months ended March 31, 2007. The increase
      was primarily due to our ongoing efforts to enhance our product development,
      which we expect to continue over the next two years. We expended funds to
      enhance our production technology and manufacturing capabilities.




***Net
      other expense:*** Net
      other
      expense, which includes interest income, income from research and development
      activities, interest expense and non-operating expenses, was $62,925 for the
      three months ended March 31, 2008 as compared to $172,503 for the three months
      ended March 31, 2007, a decrease of $109,578, or 63.5%. The decrease in net
      other expense was primarily due to the increase in income from research and
      development activities, which was offset by an increase in non-operating
      expenses and an increase in interest expense due to an increase in bank
      loans.




***Benefits
      from (provision for) income taxes:*** Provision
      for income taxes was $352,981 for the three months ended March 31, 2008 as
      compared to a benefit from income tax of approximately $1.14 million for the
      three months ended March 31, 2007. On March 15, 2007, one of our majority owned
      subsidiaries was granted relief from income taxes for the years ended December
      31, 2006 and 2005. As a result, the subsidiary recognized an aggregate of $1.1
      million as a benefit in the three months ended March 31, 2007. In addition,
      as
      of January 1, 2008, the income tax rate for our subsidiaries was decreased
      from
      33% to 25%. We have a deferred income tax asset that was adjusted for this
      tax
      rate decrease, resulting in an increase in the provision for the correction
      of
      deferred income taxes. These two factors were the principle causes of the change
      from an income tax benefit for the first quarter of 2007 to an income tax
      provision for the first quarter of 2008.




***Net
      (loss) income:*** We
      incurred a net loss of $338,341 for the three months ended March 31, 2008 as
      compared to a net income of approximately $1.47 million for the three months
      ended March 31, 2007, a decrease in net income of approximately $1.81 million,
      or approximately 123%. Considering the foreign currency translation adjustments
      of $591,003 and $85,735, for the three months ended March 31, 2008 and 2007,
      respectively, comprehensive income of $252,662 and approximately $1.56 million
      was realized for the three-months ended March 31, 2008 and 2007,
      respectively.




**Liquidity
      and Capital Resources**




***General
      -*** As
      of
      March 31, 2008, we had cash and cash equivalents of $1,005,333. We have
      historically financed our business operations through bank loans, in addition
      to
      equity offerings. As of March 31, 2008, we had borrowed from banks and other
      institutions and had amounts of approximately $4.13 million in short-term notes
      payable. As of March 31, 2008, we had also borrowed approximately $2.85 million
      in our current portion of long-term debt. For the three months ending March
      31,
      2008, the net decrease in cash and cash equivalents was approximately $1.8
      million. The gross proceeds that we received in June 2007 as a result of the
      sale of 460,000 shares of our common stock in an initial public offering were
      offset primarily by increases in receivables from related parties and employee
      advances. In addition, we received gross proceeds of $250,000 in October 2007
      from an exercise of warrants by a warrant holder to purchase 100,000 shares
      of
      our common stock at a per share exercise price of $2.50.


17


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




**March 31,**
              
              **December 31,****2008**
              
              **2007**Short-term
                  note payable to a bank, interest at 6.12%, matures March 2008,
                  secured by
                  land use rights
              
              $
              -
              
              $
              1,367,222Short-term
                  note payable to a municipality, interest at 1.8%, payable on demand,
                  unsecured
              
              
              71,202
              
              
              68,360Short-term
                  note payable to a finance bureau, interest at 4.5%, payable on
                  demand,
                  unsecured
              
              
              73,383
              
              
              70,455Short-term
                  note payable to a bank, interest at 6.39%, matures March 2008,
                  secured by
                  property
              
              
              3,560,138
              
              
              3,418,056Short-term
                  note payable to a government development zone interest at 2.43%,
                  matured
                  November 2007, secured by property
              
              
              427,217
              
              
              410,167Total
                  short-term notes payable
              
              $
              4,131,940
              
              $
              5,334,260
  **March 31,**
                
                **December 31,****2008**
                
                **2007**Long-term
                    note payable to a bank, interest at 7.72%, matures August 2009,
                    secured by
                    shareholder
                
                $
                8,544,331
                
                $
                6,836,111Long-term
                    note payable to a bank, interest at 6.57%, matures March 2010,
                    secured by
                    property
                
                
                2,848,110
                
                
                4,101,667Total
                    long-term debt
                
                
                11,392,441
                
                
                10,937,778Less
                    current maturities of long-term debt
                
                
                2,848,110
                
                
                4,101,667Long-term
                    notes payable, net of current portion
                
                $
                8,544,331
                
                $
                6,836,111Past
                    due notes payable
                
                $
                3,987,355
                
                $
                410,167




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




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




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




18




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




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




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




The
      following table provides summary information about net cash flow for the three
      months ended March 31, 2008 and 2007:




**Cash
      Flow**


**Three
      months ended March 31,**


**2008**
              
              **2007****(unaudited,
                  in thousands)**Net
                  cash provided by (used in) operating activities
              
              $
              (392
              )
              $
              (1,054
              )Net
                  cash provided by (used in) investing activities
              
              
              (70
              )
              
              (250
              )Net
                  cash provided by (used in) financing activities
              
              
              (1,409
              )
              
              (697
              )**Cash
                  and Cash Equivalents at End of Period**
              
              $
              1,005
              
              $
              1,719




**Operating
        Activities:** Net cash
        used in operating activities for the three months ended March 31, 2008 was
        $391,880, as compared to cash used in operating activities of approximately
        $1.05 million for the three months ended March 31, 2007. The decrease in
        cash
        used was primarily due to the following reasons: cash paid for taxes and
        related
        payables decreased, accounts receivable generated a cash inflow, and accounts
        payable increased, generating a cash inflow of $937,166.


**Investing
      Activities:** Net
      cash
      used by investing activities was $70,177 for the three months ended March 31,
      2008, as compared to net cash used in the amount of $250,097 for the three
      months ended March 31, 2007. The decrease in net cash used by investing
      activities was primarily due to receivables from related
      parties generating a cash flow.




**Financing
      Activities:** Net
      cash
      used by financing activities was approximately $1.41 million for the three
      months ended March 31, 2008 compared to net cash used in the amount of $696,624
      for the three months ended March 31, 2007. The increase in cash used was
      primarily due to a lack of proceeds from short and long-term loans while still
      making payments on short and long-term loans during the three months ended
      March
      31, 2008. In April 2008, we obtained additional loans to be used to retire
      existing loans that had matured.




As
      of
      March 31, 2008, our accounts receivable (less allowance for doubtful accounts
      of
      approximately $2.74 million) were approximately $8.53 million, a decrease of
      approximately $1.1 million, or 11.4% from accounts receivable of approximately
      $9.65 million as of December 31, 2007. The collection period typically runs
      from
      nine months to one year, considering th e relatively long collection period in our industry. In the third quarter of
      2007,
      we adopted more stringent credit policies designed to improve the quality and
      mix of our customer base, in addition to reducing the amount of uncollectible
      account receivables. Due to these stricter credit policies, we have begun to
      improve our customer base and reduce the amount of uncollectible account
      receivables for future periods.


19


Our
      company normally requires one to two months to receive products that we order.
      Inventory increased during the three month period ended March 31, 2008 by
      $357,069, an increase of 8.66% over inventory as of December 31, 2007. The
      increase in inventory was primari l y
      due to
      the increase in work in progress. We purchased a significant amount of Sanchi,
      which is our main raw material for products. In order to avoid a risk of
      spoilage by storing the Sanchi in our warehouse, our production department
      purified the Sanchi into powder for storage. As a result, inventory
      increased. **** Moreover,
      our payment cycle is considerably shorter than our receivable cycle, since
      we
      typically pay our suppliers all or a portion of the purchase price in advance
      and for some suppliers we must maintain a deposit for future orders. We require
      our customers to pay a certain percentage of the sales price as deposit before
      we ship products to them. The percentage varies from customer to customer.
      During the course of business, we reduce the deposit requirement for some
      customers with good credit. To the extent that we cannot satisfy our cash needs,
      whether from operations or from a financing source, our business would be
      impaired in that it may be difficult for us to obtain products which could,
      in
      turn, impair our ability to generate sales. We have implemented new policies
      aimed at improving collection of accounts receivable in the fu t ure,
      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, 2008, our advance payments
      to our suppliers totaled approximately $1.28 million. We are confident that
      our
      available funds and cash generated from operations will provide us with
      sufficient capital for a sustainable operation; however, we may require
      additional capital for acquisitions or for the operation of the combined
      companies. As of the date of this report, we have no material commitments for
      capital expenditures. We cannot assure that such funding will be
      available.




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




Current
      and long-term employee advances (net of allowances for doubtful accounts) were
      approximately $13.25 million at March 31, 2008 and $10.66 million as of December
      31, 2007, an increase of approximately $2.59 million or 24.3%. The increase
      was
      due to us advancing more money to sales representatives to encourage them to
      expand their markets and increase sales. As of March 31, 2008, the gross amount
      of employee advances wa s
      approximately $15.99
      million and as of December 31, 2007 it was approximately $13.26 million, an
      increase of approximately $2.73 million in that three-month period. As of March
      31, 2008, the gross amount of employee advances aged over one year was $1.63
      million. Additionally, beginning in September 2006, we began to employ more
      sales representatives and, as a result, we made more advances to sales
      representatives in an attempt to encourage and assist sales representatives
      to
      expand into new selling markets and gain new customers. Because of the increase
      in the balance of employee advances, we, in compliance with our established
      policy to reserve an allowance for specific percentages of our aged receivables,
      accrued a larger allowance for the increased employee advances in order to
      consistently apply our established allowance policy.


20


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




**Balance at**
              **beginning of**
              **period**
            
            **Additions**
            
            **Reductions**
            
            **Balance at**
              **end of period****For the year ended
                December 31, 2006**Gross
                amount of employee accounts
            
            $
            2,635,269
            
            $
            3,492,160
            
            $
            1,567,958
            
            $
            4,559,471Allowance
                for doubtful accounts
            
            
            658,401
            
            
            771,025
            
            
            -
            
            
            1,429,426Net
                amount
            
            $
            1,976,868
            
            $
            2,721,135
            
            $
            1,567,958
            
            $
            3,130,045**For
                the year ended December 31, 2007**Gross
                amount of employee advances
            
            $
            4,559,471
            
            $
            13,338,719
            
            $
            4,635,840
            
            $
            13,262,350Allowance
                for doubtful accounts
            
            
            1,429,426
            
            
            1,171,467
            
            
            -
            
            
            2,600,893Net
                Amount
            
            $
            3,130,045
            
            $
            12,167,252
            
            $
            4,635,840
            
            $
            10,661,457**For
                the three months ended March 31, 2008**Gross
                amount of employee accounts
            
            $
            13,262,350
            
            $
            4,270,917
            
            $
            1,544,284
            
            $
            15,988,983Allowance
                for doubtful accounts
            
            
            2,600,893
            
            
            136,473
            
            
            -
            
            
            2,737,366Net
                Amount
            
            $
            10,661,457
            
            $
            4,134,444
            
            $
            1,544,284
            
            $
            13,251,617





**Off-Balance
      Sheet Arrangements**




None.




**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




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




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




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


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


·
            our
                ability to develop and market new
                products;


·
            our
                increasing employee advances;


·
            our
                ability to establish and maintain a strong
                brand;


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


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


·
            protection
                of our intellectual property
                rights;


·
            market
                acceptance of our products;


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


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


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


·
            development
                of a public trading market for our
                securities;


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


·
            other
                factors referenced in this quarterly report, including, without
                limitation, under the section entitled “Management’s Discussion and
                Analysis of Financial Condition and Results of Operations”;
                and


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





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




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




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




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




Not
      Applicable.




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




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




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


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





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





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




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




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







**PART
      II - OTHER INFORMATION**




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




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





**ITEM
      1A. RISK FACTORS**




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




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




None.


23


**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**




None.




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




None.




**ITEM
      5. OTHER INFORMATION**




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




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




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




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




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





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


24


**SIGNATURES**




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




**CHINA
                SHENGHUO PHARMACEUTICAL HOLDINGS, INC.**(Registrant)May
                20, 2008
            By:
            /s/
                Gui Hua LanGui
                Hua LanChief
                Executive Officer and Chairman of the
                Board


25