UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





Form
      10-QSB





(Mark
      One)





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      quarter ended March 31, 2007





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      transition period from ________ to __________








Commission
      File Number: 001-32581







**LOTUS
      PHARMACEUTICALS, INC.**


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





NEVADA
            20-0507918(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer I.D. No.)





Boca
      Corporate Plaza, 7900 Glades Road. Suite 420


Boca
      Raton, FL 33434


(Address
      of principal executive offices)





(877)
      801-0344


(Issuer's
      telephone number, including area code)





N/A


(Former
      name or former address, if changed since last report)





Check
      whether the Issuer (1) has 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 [
      ]





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





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 41,280,000 shares at May 18,
      2007





Transitional
      Small Business Disclosure Format (Check one): Yes [ ] No [x]











LOTUS
      PHARMACEUTICALS, INC. AND SUBSIDIARIES


FORM
      10-QSB


QUARTERLY
      PERIOD ENDED MARCH 31, 2007





INDEX




PagePART
                  I - FINANCIAL INFORMATIONItem
                  1.
              Consolidated
                  Financial StatementsConsolidated
                  Balance Sheet (Unaudited) As of March 31, 2007
              3Consolidated
                  Statements of Operations (Unaudited)
              4For
                  the Three Months Ended March 31, 2007 and 2006Consolidated
                  Statements of Cash Flows (Unaudited)
              5For
                  the Three Months Ended March 31, 2007 and 2006Notes
                  to Unaudited Consolidated Financial Statements
              6Item
                  2.
              Management's
                  Discussion and Analysis or Plan of Operation
              19Item
                  3.
              Controls
                  and Procedures
              29PART
                  II - OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings.
              30Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              30Item
                  3.
              Default
                  Upon Senior Securities
              30Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              30Item
                  5.
              Other
                  Information.
              32Item
                  6.
              Exhibits
              32







**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING INFORMATION**





Certain
      statements in this quarterly report contain or may contain forward-looking
      statements that are subject to known and unknown risks, uncertainties and other
      factors which may cause actual results, performance or achievements to be
      materially different from any future results, performance or achievements
      expressed or implied by such forward-looking statements. These forward-looking
      statements were based on various factors and were derived utilizing numerous
      assumptions and other factors that could cause our actual results to differ
      materially from those in the forward-looking statements. These factors include,
      but are not limited to, our ability to increase our revenues, develop our
      brands, implement our strategic initiatives, economic, political and market
      conditions and fluctuations, government and industry regulation, U.S. and global
      competition, and other factors. Most of these factors are difficult to predict
      accurately and are generally beyond our control.





You
      should consider the areas of risk described in connection with any
      forward-looking statements that may be made in our annual report as filed with
      the SEC. Readers are cautioned not to place undue reliance on these
      forward-looking statements and readers should carefully review this quarterly
      report in its entirety, Except for our ongoing obligations to disclose material
      information under the Federal securities laws, we undertake no obligation to
      release publicly any revisions to any forward-looking statements, to report
      events or to report the occurrence of unanticipated events. These
      forward-looking statements speak only as of the date of this quartlery report,
      and you should not rely on these statements without also considering the risks
      and uncertainties associated with these statements and our business.





When
      used
      in this quarterly report, the terms the "Company," "we," and "us" refers to
      Lotus Pharmaceuticals, Inc., a Nevada corporation,and our wholly-owned
      subsidiary Lotus Pharmaceutical International, Inc., a Nevada
      Corporation.




-
          2 -


LOTUS
                  PHARMACEUTICALS, INC. AND SUBSIDIARIESCONSOLIDATED
                  BALANCE SHEETMarch
                  31, 2007(Unaudited)ASSETS
  CURRENT
                  ASSETS:Cash
              
              $
              4,456,059Accounts
                  receivable, net of allowance for doubtful accounts of
                  $544,967and
                  sales returns of $2,320,133
              
              
              7,134,119Inventories,
                  net of reserve for obsolete inventory of $517,984
              
              
              4,328,874Prepaid
                  expenses
              
              
              350,392Deferred
                  debt costs
              
              
              205,379Total
                  Current Assets
              
              
              16,474,823PROPERTY
                  AND EQUIPMENT - net of accumulated depreciation
              
              
              6,150,498OTHER
                  ASSETSIntangible
                  assets, net of accumulated amortization
              
              
              188,268Due
                  from related party
              
              
              1,584,104Total
                  Assets
              
              $
              24,397,693LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Convertible
                  debt, net of debt discount of $1,012,049
              
              $
              1,987,951Accounts
                  payable and accrued expenses
              
              
              745,269VAT
                  and service taxes payable
              
              
              2,496,846Advances
                  from customers
              
              
              88,696Unearned
                  revenue
              
              
              688,080Due
                  to related parties
              
              
              529,449Total
                  Current Liabilities
              
              
              6,536,291LONG-TERM
                  LIABILITIES:Notes
                  payable - related parties
              
              
              4,073,057Total
                  Liabilities
              
              
              10,609,348SHAREHOLDERS'
                  EQUITY:Preferred
                  stock ($.001 par value; 10,000,000 shares authorized;No
                  shares issued and outstanding)
              
              
              -Common
                  stock ($.001 par value; 200,000,000 shares authorized;41,280,000
                  shares issued and outstanding)
              
              
              41,280Additional
                  paid-in capital
              
              
              7,071,950Retained
                  earnings
              
              
              6,051,879Other
                  comprehensive gain - cumulative foreign currency translation
                  adjustment
              
              
              623,236Total
                  Shareholders' Equity
              
              
              13,788,345Total
                  Liabilities and Shareholders' Equity
              
              $
              24,397,693
 See
          notes
          to unaudited consolidated financial statements
  -
              3 -


LOTUS
                  PHARMACEUTICALS, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF OPERATIONS
  For
                  the Three Months EndedMarch
                  31,2007
              
              2006(Unaudited)
              
              (Unaudited)NET
                  REVENUES:Wholesale
              
              $
              5,049,121
              
              $
              4,298,188Retail
              
              
              501,242
              
              
              854,829Other
                  revenues
              
              
              2,739,172
              
              
              1,388,078Total
                  Revenues
              
              
              8,289,535
              
              
              6,541,095COST
                  OF SALES
              
              
              5,662,916
              
              
              4,399,701GROSS
                  PROFIT
              
              
              2,626,619
              
              
              2,141,394OPERATING
                  EXPENSES:Selling
                  expenses
              
              
              558,724
              
              
              516,895Research
                  and development
              
              
              91,822
              
              
              75,028General
                  and administrative
              
              
              846,294
              
              
              393,487Total
                  Operating Expenses
              
              
              1,496,840
              
              
              985,410INCOME
                  FROM OPERATIONS
              
              
              1,129,779
              
              
              1,155,984OTHER
                  INCOME (EXPENSE):Debt
                  issuance costs
              
              
              (29,340
              )
              
              -Registration
                  rights penalty
              
              
              (54,000
              )
              
              -Interest
                  expense
              
              
              (252,567
              )
              
              (102,424
              )Total
                  Other Income (Expense)
              
              
              (335,907
              )
              
              (102,424
              )INCOME
                  BEFORE INCOME TAXES
              
              
              793,872
              
              
              1,053,560INCOME
                  TAXES
              
              
              -
              
              
              -NET
                  INCOME
              
              $
              793,872
              
              $
              1,053,560COMPREHENSIVE
                  INCOME:NET
                  INCOME
              
              $
              793,872
              
              $
              1,053,560OTHER
                  COMPREHENSIVE INCOME:Unrealized
                  foreign currency translation gain
              
              
              124,132
              
              
              34,564COMPREHENSIVE
                  INCOME
              
              $
              918,004
              
              $
              1,088,124NET
                  INCOME PER COMMON SHARE:Basic
              
              $
              0.02
              
              $
              0.03Diluted
              
              $
              0.02
              
              $
              0.03WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING:Basic
              
              
              41,280,000
              
              
              40,041,600Diluted
              
              
              44,280,000
              
              
              40,041,600
  See
          notes
          to unaudited consolidated financial statements


-
          4 -


LOTUS
                PHARMACEUTICALS, INC. AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF CASH FLOWS




For
                the Three Months EndedMarch
                31,2007
            
            2006(Unaudited)
            
            (Unaudited)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            793,872
            
            $
            1,053,560Adjustments
                to reconcile net income from operations to net cashprovided
                by operating activities:Depreciation
                and amortization
            
            
            110,158
            
            
            143,714Amortization
                of deferred debt issuance costs
            
            
            29,340
            
            
            -Amortization
                of debt discount
            
            
            144,578
            
            
            -Increase
                in allowance for doubtful accounts and sales returns
            
            
            -
            
            
            20,230Changes
                in assets and liabilities:Accounts
                receivable
            
            
            214,114
            
            
            (674,994
            )Inventories
            
            
            (1,159,619
            )
            
            (1,017,565
            )Prepaid
                and other current assets
            
            
            (98,927
            )
            
            3,423Other
                assets
            
            
            -
            
            
            -Accounts
                payable and accrued expenses
            
            
            35,097
            
            
            169,711VAT
                and service taxes payable
            
            
            427,048
            
            
            18,140Unearned
                revenue
            
            
            256,493
            
            
            405,736Advances
                from customers
            
            
            (144,365
            )
            
            (19,184
            )NET
                CASH PROVIDED BY OPERATING ACTIVITIES
            
            
            607,789
            
            
            102,771CASH
                FLOWS FROM INVESTING ACTIVITIES:Decrease
                in due from related parties
            
            
            259,575
            
            
            250,411Purchase
                of property and equipment
            
            
            (366,218
            )
            
            -NET
                CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
            
            
            (106,643
            )
            
            250,411CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                proceeds from convertible debt
            
            
            2,950,000
            
            
            -Payment
                of debt issaunce costs
            
            
            (231,526
            )
            
            -Proceeds
                from related party advances
            
            
            2,866
            
            
            -Repayments
                of related party advances
            
            
            (174,839
            )
            
            (168,667
            )Repayments
                of notes payable - related parties
            
            
            (700,866
            )
            
            -NET
                CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
            
            
            1,845,635
            
            
            (168,667
            )EFFECT
                OF EXCHANGE RATE ON CASH
            
            
            20,122
            
            
            1,638NET
                INCREASE IN CASH
            
            
            2,366,903
            
            
            186,153CASH
                - beginning of year
            
            
            2,089,156
            
            
            160,934CASH
                - end of period
            
            $
            4,456,059
            
            $
            347,087SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Cash
                paid for:Interest
            
            $
            55,489
            
            $
            102,424Income
                taxes
            
            $
            -
            
            $
            -


See
        notes
        to unaudited consolidated financial statements.
  -
            5 -




LOTUS
      PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
      TO UNAUDITED FINANCIAL STATEMENTS


MARCH
      31, 2007





NOTE
      1 - ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Organization





Lotus
      Pharmaceuticals, Inc. (“Lotus” or the “Company”), formerly S.E. Asia Trading
      Company, Inc. (“SEAA”), was incorporated on January 28, 2004 under the laws of
      the State of Nevada. SEAA operated as a retailer of jewelry, framed art and
      home
      accessories. In December 2006, SEAA changed its name to Lotus Pharmaceuticals,
      Inc.





On
      September 6, 2006, the Company entered into a definitive Share Exchange
      Agreement with Lotus Pharmaceutical International, Inc. (“Lotus International”),
      whereby the Company acquired all of the outstanding common stock of Lotus
      International in exchange for newly-issued stock of the Company to Lotus
      International’s shareholders.  On September 28, 2006 (the closing date),
      Lotus International became a wholly-owned subsidiary of the Company and
      Lotus International’s shareholders became the owners of the majority of the
      Company’s voting stock. The acquisition of Lotus International by the
      Company was accounted for as a reverse merger because on a post-merger basis,
      the former shareholders of Lotus International hold a majority of the
      outstanding common stock of the Company on a voting and fully-diluted basis.
      As
      a result, Lotus International is deemed to be the acquirer for accounting
      purposes.





Lotus
      International was incorporated under the laws the State of Nevada on August
      28, 2006 to develop and market pharmaceutical products in the People's Republic
      of China (“PRC” or “China”). PRC law currently has limits on foreign ownership
      of certain companies. To comply with these foreign ownership restrictions,
      Lotus
      operates its pharmaceutical business in China through Beijing Liang Fang
      Pharmaceutical Co., Ltd. (“Liang Fang”) and an affiliate of Liang Fang, Beijing
      En Zhe Jia Shi Pharmaceutical Co., Ltd. (“En Zhe Jia”), both of which are
      pharmaceutical companies headquartered in the PRC and organized under the laws
      of the PRC (hereinafter, referred to together as “Lotus East”). Lotus
      International has contractual arrangements with Lotus East and its shareholders
      pursuant to which Lotus International will provide technology consulting and
      other general business operation services to Lotus East. Through these
      contractual arrangements, Lotus International also has the ability to
      substantially influence Lotus East’s daily operations and financial affairs,
      appoint its senior executives and approve all matters requiring shareholder
      approval. As a result of these contractual arrangements, which enable Lotus
      International to control Lotus East, Lotus International is considered
      the primary beneficiary of Lotus East.




On
      September 6, 2006, Lotus International entered into the following
      contractual arrangements:




Consulting
      Services Agreement .
      Pursuant to the exclusive consulting services agreements between Lotus and
      Lotus
      East, Lotus has the exclusive right to provide to Lotus East general
      pharmaceutical business operations services as well as consulting services
      related to the technological research and development of pharmaceutical products
      as well as general business operation advice and strategic planning (the
“Services”). Under this agreement, Lotus owns the intellectual property rights
      developed or discovered through research and development, in the course of
      providing the Services, or derived from the provision of the Services. Lotus
      East pays a quarterly consulting service fees in Renminbi (“RMB”) to Lotus that
      is equal to Lotus East’s revenue, as defined, for such quarter.





Operating
      Agreement .
      Pursuant to the operating agreement among Lotus, Lotus East and the shareholders
      of Lotus East, (collectively “Lotus East’s Shareholders”), Lotus provides
      guidance and instructions on Lotus East’s daily operations, financial management
      and employment issues. The shareholders of Lotus East must designate the
      candidates recommended by Lotus as their representatives on Lotus East’s Board
      of Directors. Lotus has the right to appoint senior executives of Lotus East.
      In
      addition, Lotus agreed to guarantee Lotus East’s performance under any
      agreements or arrangements relating to Lotus East’s business arrangements with
      any third party. Lotus East, in return, agreed to pledge its accounts receivable
      and all of its assets to Lotus. Moreover, Lotus East agreed that without the
      prior consent of Lotus, Lotus East would not engage in any transaction that
      could materially affect the assets, liabilities, rights or operations of Lotus
      East, including, without limitation, incurrence or assumption of any
      indebtedness, sale or purchase of any assets or rights, incurrence of any
      encumbrance on any of its assets or intellectual property rights in favor of
      a
      third party or transfer of any agreements relating to its business operation
      to
      any third party. The term of this agreement is ten (10) years from September
      6,
      2006 and may be extended only upon Lotus’s written confirmation prior to the
      expiration of the this agreement, with the extended term to be mutually agreed
      upon by the parties.





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            6 -




LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      1 - ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Organization
      (continued)




Equity
      Pledge Agreement *.* Under
      the
      equity pledge agreement between the shareholders of Lotus East and Lotus, the
      shareholders of Lotus East pledged all of their equity interests in Lotus East
      to Lotus to guarantee Lotus East’s performance of its obligations under the
      technology consulting agreement. If Lotus East or Lotus East’s Shareholders
      breaches its respective contractual obligations, Lotus, as pledgee, will be
      entitled to certain rights, including the right to sell the pledged equity
      interests. Lotus East’s Shareholders also agreed that upon occurrence of any
      event of default, Lotus shall be granted an exclusive, irrevocable power of
      attorney to take actions in the place and stead of Lotus East’s
      Shareholders to carry out the security provisions of the equity pledge agreement
      and take any action and execute any instrument that Lotus may deem necessary
      or
      advisable to accomplish the purposes of the equity pledge agreement. The
      shareholders of Lotus East agreed not to dispose of the pledged equity interests
      or take any actions that would prejudice Lotus’ interest. The equity pledge
      agreement will expire two (2) years after Lotus East’s obligations under the
      exclusive consulting services agreements have been fulfilled.





Option
      Agreement *.*  ** Under
      the
      option agreement between the shareholders of Lotus East and Lotus, the
      shareholders of Lotus East irrevocably granted Lotus or its designated person
      an
      exclusive option to purchase, to the extent permitted under PRC law, all or
      part
      of the equity interests in Lotus East for the cost of the initial contributions
      to the registered capital or the minimum amount of consideration permitted
      by
      applicable PRC law. Lotus or its designated person has sole discretion to decide
      when to exercise the option, whether in part or in full. The term of this
      agreement is ten (10) years from September 6, 2006 and may be extended prior
      to
      its expiration by written agreement of the parties.




Proxy
      Agreement *.* Pursuant
      to the proxy agreement among Lotus and Lotus East’s Shareholders, Lotus East’s
      Shareholders agreed to irrevocably grant a person to be designated by Lotus
      with
      the right to exercise Lotus East’s Shareholders’ voting rights and their other
      rights, including the attendance at and the voting of Lotus East’s Shareholders’
shares at the shareholders’ meetings (or by written consent in lieu of such
      meetings) in accordance with applicable laws and its Article of Association,
      including but not limited to the rights to sell or transfer all or any of his
      equity interests of Lotus East, and appoint and vote for the directors and
      Chairman as the authorized representative of the shareholders of Lotus East.
      The
      term of this Proxy Agreement is ten (10) years from September 6, 2006 and may
      be
      extended prior to its expiration by written agreement of the parties.





Liang
      Fang is a Chinese limited liability company and was formed under laws of the
      People’s Republic of China on June 21, 2000. Liang Fang is engaged in the
      production, trade and retailing of pharmaceuticals. Further, Liang Fang is
      focused on development of innovative medicines and investing strategic growth
      to
      address various medical needs for patients worldwide. Liang Fang’s operations
      are based in Beijing, China.





Liang
      Fang owns and operates several drug stores throughout Beijing, China. These
      drugstores sell Western and traditional Chinese medicines, and medical treatment
      accessories.





Liang
      Fang’s affiliate, En Zhe Jia is a Chinese limited liability company and was
      formed under laws of the People’s Republic of China on September 17, 1999. En
      Zhe Jia is the sole manufacturer for Liang Fang and maintains facilities for
      the
      production of medicines, patented Chinese medicine, as well as the research
      and
      production of other new medicines.





As
      a
      result of the management agreements between Lotus International and Lotus East,
      Lotus East was deemed to be the acquirer of Lotus International for
      accounting purposes. Accordingly, the financial statement data presented are
      those of Lotus East for all periods prior to the Company’s acquisition of Lotus
      International on September 28, 2006, and the financial statements of the
      consolidated companies from the acquisition date forward.





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            7 -


LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      1 - ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Basis
      of presentation





The
      financial statements are prepared in accordance with generally accepted
      accounting principles in the United States of America ("US GAAP"). The
      consolidated statements include the accounts of Lotus Pharmaceuticals, Inc.
      and
      its wholly-owned subsidiary, Lotus and companies under its control (Liang Fang
      and En Zhe Jia). All significant inter-company balances and transactions have
      been eliminated.





The
      accompanying unaudited consolidated financial statements have been prepared
      pursuant to the rules and regulations of the Securities and Exchange Commission
      (“SEC”). The accompanying consolidated financial statements for the interim
      periods are unaudited and reflect all adjustments (consisting only of normal
      recurring adjustments) which are, in the opinion of management, necessary for
      a
      fair presentation of the financial position and operating results for the
      periods presented. These consolidated financial statements should be read in
      conjunction with the financial statements for the year ended December 31, 2006
      and notes thereto contained on Form 10-KSB of the Company as filed with the
      Securities and Exchange Commission. The results of operations for the three
      months ended March 31, 2007 are not necessarily indicative of the results for
      the full fiscal year ending December 31, 2007.




Use
      of
      estimates





The
      preparation of financial statements in conformity with US GAAP requires
      management to make estimates and assumptions that affect certain reported
      amounts and disclosures. Accordingly, actual results could differ from those
      estimates. Significant estimates in 2007 and 2006 include the allowance for
      doubtful accounts and sales returns, the allowance for obsolete inventory,
      the
      useful life of property and equipment and intangible assets, and accruals for
      taxes due.





Fair
      value of financial instruments





The
      carrying amounts reported in the balance sheet for cash, accounts receivable,
      accounts payable and accrued expenses, customer advances, and amounts due from
      related parties approximate their fair market value based on the short-term
      maturity of these instruments.




Cash
      and cash equivalents





For
      purposes of the combined statements of cash flows, the Company considers all
      highly liquid instruments purchased with a maturity of three months or less
      and
      money market accounts to be cash equivalents.





Accounts
      receivable





The
      Company has a policy of reserving for uncollectible accounts based on its best
      estimate of the amount of probable credit losses in its existing accounts
      receivable. The Company periodically reviews its accounts receivable to
      determine whether an allowance is necessary based on an analysis of past due
      accounts and other factors that may indicate that the realization of an account
      may be in doubt. Account balances deemed to be uncollectible are charged to
      the
      allowance after all means of collection have been exhausted and the potential
      for recovery is considered remote. At March 31, 2007, the Company has
      established, based on a review of its outstanding balances, an allowance for
      doubtful accounts in the amount of $544,967.





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            8 -




LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      1 - ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Sales
      Returns





The
      Company accounts for sales
      returns in accordance with Statements of Financial Accounting Standards
      (SFAS) No. 48,*Revenue
      Recognition When Right of Return Exists*,
      by
      establishing an accrual in an amount equal to its estimate of sales recorded
      for
      which the related products are expected to be returned. The Company determines
      the estimate of the sales return accrual primarily based on historical
      experience regarding sales
      return, but also by considering other factors that could impact sales
      returns. These factors include levels of inventory in the distribution channel,
      estimated shelf life, product discontinuances, price changes of competitive
      products, introductions of generic products and introductions of competitive
      new
      products. The allowance for product returns at March 31, 2007 was
      $2,320,133.





Inventories





Inventories,
      consisting of raw materials and finished goods related to the Company’s products
      are stated at the lower of cost or market utilizing the weighted average method.
      An allowance is established when management determines that certain inventories
      may not be saleable. If inventory costs exceed expected market value due to
      obsolescence or quantities in excess of expected demand, the Company will record
      reserves for the difference between the cost and the market value. These
      reserves are recorded based on estimates. The Company recorded an inventory
      reserve of $234,038 for the three months ended March 31, 2007, which as been
      reflects in cost of sales. At March 31, 2007, inventory reserve was
      $517,984.





Property
      and equipment





Property
      and equipment are carried at cost and are depreciated on a straight-line basis
      over the estimated useful lives of the assets. The cost of repairs and
      maintenance is expensed as incurred; major replacements and improvements are
      capitalized. When assets are retired or disposed of, the cost and accumulated
      depreciation are removed from the accounts, and any resulting gains or losses
      are included in income in the year of disposition. In accordance with Statement
      of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment
      or Disposal of Long-Lived Assets", the Company examines the possibility of
      decreases in the value of fixed assets when events or changes in circumstances
      reflect the fact that their recorded value may not be recoverable.





Impairment
      of long-lived assets





In
      accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
      "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company
      periodically reviews its long-lived assets for impairment whenever events or
      changes in circumstances indicate that the carrying amount of the assets may
      not
      be fully recoverable. The Company recognizes an impairment loss when the sum
      of
      expected undiscounted future cash flows is less than the carrying amount of
      the
      asset. The amount of impairment is measured as the difference between the
      asset’s estimated fair value and its book value. The Company did not consider it
      necessary to record any impairment charges during the three months ended March
      31, 2007 and 2006.





Advances
      from customers





Advances
      from customers at March 31, 2007 of $88,696 consist of prepayments from
      third party customers to the Company for merchandise that had not yet
      shipped. The Company will recognize the deposits as revenue as customers take
      delivery of the goods, in compliance with its revenue recognition
      policy.




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            9 -




LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      1 - ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Income
      taxes





The
      Company is governed by the Income Tax Law of the People’s Republic of China and
      the United States. Income taxes are accounted for under Statement of Financial
      Accounting Standards No. 109, "Accounting for Income Taxes," which is an asset
      and liability approach that requires the recognition of deferred tax assets
      and
      liabilities for the expected future tax consequences of events that have been
      recognized in the Company's financial statements or tax returns.





Earnings
      per common share





Basic
      earnings per share is computed by dividing net earnings by the weighted average
      number of shares of common stock outstanding during the period. Diluted income
      per share is computed by dividing net income by the weighted average number
      of
      shares of common stock, common stock equivalents and potentially dilutive
      securities outstanding during each period. Potentially dilutive common shares
      consist of the common shares issuable upon the conversion of convertible debt
      (using the if-converted method). The following table presents a reconciliation
      of basic and diluted earnings per share:





For
                the Three Months
              Ended
                March 31,2007
            
            
            2006Net
                income
            
            $
            793,872
            
            $
            1,053,560Weighted
                average shares outstanding - basic
            
            
            41,280,000
            
            
            40,041,600EPS
                - basic
            
            $
            0.02
            
            $
            0.03Net
                income
            
            $
            793,872
            
            $
            1,053,560Weighted
                average shares outstanding - basic
            
            
            41,280,000
            
            
            40,041,600Effect
                of dilutive securitiesUnexercised
                options and warrants
            
            
            -
            
            
            -Convertible
                debentures
            
            
            3,000,000
            
            
            -Weighted
                average shares outstanding- diluted
            
            
            44,280,000
            
            
            40,041,600EPS
                - diluted
            
            $
            0.02
            
            $
            0.03





Revenue
      recognition





*Product
      sales*




Product
      sales are generally recognized when title to the product has transferred to
      customers in accordance with the terms of the sale. The Company recognizes
      revenue in accordance with the Securities and Exchange Commission’s (SEC) Staff
      Accounting Bulletin (SAB) No. 101, “ *Revenue
      Recognition in Financial Statements* ”
as
      amended by SAB No. 104 (together, “SAB 104”), and Statement of
      Financial Accounting Standards (SFAS) No. 48 “ *Revenue
      Recognition When Right of Return Exists.* ”
      SAB 104 states that revenue should not be recognized until it is
      realized or realizable and earned. In general, the Company records revenue
      when
      persuasive evidence of an arrangement exists, services have been rendered or
      product delivery has occurred, the sales price to the customer is fixed or
      determinable, and collectibility is reasonably assured.





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            10 -




LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      1 - ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Revenue
      recognition (continued)





SFAS No. 48 states
      that revenue from sales transactions where the buyer has the right to return
      the
      product shall be recognized at the time of sale only if the seller’s price to
      the buyer is substantially fixed or determinable at the date of sale, the buyer
      has paid the seller, or the buyer is obligated to pay the seller and the
      obligation is not contingent on resale of the product, the buyer’s obligation to
      the seller would not be changed in the event of theft or physical destruction
      or
      damage of the product, the buyer acquiring the product for resale has economic
      substance apart from that provided by the seller, the seller does not have
      significant obligations for future performance to directly bring about resale
      of
      the product by the buyer, and the amount of future returns can be
      reasonably estimated.





The
      Company’s net product revenues represent total product revenues less allowances
      for returns.





*Allowance
      for returns* —
      In general, for wholesale sales, the Company provides credit for product returns
      that are returned six months prior to and up to six months after the product
      expiration date. Upon sale, the Company estimates an allowance for future
      product returns. The Company provides additional reserves for contemporaneous
      events that were not known and knowable at the time of shipment. In order to
      reasonably estimate future returns, the Company analyzed both quantitative
      and
      qualitative information including, but not limited to, actual return rates,
      the
      level of product manufactured by the Company, the level of product in the
      distribution channel, expected shelf life of the product, current and projected
      product demand, the introduction of new or generic products that may erode
      current demand, and general economic and industry wide indicators. The Company
      also utilizes the guidance provided in SFAS No. 48 and SAB 104 in
      establishing its return estimates. The allowance for product returns at March
      31, 2007 was $2,320,133. This allowance has been netted with accounts receivable
      on the Company’s balance sheet.





*Other
      revenues*




Other
      revenues consist of (i) leasing revenues received for the lease of retail space
      to various retail merchants; (ii) advertising revenues from the lease of counter
      space at the Company’s retail locations; (iii) leasing revenue from the lease of
      retail space to licensed medical practitioners; (iv) revenues received by the
      Company for research and development projects and lab testing jobs conducted
      on
      behalf of third party companies, and; (v) revenues received for performing
      third
      party contract manufacturing projects. In connection with third-party
      manufacturing, the customer supplies the raw materials and we are paid a fee
      for
      manufacturing their product and revenue is recognized at the completion of
      the
      manufacturing job. The Company recognizes revenues from leasing of space and
      advertising revenues as earned from contracting third parties. The Company
      recognizes revenues upon performance of a any research or lab testing jobs.
      Revenues received in advance are reflected as deferred revenue on the
      accompanying balance sheet. Additionally, the Company receives income from
      the
      sale of developed drug formulas. Income from the sale of drug formulas are
      recognized upon performance of all of the Company’s obligations under the
      respective sales contract and are included in other income on the accompanying
      consolidated statement of operations.





Concentrations
      of credit risk




Financial
      instruments which potentially subject the Company to concentrations of credit
      risk consist principally of cash and trade accounts receivable. Substantially
      all of the Company’s cash is maintained with state-owned banks within the
      People’s Republic of China of which no deposits are covered by insurance. The
      Company has not experienced any losses in such accounts and believes it is
      not
      exposed to any risks on its cash in bank accounts. A significant portion of
      the
      Company's sales are credit sales which are primarily to customers whose ability
      to pay is dependent upon the industry economics prevailing in these areas;
      however, concentrations of credit risk with respect to trade accounts
      receivables is limited due to generally short payment terms. The Company also
      performs ongoing credit evaluations of its customers to help further reduce
      credit risk.







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            11 -




LOTUS
      PHARMACEUTICALS, INC. AND SUBSIDIARIES


NOTES
      TO UNAUDITED FINANCIAL STATEMENTS


MARCH
      31, 2007





NOTE
      1 - ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Shipping
      costs





Shipping
      costs are included in cost of sales and totaled $240,425 and $127,118 for the
      three months ended March 31, 2007 and 2006, respectively.





Advertising





Advertising
      is expensed as incurred. Advertising expenses amounted to $130,454 and $14,915
      for the three months ended March 31, 2007 and 2006, respectively.





Foreign
      currency translation





The
      reporting currency is the U.S. dollar. The functional currency of the Company
      is
      the local currency, the Chinese Renminbi (“RMB”). The financial statements of
      the Company are translated into United States dollars using year-end rates
      of
      exchange for assets and liabilities, and average rates of exchange for the
      period for revenues, costs, and expenses. Translation adjustments resulting
      from
      the process of translating the local currency financial statements into U.S.
      dollars are included in determining comprehensive income. The cumulative
      translation adjustment and effect of exchange rate changes on cash at March
      31,
      2007 was $20,122.





Research
      and development





Research
      and development costs are expensed as incurred. These costs primarily consist
      of
      cost of material used and salaries paid for the development of the Company’s
      products and fees paid to third parties. Research and development costs for
      the
      three months ended March 31, 2007 and 2006 were approximately $91,800 and
      $75,000, respectively, and are included in operating expenses.





Accumulated
      other comprehensive income




Accumulated
      other comprehensive income consisted of unrealized gains on currency translation
      adjustments from the translation of financial statements from Chinese RMB to
      US
      dollars. For the three months ended March 31, 2007 and 2006, accumulated other
      comprehensive income was $918,004 and $1,088,124, respectively.





Recent
      Accounting Pronouncements





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48 (“FIN 48”), *“Accounting
      for Uncertainty in Income Taxes,”* an
      interpretation of FASB Statement No. 109 (“SFAS 109”). The
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an entity’s financial statements in accordance with SFAS 109, *“Accounting
      for Income Taxes.”* It
      prescribes a recognition threshold and measurement attribute for financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken on a tax return. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. The
      adoption of this interpretation did not have an impact on the Company’s
      consolidated financial statements.




In
      September 2006, the FASB issued SFAS No. 157, *“Fair
      Value Measurements”* (SFAS 157), which provides guidance for how companies should measure fair
      value when required to use a fair value measurement for recognition or
      disclosure purposes under generally accepted accounting principle (GAAP).
      SFAS 157 is effective for fiscal years beginning after November 15,
      2007. The Company is currently assessing the impact, if any, the adoption of
      SFAS 157 will have on its financial statements.





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            12 -




LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      1 - ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





In
      December 2006, FASB Staff Position No. EITF 00-19-2, *“Accounting
      for Registration Payment Arrangements,”* was
      issued. The FSP specifies that the contingent obligation to make future payments
      or otherwise transfer consideration under a registration payment arrangement,
      whether issued as a separate agreement or included as a provision of a financial
      instrument or other agreement, should be separately recognized and measured
      in
      accordance with SFAS No. 5, *“Accounting
      for Contingencies.”* The
      Company believes that its current accounting is consistent with the FSP.





In
      February 2007, the FASB issued SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities, Including
      an
      Amendment of FASB Statement No. 115”* ,
      under
      which entities will now be permitted to measure many financial instruments
      and
      certain other assets and liabilities at fair value on an
      instrument-by-instrument basis. This Statement is effective as of the beginning
      of an entity’s first fiscal year that begins after November 15, 2007. Early
      adoption is permitted as of the beginning of a fiscal year that begins on or
      before November 15, 2007, provided the entity also elects to apply the
      provisions of SFAS 157. The Company is currently assessing the impact, if
      any, the adoption of SFAS 159 will have on its financial statements.





Reclassifications





Certain
      prior period balances have been reclassified to conform to the current period's
      financial statement presentation. These reclassifications had no impact on
      previously reported financial position, results of operations or cash
      flows.





NOTE
      2 - INVENTORIES





At
      March
      31, 2007, inventories consisted of the following:





Raw
                materials
            
            $
            3,293,905Packing
                materials
            
            
            5,321Finished
                goods
            
            
            1,547,6324,846,858Less:
                Reserve for obsolete inventory
            
            
            (517,984
            )$
            4
                ,328,874




NOTE
      3 - PROPERTY
      AND EQUIPMENT





At
      March
      31, 2007, property and equipment consist of the following:




Useful
                  LifeOffice
                  equipment and furniture
              
              
              5-8
                  Years
              
              $
              137,961Manufacturing
                  equipment
              
              
              10
                  - 15 Years
              
              
              4,755,126Construction
                  in process
              
              
              N/A
              
              
              367,661Building
                  and building improvements
              
              
              20
                  - 40 Years
              
              
              2,409,2627,670,010Less:
                  accumulated depreciation
              
              
              
              
              
              (1,519,512$
              6,150,498




For
      the
      three months ended March 31, 2007 and 2006, depreciation expense amounted to
      $88,283 and $98,016, respectively.





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            13 -




LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      4 - RELATED
      PARTY TRANSACTIONS




**Due
      from related parties**





At
      March
      31, 2007, the Company had a receivable from an affiliated entity owned by the
      Company’s chief executive officer. During the three months ended March 31, 2007,
      this related party repaid approximately $260,000 of these advances and is
      currently repaying this balance monthly at approximately $84,000 per month
      until
      paid in full. At March 31, 2007, the Company has a receivable from this related
      party amounting to $1,584,104. These advances are payable on demand and were
      personally guaranteed by the officer. The Company is aware that the receivable
      from this related party may be in violation of the Sarbanes-Oxley Act of 2002.
      Through monthly payments, the Company intends on rectifying this situation
      during fiscal 2007.





**Notes
      payable - related parties**





Notes
      payable - related parties consisted of the following at March 31,
      2007:





Note
                to Song Guoan, father of Song Zheng Hong, director and spouse of
                Liu Zhong
                Yi, due on December 30, 2015 with variable annual interest at 80%
                of
                current bank rate (5.1% at March 31, 2007), and unsecured
            
            $
            1,899,004Note
                to Zheng Gui Xin, employee, due on December 30, 2015 with with variable
                annual interest at 80% of current bank rate (5.1% at March 31, 2007),
                and
                unsecured
            
            
            1,460,423Note
                to Ma Zhao Zhao, employee, due on December 30, 2015 with variable
                annual
                interest at 80% of current bank rate (5.1% at March 31, 2007), and
                unsecured
            
            
            584,898Note
                to Liu Zhong Yi, officer and director, due on December 30, 2015 with
                variable annual interest at 80% of current bank rate (5.1% at March
                31,
                2007), and unsecured
            
            
            128,732Total
                notes payable - related parties, long term
            
            $
            4,073,057




For
      the
      three months ended March 31, 2007 and 2006, interest expense related to these
      related loans amounted to $55,489 and $102,424, respectively.





**Due
      to related parties**





Prior
      to
      fiscal 2006, the chief executive officer of the Company and his spouse, from
      time to time, provided advances to the Company for operating expenses. During
      the three months ended March 31, 2007, the Company repaid approximately $116,500
      of these advances. At March 31, 2007, the Company had a payable to the chief
      executive officer and his spouse amounting to $435,880. These advances are
      short-term in nature and non-interest bearing.





Prior
      to
      fiscal 2006, an employee of the Company, from time to time, provided advances
      to
      the Company for operating expenses. During the three months ended March 31,
      2007, the Company repaid approximately $58,300 of these advances. At March
      31,
      2007, the Company had a payable to this employee amounting to $90,703. These
      advances are short-term in nature and non-interest bearing.





The
      chief
      financial officer of the Company, from time to time, provided advances to the
      Company for operating expenses. At March 31, 2007, the Company had a payable
      to
      the chief financial officer amounting to $2,866. These advances are short-term
      in nature and non-interest bearing.





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            14 -




LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      4 - RELATED
      PARTY TRANSACTIONS (continued)





**Other**





On
      October 9, 2006, the Company entered into a five-year loan agreement and a
      contract with Wu Lan Cha Bu Emergency Hospital (“Wu Lan”), whereby the Company
      agreed to lend to Wu Lan approximately $3,840,000 for the construction of a
      hospital ward in Inner Mongolia, China. In exchange for agreeing to lend to
      Wu
      Lan the funds, Wu Lan agreed that the Company will be the exclusive provider
      for
      all medicines and disposable medical treatment apparatus to Wu Lan for a period
      of twenty (20) years. In October 2006, the Company’s chief executive officer,
      Mr. Liu, lent these funds to Wu Lan on behalf of the Company. Accordingly,
      the
      Company entered into an assignment agreement whereby the Company assigned all
      of
      its rights, obligations, and receipts under the Loan Agreement to Mr. Liu,
      except for the rights to revenues from the sale of medical and disposable
      medical treatment apparatus which will remain with the Company. As compensation
      to Mr. Liu for accepting the assignment under the loan agreement including
      all
      of the risks and obligations and for Liu not accepting the rights to revenues
      from the sale of medical and disposable medical treatment apparatus which will
      remain with the Company, the Company agreed to pay Mr. Liu an aggregate of
      approximately $1,150,000 to be paid in 5 equal annual installments of
      approximately $230,000.





For
      the
      three months ended March 31, 2007, assignment fee expense, which was paid during
      the period, amounted to $57,905 and is included in general and administrative
      expenses on the accompanying consolidated statements of operations.





NOTE
      5 - CONVERTIBLE
      DEBT





On
      February 12, 2007, the Company entered into Subscription Agreements with certain
      accredited investors (the "Purchasers"). Pursuant to the Agreements, the Company
      issued to the Purchasers Secured Convertible Notes, ("Notes"), with an aggregate
      principal value of $3,000,000, plus interest on the unpaid principal balance
      at
      a rate equal to 14.0% per annum. The maturity date of the Notes is February
      12,
      2008. Interest on the Notes commences accruing on February 12, 2007 and is
      payable on April 30, 2007 and on the last business day of each calendar quarter
      thereafter. Interest is payable in cash, except that upon notice to the
      Purchasers in writing not less than 15 trading days prior to the relevant
      interest payment date, the Company may deliver common stock that were registered
      exclusively for the purpose of satisfying the payment of interest and not
      principal (“Interest Shares”) valued at 75% of the average of the three lowest
      closing bid prices of the common stock as report by Bloomberg L.P. for the
      20
      trading days ending on the trading day preceding the relevant interest payment
      date. In the event of default under the terms of the Notes, at the option of
      the
      Purchaser, all sums of principal and interest remaining unpaid will become
      immediately due and payable. The notes are convertible into shares of common
      stock of the Company a rate equal to $1.00 per share, subject to adjustment.
      The
      transaction closed on February 12, 2007.





In
      connection with the debt issuance on February 12, 2007, $50,000 was deducted
      from the gross proceeds, which was deferred as a debt discount and will be
      amortized over the life of the convertible debentures. Other fees incurred
      in
      connection with the debt issuance include $234,719 of legal fees and other
      costs, which were treated as a deferred debt issue costs and will be amortized
      to debt issue cost expense over the life of the debenture.





The
      Purchasers also received Common Stock Purchase Warrants (the "Warrants").
      Pursuant to the terms of the Warrants, the Purchasers are entitled to purchase
      up to 1,500,000 shares of common stock of the Company at an exercise price
      of
      $1.50 per share. The Warrants have a term of 5 years after the issue date of
      February 12, 2007. These warrants were treated as a discount on the secured
      notes and were valued at $1,106,627 to be amortized over the 12-month note
      terms. The fair market value of each stock warrant was estimated on the date
      of
      grant using the Black-Scholes option-pricing model in accordance with SFAS
      No.
      123R using the following weighted-average assumptions: expected dividend yield
      0%; risk-free interest rate of 4.62%; volatility of 105% and an expected term
      of
      one year.





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            15 -


LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      5 - CONVERTIBLE
      DEBT (continued)





During
      the three months ended March 31, 2007, amortization debt issue costs was
      $29,340. The remaining balance of debt issue costs at March 31, 2007 was
      $205,379. The amortization of debt discounts for the three months ended March
      31, 2007 was $144,578, which has been included in interest expense on the
      accompaying statement of operations. The balance of the debt discount is
      $1,012,049 at March 31, 2007.





The
      Notes
      are secured by a Security Agreement, a Pledge Agreement, a Guaranty, and Share
      Pledge Agreements (collectively, the “Security Agreements”). In the event of a
      default, the Security Agreements grant to S. Michael Rudolph, as collateral
      agent for the Purchasers, a security interest in all right, title and interest
      of Debtors, as that term is defined therein, to and in respect of all Accounts,
      Goods, real or personal property, all present and future books and records
      relating to the foregoing and all products and Proceeds of the foregoing, as
      set
      forth therein, and all security interests, as set forth therein, of the Company,
      Lotus Pharmaceutical International, Inc. Beijing Liang Fang Pharmaceutical
      Co.,
      Ltd. and Beijing En Ze Jia Shi Pharmaceutical Co., Ltd. In addition, Liu Zhong
      Yi, the Company’s president and chief executive officer, pledged his 18,782,400
      shares of the Company’s common stock, Song Zhenghong, a director of the Company
      and spouse of Liu Zhong Yi, pledged her 6,708,000 shares of the Company’s common
      stock, and the Company pledged its 38,800 shares of Lotus’s common stock in the
      event of a default under the Notes. Events of default include, but are not
      limited to, (i) the Company’s failure to pay any installment of principal,
      interest or other sum due under the Notes when due and such failure continues
      for a period of 5 business days after the due date, (ii) the commencement of
      a
      voluntary or involuntary liquidation, or other relief with respect to the
      Company or its debts under bankruptcy, insolvency or other similar law, that
      is
      not dismissed with 45 days of initiation (iii) final judgments for the payment
      in excess of $100,000 are rendered against the Company, and remain unpaid,
      unvacated, unbonded or unstayed for a period of 45 days (iv) or any breach
      or
      failure to comply in any respect with the terms of the Notes or any agreements
      entered into in connection with the transactions contemplated by the
      Agreements.





The
      Company evaluated whether or not the secured convertible debentures contain
      embedded conversion options, which meet the definition of derivatives under
      SFAS
      133 "Accounting for Derivative Instruments and Hedging Activities" and related
      interpretations. The Company concluded that since the secured convertible
      debentures had a fixed conversion rate of $1.00, the secured convertibvl edebt
      was not a derivative instument.





The
      Company granted registration rights to holders of the Securities. Generally,
      the
      Company shall file with the Commission a Form SB-2 registration statement (the
      “Registration Statement”) (or such other form that it is eligible to use) in
      order to register the Registrable Securities for resale and distribution under
      the 1933 Act within forty-five (45) calendar days after the Closing Date (the
      “Filing Date”), and cause the Registration Statement to be declared effective
      not later than one hundred and fifty (150) calendar days after the Closing
      Date
      (the “Effective Date”). If the Registration Statement is not filed on or before
      the Filing Date or is not declared effective on or before the Effective Date,
      then the Company shall deliver to the holder of Registrable Securities, as
      Liquidating Damages, an amount equal to two percent (2%) for the first day
      of
      such Non-Registration Event and two percent (2%) for each thirty (30) days
      (or
      such lesser pro-rata amount for any period of less than thirty (30) days) of
      the
      Purchase Price of the outstanding Notes. The Company must pay the Liquidated
      Damages in cash. The Liquidated Damages must be paid within ten (10) days after
      the end of each thirty (30) day period or shorter part thereof for which
      Liquidated Damages are payable. The Company files its registration on April
      25,
      2007 and it was declared effective on May 4, 2007. In
      December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for Registration
      Payments" which was effective immediately. This FSP amends EITF 00-19 to require
      potential registration payment arrangements be treated as a contingency pursuant
      to FASB Statement 5 rather than at fair value. Accordingly, at March 31, 2007,
      the Company accrued registraion rights penalties of $54,000, which has been
      included in accounts payable and accrued expenses on the accompanying
      consildated balance sheet.





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            16 -


LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      5 - CONVERTIBLE
      DEBT (continued)





The
      financing was completed through a private placement to accredited investors
      and
      is exempt from registration pursuant to Section 4(2) of the Securities Act
      of
      1933, as amended ("Securities Act"). The securities sold in the financing were
      registered on Form SB-2 under the Securities Act of 1933, as amended, on April
      25, 2007 (the “Registration Statement”), and the Securities and Exchange
      Commission declared the Registration Statement effective on May 4, 2007.





The
      convertible debenture liability is as follows at March 31, 2007:





Convertible
                debentures payable
            
            $
            3,000,000Less:
                unamortized discount on debentures
            
            
            (1,012,0491
            )Convertible
                debentures, net
            
            $
            1,987,9516





NOTE
      6 - SHAREHOLDERS
      EQUITY





In
      February 2007, the Company’s Board of Directors and its consenting majority
      stockholders have adopted and approved an amendment to increase the number
      of
      the Company’s authorized shares of capital stock from 50,000,000 to 210,000,000
      total authorized shares of capital stock. The capital stock shall consist of
      200,000,000 authorized shares of Common Stock, $0.001 par value per share,
      and
      10,000,000 authorized shares of Preferred Stock, with a par value $0.001 per
      share.





NOTE
      7 - SEGMENT
      INFORMATION




The
      following information is presented in accordance with SFAS No. 131, Disclosure
      about Segments of an Enterprise and Related Information. In the three
      months ended March 31, 2007 and 2006, the Company operated in two
      reportable business segments - (1) the manufacture and distribution of
      pharmaceutical products and (2) the retailing of traditional and Chinese
      medicines and supplies through ten drug stores located in Beijing China and
      other ancillary revenues generated from retail location such as advertising
      income, rental income, and examination income. The Company's reportable segments
      are strategic business units that offer different products. They are managed
      separately based on the fundamental differences in their operations.




Information
      with respect to these reportable business segments for the three months ended
      March 31, 2007 and 2006 is as follows:


**Wholesale
                andthird-partymanufacturing**
            
            **Retail
                Operations**
            
            **Unallocated**
            
            **Total****2007****Net
                revenues**
            
            $
            7,285,050
            
            $
            926,551
            
            $
            77,934
            
            $
            8,289,535**Cost
                of sales (excluding depreciation)**
            
            
            5,140,930
            
            
            429,973
            
            
            7,029
            
            
            5,577,932**Operating
                expenses (excluding depreciation and
                amortization)**
            
            
            -
            
            
            -
            
            
            1,471,666
            
            
            1,471,666**Depreciation
                and amortization**
            
            
            80,735
            
            
            4,249
            
            
            25,174
            
            
            110,158**Other
                expenses**
            
            
            -
            
            
            -
            
            
            83,340
            
            
            83,340**Interest
                expense**
            
            
            -
            
            
            -
            
            
            252,567
            
            
            252,567**Net
                income (loss)**
            
            $
            2,063,385
            
            $
            492,329
            
            $
            (1,761,842
            )
            $
            793,872





-
            17 -




LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES
        TO UNAUDITED FINANCIAL STATEMENTS
 MARCH
        31, 2007


NOTE
      7 - SEGMENT
      INFORMATION (continued)


**2006****Net
                revenues**
            
            $
            5,191,720
            
            $
            1,349,375
            
            $
            -
            
            $
            6,541,095**Cost
                of sales (excluding depreciation)**
            
            
            3,615,284
            
            
            690,820
            
            
            -
            
            
            4,306,104**Operating
                expenses (excluding depreciation and
                amortization)**
            
            
            -
            
            
            -
            
            
            935,293
            
            
            935,293**Depreciation
                and amortization**
            
            
            88,917
            
            
            4,680
            
            
            50,117
            
            
            143,714**Other
                income**
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Interest
                expense**
            
            
            -
            
            
            -
            
            
            102,424
            
            
            102,424**Net
                income (loss)**
            
            $
            1,487,519
            
            $
            653,875
            
            $
            (1,087,834
            )
            $
            1,053,560





**Total
                assets be geographical location:**China
            
            $
            21,631,993USA
            
            
            2,765,700Total
                assets
            
            $
            24,397,693




The
      Company does not allocate research and development, selling and general and
      administrative expenses to its reportable segments, because these activities
      are
      managed at a corporate level.





Asset
      information by reportable segment is not reported to or reviewed by the chief
      operating decision maker and, therefore, the Company has not disclosed asset
      information for each reportable segment.





NOTE
      8 - OPERATING
      RISK





(a)
      Country risk





Currently,
      the Company’s revenues are primarily derived from the sale of pharmaceutical
      products to customers in the Peoples Republic of China (PRC). The Company hopes
      to expand its operations to countries outside the PRC, however, such expansion
      has not been commenced and there are no assurances that the Company will be
      able
      to achieve such an expansion successfully. Therefore, a downturn or stagnation
      in the economic environment of the PRC could have a material adverse effect
      on
      the Company’s financial condition.





(b)
      Products risk





In
      addition to competing with other manufacturers of pharmaceutical product
      offerings, the Company competes with larger Chinese companies who may have
      greater funds available for expansion, marketing, research and development
      and
      the ability to attract more qualified personnel. These Chinese companies may
      be
      able to offer products at a lower price. There can be no assurance that the
      Company will remain competitive should this occur.





(c)
      Political risk





Currently,
      PRC is in a period of growth and is openly promoting business development in
      order to bring more business into PRC. Additionally PRC allows a Chinese
      corporation to be owned by a United States corporation. If the laws or
      regulations are changed by the PRC government, the Company's ability to operate
      the PRC subsidiaries could be affected.





-
            18 -




ITEM
      2.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





**Overview**




The
      following discussion of the financial condition and results of operation of
      Lotus Pharmaceuticals, Inc. (“Lotus”) should
      be
      read in conjunction with the financial statements and the notes to those
      statements included herein. This discussion includes forward-looking statements
      that involve risk and uncertainties. As a result of many factors, such as those
      set forth under “Risk Factors”, actual results may differ materially from those
      anticipated in the forward-looking statements.





Lotus’
      revenues and results of operations could differ materially from those projected
      in the forward-looking statements as a result of numerous factors, including,
      but not limited to, the following: the risk of significant natural disaster,
      the
      inability of Lotus to insure against certain risks, inflationary and
      deflationary conditions and cycles, currency exchange rates, changing government
      regulations domestically and internationally affecting the pharmaceutical
      industry, competition and pricing, changes in external competitive market
      factors, termination of certain agreements, protocol, or inability to enter
      into
      strategic agreements, inability to satisfy anticipated working capital or other
      cash shortage requirements, changes in or developments under domestic or foreign
      laws, regulations, or changes in Lotus’ business strategy or an inability to
      execute its strategy due to unanticipated changes in the market. In light of
      these risks and uncertainties, there can be no assurance that actual results,
      performance or achievements of Lotus will not differ materially from any future
      results, performance or achievements expressed or implied by such
      forward-looking statements. For purposes of the following discussion and
      analysis, references to ‘‘we’’, ‘‘our’’, ‘‘us’’ refers to Lotus .





On
      September 6, 2006, we entered into a definitive Share Exchange Agreement with
      Lotus Pharmaceutical International, Inc. (“Lotus International”), whereby we
      acquired all of the outstanding common stock of Lotus International in exchange
      for newly-issued shares of our common stock to Lotus International’s
      shareholders.  Lotus International was incorporated under the laws the
      State of Nevada on August 28, 2006 to develop and market pharmaceutical products
      in the People's Republic of China (“PRC” or “China”). On September 28, 2006 (the
      closing date), Lotus International became our wholly-owned subsidiary and
      Lotus International’s shareholders became owners of a majority of our voting
      stock. The acquisition of Lotus International by us is accounted for as a
      reverse merger because on a post-merger basis, the former shareholders of Lotus
      International held a majority of our outstanding common stock on a voting and
      fully-diluted basis. As a result, Lotus International is deemed to be the
      acquirer for accounting purposes.




Additionally,
      on September 6, 2006, Lotus International entered into various agreements with
      Liang Fang Pharmaceuticals Co. Ltd. (“Liang Fang”) and Beijing En Zhe Jia
      Pharmaceutical Co., Ltd. (“En Zhe Jia”) (herein referred to as “Lotus East”)
      whereby the shareholders of Lotus East transferred all operating and voting
      control of Lotus East to Lotus International. As a result of these agreements,
      Lotus East was deemed to be the acquirer of Lotus International for
      accounting purposes. Accordingly, the financial statement data presented are
      those of Lotus East
      for
      all periods prior to our acquisition of Lotus International on September 28,
      2006, and the financial statements of the consolidated companies from the
      acquisition date forward.





Liang
      Fang is a Chinese limited liability company and was formed under laws of the
      People’s Republic of China on June 21, 2000 and is engaged in the production,
      trade and retailing of pharmaceuticals. Further, Liang Fang is focused on
      development of innovative medicines and investing strategic growth to address
      various medical needs for patients worldwide. Liang Fang’s operations are based
      in Beijing, China.




Liang
      Fang owns and operates several drug stores throughout Beijing, China. These
      drugstores sell Western and traditional Chinese medicine, and medical treatment
      equipment.




Liang
      Fang’s affiliate, En Zhe Jia, is a Chinese limited liability company and was
      formed under the laws of the People’s Republic of China on September 17, 1999.
      En Zhe Jia is the sole manufacturer of pharmaceuticals for the Company and
      maintains facilities for the production of Western medicines, Chinese medicines,
      as well as the research and production of other new
      medicines.




-
            19 -





**Current
      Business Operations**





As
      discussed above, our operations are conducted through Liang Fang and its
      affiliated company, En Zhe Jia, both of which are limited liability companies
      headquartered in PRC and organized under the laws of PRC. Our business is
      composed of four parts: (1) Manufacturing and distribution of pharmaceutical
      products, including the manufacture of pharmaceutical products for other
      distributors (OEM manufacturing), (2) retailing of Western and traditional
      Chinese medications and accessories, (3) leasing retail space to licensed
      physicians and other parties and (4) research and development.





The
      Company currently has 268 employees, but we do not have any employees at our
      Boca Raton, Florida headquarters offices located at Boca Corporate Plaza, 7900
      Glades Road, Suite 420, Boca Raton, Florida 33434, except our Chief Financial
      Officer who is hired on an outsourced basis.





**Results
      of Operations**




***For
      the Three Months Ended March 31, 2007 Versus Three Months Ended March 31,
      2006***




**Total
      Revenues**





Total
      revenues for the three months ended March 31, 2007 were $8,289,535 as compared
      to total revenues of $6,541,095 for the three months ended March 31, 2006,
      an
      increase of $1,748,440 or approximately 26.73%. For the three months ended
      March
      31, 2007 and 2006, net revenues consisted of the following:


2007
            
            2006Wholesale
            
            $
            5,049,121
            
            $
            4,298,188Retail
            
            
            501,242
            
            
            854,829Other
                revenues
            
            
            2,739,172
            
            
            1,388,078Total
                Revenues
            
            $
            8,289,535
            
            $
            6,541,095





·
            For
                the three months ended March 31, 2007, wholesale revenues increased
                by
                $750,933 or 17.5%. The significant increase in tangible product revenues
                is mainly attributed to continued strong sales of our best selling
                product, VALSARTAN Capsules, a medicine for primary hypertension
                or high
                blood pressure.





·
            For
                the three months ended March 31, 2007, retail revenues decreased
                by
                $353,587 or 41.4%. The decrease is attributable the closing of several
                pharmacy locations during the period for one month for repairs and
                reorganization.




-
            20 -





·
            For
                the three months ended March 31, 2007, other revenues increased by
                $1,351,094. The significant increase in other revenues is attributed
                to
                the following:





2007
            
            2006Leasing
                revenues
            
            $
            278,617
            
            $
            227,161Third-party
                manufacturing
            
            
            2,235,929
            
            
            893,532Advertising
                revenues
            
            
            146,692
            
            
            148,961Research
                and development and lab testing services
            
            
            77,934
            
            
            118,424Total
                other revenues
            
            $
            2,739,172
            
            $
            1,388,078





•
            During
                2006, we began performing third party contract manufacturing projects.
                In
                connection with third-party manufacturing, the customers supply the
                raw
                materials and we are paid a fee for manufacturing their product.





•
            In
                2006, we entered into an advertisement contract whereby we receive
                approximately $50,000 per month for the lease of counter and other
                space
                at our retail locations. We expect this revenue to increase in the
                future
                as we sign similar contracts.





•
            In
                the 2007 and 2006 period, we performed research and development and
                lab testing projects for various third parties and performed drug
                testing
                and analysis.





**Cost
      of Sales**





Cost
      of
      sales includes raw materials, packing materials, shipping, and manufacturing
      costs, which includes allocated portion of overhead expenses such as utilities
      and depreciation directly related to product production. For the three months
      ended March 31, 2007, cost of sales amounted to $5,662,916 or approximately
      68.3% of total revenues as compared to cost of sales of $4,399,701 or
      approximately 67.3% of total revenues for the three months ended March 31,
      2006.





**Gross
      Profit**





Gross
      profit for the three months ended March 31, 2007 was $2,626,619 or 31.7% of
      total revenues, as compared to $2,141,394 or 32.7% of revenues for the three
      months ended March 31, 2006.





**Operating
      Expenses**





Total
      operating expenses for the three months ended March 31, 2007 were $1,496,840,
      an
      increase of $511,430 or 51.9%, from total operating expenses in the three months
      ended March 31, 2006 of $985,410. This increase included the
      following:





For
      the
      three months ended March 31, 2007, selling expenses amounted to $558,724 as
      compared to $516,895 for the three months ended March 31, 2006, an increase
      of
      $41,829 or 8%. This increase is attributable to an increase in advertising
      costs
      of approximately $115,500, and an increase in other selling expenses of $64,355
      such as travel and entertainment, and sales conferences and training, offset
      by
      a decrease in commissions paid of $138,026. We expect our selling expenses
      to
      increase as our revenues increase and expect to spend increased funds on
      adverting and promotion of our products as well as sales training. During fiscal
      2007, we intend to expand our marketing efforts related to our
      products.




-
            21 -





For
      the
      three months ended March 31, 2007, research and development costs amounted
      to
      $91,822 as compared to $75,028 for the three months ended March 31, 2006, an
      increase of $16,794 or 22.4%. In fiscal 2006, we decreased our research and
      development activities to concentrate on the sale and marketing of developed
      products. We currently have 4 drugs in the pipeline that are in the process
      of
      obtaining government approval. As of the date of this filing, we can not predict
      when we will begin the development of new pharmaceutical products or the related
      costs.





For
      the
      three months ended March 31, 2007, general and administrative expenses were
      $846,294 as compared to $393,487 for the three months ended March 31, 2006,
      an
      increase of $452,807, or 115.1% as summarized below:





Three
                months ended
              March
                31,2007
            
            2006Salaries
                and related benefits
            
            $
            389,481
            
            $
            174,580Amortization
            
            
            21,875
            
            
            45,698Bad
                debt
            
            
            -
            
            
            20,696Depreciation
            
            
            7,465
            
            
            4,419Rent
            
            
            67,277
            
            
            61,572Travel
                and entertainment
            
            
            51,504
            
            
            17,273Professional
                fees
            
            
            53,100
            
            
            -Other
            
            
            255,592
            
            
            69,249Total
            
            $
            846,294
            
            $
            393,487





The
      changes in these expenses from the three months ended March 31, 2007 as compared
      to the three months ended March 31, 2006 included the following:





•
            Salaries
                and related benefits increased $214,901 or 123% due the increase
                in hours
                worked and overtime and the increased use of our part time employees.
                For
                the three months ended March 31, 2007, we incurred directors’ fees of
                $52,500 and recorded compensation expense for our chief executive
                officer
                and chief financial officer of $60,900. We did not incur these fees
                in the
                prior year.•
            Amortization
                of our manufacturing rights decreased by $23,823 or approximately
                52%.





•
            A
                decrease of $20,696 or 100%, in bad debt expenses.•
            Depreciation
                increased by $3,046 or approximately
                69%.





•
            Rent
                increased by $5,705 or approximately 9.3%.•
            Travel
                and entertainment expenses increased by $34,231 or 198.2% due to
                increased
                sales-related travel.•
            Professional
                fees increased $53,100 or 100% due to an increase in accounting and
                legal
                fees activities related to being a public entity in the United
                States.





•
            Other
                selling, general and administrative expenses, which includes utilities,
                office supplies and expenses increased by $186,343 or 269%.




-
            22 -





**Income
      from Operations**





We
      reported income from operations of $1,129,779 for the three months ended March
      31, 2007 as compared to income from operations of $1,155,984 for the three
      months ended March 31, 2006, a decrease of $26,205 or approximately
      2.3%.





**Other
      Expense**





For
      the
      three months ended March 31, 2007, total other expense amounted to $335,907
      as
      compared to other expense of $102,424 for the three months ended March 31,
      2006,
      an increase of $233,483. This change is primarily attributable to:





•
            For
                the three months ended March 31, 2007, we recorded debt issuance
                costs of
                $29,340 compared to $0 for the three months ended March 31, 2006
                due to
                our recent funding.





•
            For
                the three months ended March 31, 2007, we recorded registration rights
                penalties related to the late filing of our registration statement
                on Form
                SB-2.





•
            For
                the three months ended March 31, 2007, interest expense was $252,567
                as
                compared to $102,424 for the three months ended March 31, 2006, an
                increase of $150,143. This increase is attributable to the amortization
                of
                debt discount of $144,578 and the accrual of interest payable of
                $52,500
                in connection with our debt funding. This increase was offset by
                a
                reduction of interest expense from our related party notes payable
                due to
                the repayment of this debt.





**Net
      Income**





As
      a
      result of these factors, we reported net income of $793,872 for the three months
      ended March 31, 2007 as compared to net income of $1,053,560 for the three
      months ended March 31, 2006. This translates to basic and diluted net income
      per
      common share of $0.02 and $0.03 for the three months ended March 31, 2007 and
      2006, respectively.





**Liquidity
      and Capital Resources**





Liquidity
      is the ability of a company to generate funds to support its current and future
      operations, satisfy its obligations and otherwise operate on an ongoing basis.





At
      March
      31, 2007, we had a cash balance of $4,456,059. These funds are located in
      financial institutions located as follows:





China
            
            $
            1,971,363USA
            
            
            2,484,696Total
            
            $
            4,456,059





Our
      working capital position increased $1,292,456 to $9,938,532 at March 31, 2007
      from $8,646,076 at December 31, 2006. This increase in working capital is
      primarily attributable to an increase in cash of approximately $2.4 million
      and
      an increase of approximately $1.2 million in inventories offset by an increase
      in accounts payable and accrued expenses of $40,000, an increase in taxes
      payable of approximately $449,000 and an increase in net convertible debt of
      approximately $2.0 million. The increase in accounts receivable and
      corresponding decrease inventories reflects the effects of increased sales
      during fiscal 2006 and the corresponding receivables generated by those
      sales.





-
            23 -





At
      March
      31, 2007, our inventories of raw materials and finished goods totaled
      $4,328,874, an increase of approximately $1.2 million, or 38%, from December
      31,
      2006. We expect to maintain higher inventory levels to accommodate for
      anticipated future sales growth as well as a wider variety of products.




At
      March
      31, 2007, we maintain an allowance for doubtful accounts on accounts receivable
      balances of $544,967 as compared to $539,637 at December 31, 2006, an increase
      of $5,330 and reflects our best estimate of probable losses. In determining
      the
      allowance for doubtful accounts, our management reviews our accounts receivable
      aging as well as the facts and circumstances of specific customers which may
      indicate the collection of specific amounts are at risk. As is customary in
      the
      PRC, we extend relatively long payment terms to our customers. Our terms of
      sale
      generally require payment within four months to a year, which is considerably
      longer than customary terms offered in the United States, however, we believe
      that our terms of sale are customary amongst our competitors for a company
      our
      size within our industry. We also occasionally offer established customers
      longer payment terms on new products as an incentive to purchase these products,
      which has served to further increase the average days outstanding for accounts
      receivable. As the market for these new products is established, we will
      discontinue offering this sales incentive. Occasionally we will request a
      customer to prepay an order prior to shipment. At March 31, 2007 our balance
      sheet reflected advances from customers of $88,696, a decrease of $142,644,
      or
      approximately 62%, from December 31, 2006.




Our
      balance sheet at March 31, 2007 also reflects a balance due to related parties
      of $529,449 which was a working capital advances made to us by our President,
      vice-president and an officer of the Company and a Board member. These loans
      are
      non-interest bearing and are due on demand. We are currently repaying these
      balances as operating cash become available.





Our
      balance sheet at March 31, 2007 also reflects notes payable to related parties
      of approximately $4.1 million due on December 30, 2015 which is a working
      capital loan made to us by the Company’s Chief Executive Officer, two employees
      of the Company and a Board member. These loans bear a variable annual interest
      at 80% of current bank rate and are unsecured. During the three months ended
      March 31, 2007, we repaid approximately $701,000 of these loan balances.





Net
      cash
      provided by operating activities for the three months ended March 31, 2007
      was
      $607,789 as compared to $102,771 for the three months ended March 31, 2006.
      For
      the three months ended March 31, 2007, net cash provided by operating activities
      was attributable primarily to our net income of $793,872, the add back of
      depreciation and amortization of $110,158, amortization of debt issuance costs
      of $29,340 and the amortization of debt discount of $144,578, a decrease in
      accounts receivable of $214,114, an increase in accounts payable ad accrued
      expenses of $35,097, an increase in VAT and service taxes payable of $427,048,
      and an increase in unearned revenues of $256,493 offset an increase in inventory
      balance of $1,159,619, an increase in prepaid and other current assets of
      $98,927, and a decrease in advances from customers of $144,365. For the three
      months ended March 31, 2006, net cash provided by operating activities was
      attributable primarily to our net income of $1,053,560, a decrease in prepaid
      and other current assets of $3,423, an increase accounts payable and accrued
      expense of $169,711, and the add back of non-cash items such as depreciation
      and
      amortization of $143,714, bad debt of $20,230, and changes in other liabilities
      of $404,692, offset by cash used to fund a net increase in accounts receivable
      of $674,994 and an increase in our inventory of $1,017,565.





Net
      cash
      used in investing activities for the three months ended March 31, 2007 was
      $106,643 attributable to the purchase of property and equipment of $366,218
      offset by payment received on due from related parties of $259,575. Net cash
      provided by investing activities for the three months ended March 31, 2006
      amounted to $250,411 and consisted of payments received from related party
      advances due.




Net
      cash
      provided by financing activities was $1,845,635 for the three months ended
      March
      31, 2007 and was attributable to the receipt of net proceeds of $2,950,000
      from
      our debt financing offset by payments on related party advances and loans of
      $875,705 and the payment of debt issuance costs of $231,526 as compared to
      net
      cash used in financing activities of $168,667 for the three months ended March
      31, 2006 and reflects repayments of related party advances.





-
            24 -





We
      reported a net increase in cash for the three months ended March 31, 2007 of
      $2,366,903 as compared to a net increase in cash of $186,153 for the three
      months ended March 31, 2006.





We
      currently have no material commitments for capital expenditures. Other than
      working capital and loans from related parties, and from our recent capital
      raising transaction as discussed below, we presently have no other alternative
      source of working capital. We may not have sufficient working capital to fund
      the expansion of our production line, an upgrade of our manufacturing facilities
      and technologies, expand our retail operations, and fund research and
      development projects as well as providing working capital necessary for our
      ongoing operations and obligations. We will need to raise additional working
      capital to complete these projects. We may seek to raise additional capital
      through the sale of equity securities. No assurances can be given that we will
      be successful in obtaining additional capital, or that such capital will be
      available in terms acceptable to our company. At this time, we have no
      commitments or plans to obtain additional capital.





**Recent
      Capital Raising Transactions**





On
      February 12, 2007, we entered into Subscription Agreements with two accredited
      investors (the "Purchasers"). Pursuant to the Agreements, we issued to the
      Purchasers Secured Convertible Notes, ("Notes"), with an aggregate principle
      value of $3,000,000, plus interest on the unpaid principal balance at a rate
      equal to 14.0% per annum. The maturity date of the Notes is February 12, 2008.
      Interest on the Notes commences accruing on February 12, 2007 and is payable
      on
      April 30, 2007 and on the last business day of each calendar quarter thereafter.
      Interest is payable in cash, except that upon notice to the Purchasers in
      writing not less than 15 trading days prior to the relevant interest payment
      date, we may deliver common stock that were registered exclusively for the
      purpose of satisfying the payment of interest and not principal (“Interest
      Shares”) valued at 75% of the average of the three lowest closing bid prices of
      the common stock as report by Bloomberg L.P. for the 20 trading days ending
      on
      the trading day preceding the relevant interest payment date. In the event
      of
      default under the terms of the Notes, at the option of the Purchaser, all sums
      of principal and interest remaining unpaid will become immediately due and
      payable. The notes are convertible into shares of common stock of the Company
      a
      rate equal to $1.00 per share, subject to adjustment. The transaction closed
      on
      February 12, 2007.





The
      Purchasers also received Common Stock Purchase Warrants (the "Warrants").
      Pursuant to the terms of the Warrants, the Purchasers are entitled to purchase
      up to 1,500,000 shares of our common stock at an exercise price of $1.50 per
      share. The Warrants have a term of 5 years after the issue date of February
      12,
      2007.





The
      Notes
      are secured by a Security Agreement, a Pledge Agreement, a Guaranty, and Share
      Pledge Agreements (collectively, the “Security Agreements”). In the event of a
      default, the Security Agreements grant to S. Michael Rudolph, as collateral
      agent for the Purchasers, a security interest in all right, title and interest
      of Debtors, as that term is defined therein, to and in respect of all Accounts,
      Goods, real or personal property, all present and future books and records
      relating to the foregoing and all products and Proceeds of the foregoing, as
      set
      forth therein, and all security interests, as set forth therein, of the Company,
      Lotus Pharmaceutical International, Inc. Beijing Liang Fang Pharmaceutical
      Co.,
      Ltd. and Beijing En Ze Jia Shi Pharmaceutical Co., Ltd. In addition, Liu Zhong
      Yi, the Company’s president and chief executive officer, pledged his 18,782,400
      shares of the Company’s common stock, Song Zhenghong, a director of the Company
      and spouse of Liu Zhong Yi, pledged her 6,708,000 shares of the Company’s common
      stock, and the Company pledged its 38,800 shares of Lotus’s common stock in the
      event of a default under the Notes. Events of default include, but are not
      limited to, (i) the Company’s failure to pay any installment of principal,
      interest or other sum due under the Notes when due and such failure continues
      for a period of 5 business days after the due date, (ii) the commencement of
      a
      voluntary or involuntary liquidation, or other relief with respect to the
      Company or its debts under bankruptcy, insolvency or other similar law, that
      is
      not dismissed with 45 days of initiation (iii) final judgments for the payment
      in excess of $100,000 are rendered against the Company, and remain unpaid,
      unvacated, unbonded or unstayed for a period of 45 days (iv) or any breach
      or
      failure to comply in any respect with the terms of the Notes or any agreements
      entered into in connection with the transactions contemplated by the
      Agreements.




-
            25 -





We
      granted registration rights to holders of the Securities. Generally, the Company
      shall file with the Commission a Form SB-2 registration statement (the
“Registration Statement”) (or such other form that it is eligible to use) in
      order to register the Registrable Securities for resale and distribution under
      the 1933 Act within forty-five (45) calendar days after the Closing Date (the
      “Filing Date”), and cause the Registration Statement to be declared effective
      not later than one hundred and fifty (150) calendar days after the Closing
      Date
      (the “Effective Date”). If the Registration Statement is not filed on or before
      the Filing Date or is not declared effective on or before the Effective Date,
      then we shall deliver to the holder of Registrable Securities, as Liquidating
      Damages, an amount equal to two percent (2%) for the first day of such
      Non-Registration Event and two percent (2%) for each thirty (30) days (or such
      lesser pro-rata amount for any period of less than thirty (30) days) of the
      Purchase Price of the outstanding Notes. The Company must pay the Liquidated
      Damages in cash. The Liquidated Damages must be paid within ten (10) days after
      the end of each thirty (30) day period or shorter part thereof for which
      Liquidated Damages are payable.





The
      financing was completed through a private placement to accredited investors
      and
      is exempt from registration pursuant to Section 4(2) of the Securities Act
      of
      1933, as amended ("Securities Act"). The securities sold in the financing were
      registered on Form SB-2 under the Securities Act of 1933, as amended, on April
      25, 2007 (the “Registration Statement”), and the Securities and Exchange
      Commission declared the Registration Statement effective on May 4, 2007.





**Critical
      Accounting Policies and Estimates**




Our
      discussion and analysis of our financial condition and results of operations
      are
      based on our financial statements, which have been prepared in accordance with
      accounting principles generally accepted in the United States of America. The
      preparation of these financial statements requires us to make estimates and
      judgments that affect the reported amounts of assets, liabilities and expenses.
      On an ongoing basis, we evaluate our estimates and judgments, including those
      related to accrued expenses, fair valuation of stock related to stock-based
      compensation and income taxes. We based our estimates on historical experience
      and on various other assumptions that we believe to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions.





**Revenue
      Recognition**





*Product
      sales* .
      Product
      sales are generally recognized when title to the product has transferred to
      customers in accordance with the terms of the sale. The Company recognizes
      revenue in accordance with the Securities and Exchange Commission’s (SEC) Staff
      Accounting Bulletin (SAB) No. 101, “ *Revenue
      Recognition in Financial Statements* ”
as
      amended by SAB No. 104 (together, “SAB 104”), and Statement of
      Financial Accounting Standards (SFAS) No. 48 “ *Revenue
      Recognition When Right of Return Exists.* ”
      SAB 104 states that revenue should not be recognized until it is
      realized or realizable and earned. In general, the Company records revenue
      when
      persuasive evidence of an arrangement exists, services have been rendered or
      product delivery has occurred, the sales price to the customer is fixed or
      determinable, and collectibility is reasonably assured.




SFAS No. 48 states
      that revenue from sales transactions where the buyer has the right to return
      the
      product shall be recognized at the time of sale only if the seller’s price to
      the buyer is substantially fixed or determinable at the date of sale, the buyer
      has paid the seller, or the buyer is obligated to pay the seller and the
      obligation is not contingent on resale of the product, the buyer’s obligation to
      the seller would not be changed in the event of theft or physical destruction
      or
      damage of the product, the buyer acquiring the product for resale has economic
      substance apart from that provided by the seller, the seller does not have
      significant obligations for future performance to directly bring about resale
      of
      the product by the buyer, and the amount of future returns can be
      reasonably estimated.




We
      recognize revenue for the sale of pharmaceutical products and for payments
      received, if any, under reimbursement of development costs as follows:





-
            26 -





*Product
      Sales.* Revenue
      from product sales, net of estimated provisions, is recognized when there is
      persuasive evidence that an arrangement exists, delivery has occurred, the
      selling price is fixed or determinable, and collectibility is reasonably
      probable. Our customers consist of pharmaceutical wholesalers who sell directly
      into the retail channel, hospitals, and retail customers. Provisions for sales
      discounts, and estimates for chargebacks, and product returns are established
      as
      a reduction of product sales revenue at the time revenues are recognized, based
      on historical experience adjusted to reflect known changes in the factors that
      impact these reserves. Factors include current contract prices and terms,
      estimated wholesaler inventory levels, remaining shelf life of product, and
      historical information for similar products in the same distribution channel.
      These revenue reductions are generally reflected either as a direct reduction
      to
      accounts receivable through an allowance, or as an addition to accrued expenses
      if the payment is due to a party other than the customer.





*Product
      returns.* In
      the pharmaceutical industry, customers are normally granted the right to return
      product for a refund if the product has not been used prior to its expiration
      date. Our return policy typically allows product returns for products within
      an
      twelve-month window from six months prior to the expiration date and up to
      six
      months after the expiration date. We estimate the level of sales which will
      ultimately be returned pursuant to our return policy, and record a related
      reserve at the time of sale. These amounts are deducted from our gross sales
      to
      determine our net revenues. Our estimates take into consideration historical
      returns of our products and our future expectations. We periodically review
      the
      reserves established for returns and adjust them based on actual experience.
      The
      amount of actual product returns could be either higher or lower than the
      amounts we accrued. Changes in our estimates would be recorded in the income
      statement in the period of the change. If we over or under estimate the quantity
      of product which will ultimately be returned, there may be a material impact
      to
      our financial statements.





*Other
      revenues* .
      Other
      revenues consist of (i) rental income received for the lease of retail space
      to
      various retail merchants; (ii) advertising revenues from the lease of counter
      space at our retail locations; (iii) rental income from the lease of retail
      space to licensed medical practitioners; and (iv) revenues received by us for
      research and development projects. We recognize revenues upon performance of
      such funded research. We recognize revenues from leasing of space as earned
      from
      contracting third parties. Revenues received in advance are reflected as
      deferred revenue on the accompanying balance sheet. Additionally, we receive
      income from the sale of developed drug formulas. Income from the sale of drug
      formulas are recognized upon performance of all of our obligations under the
      respective sales contract and are included in other income on the accompanying
      consolidated statement of operations.




**Accounts
      Receivable**





Accounts
      receivable are carried at original invoice amount less an estimate made for
      doubtful receivables based on a review of all outstanding amounts on a monthly
      basis. Management judgment and estimates are made in connection with
      establishing the allowance for doubtful accounts. Specifically, we analyze
      the
      aging of accounts receivable balances, historical bad debts, customer
      concentrations, customer credit-worthiness, current economic trends and changes
      in our customer payment terms. Significant changes in customer concentration
      or
      payment terms, deterioration of customer credit-worthiness or weakening in
      economic trends could have a significant impact on the collectibility of
      receivables and our operating results. If the financial condition of our
      customers were to deteriorate, resulting in an impairment of their ability
      to
      make payments, additional allowances may be required. At March 31, 2007,
      accounts receivable, net of allowance for doubtful accounts and sales returns,
      amounted to $7,134,119.





**Inventories**





Inventory
      is stated at the lower of cost or market with cost determined under the
      weighted-average method. Inventory consists of finished capsules, liquids,
      finished oral suspension powder and other western and traditional Chinese
      medicines and medical equipment. At least on a quarterly basis, we review our
      inventory levels and write down inventory that has become obsolete or has a
      cost
      basis in excess of its expected net realizable value or is in excess of expected
      requirements. Inventory levels are evaluated by management relative to product
      demand, remaining shelf life, future marketing plans and other factors, and
      reserves for obsolete and slow-moving inventories are recorded for amounts
      which
      may not be realizable.





-
            27 -





**Property
      and Equipment**





Property
      and equipment are carried at cost. The cost of repairs and maintenance is
      expensed as incurred; major replacements and improvements are capitalized.
      When
      assets are retired or disposed of, the cost and accumulated depreciation are
      removed from the accounts, and any resulting gains or losses are included in
      income in the year of disposition. In accordance with Statement of Financial
      Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
      of Long-Lived Assets", the Company examines the possibility of decreases in
      the
      value of fixed assets when events or changes in circumstances reflect the fact
      that their recorded value may not be recoverable.





Depreciation
      is calculated on a straight-line basis over the estimated useful lives of the
      assets. The useful lives for property and equipment are as follows:





Buildings
                and leasehold improvement
            20
                to 40 yearsManufacturing
                equipment
            10
                to 15 yearsOffice
                equipment and furniture
            5
                to 8 years




**Income
      Taxes**





Taxes
      are
      calculated in accordance with taxation principles currently effective in the
      United States and PRC. The Company accounts for income taxes using the liability
      method. Deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      bases. 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 as income in
      the
      period that includes the enactment date. A valuation allowance is provided
      for
      the amount of deferred tax assets that, based on available evidence, are not
      expected to be realized.





**Recent
      Accounting Pronouncements**





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48 (“FIN 48”), *“Accounting
      for Uncertainty in Income Taxes,”* an
      interpretation of FASB Statement No. 109 (“SFAS 109”). The
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an entity’s financial statements in accordance with SFAS 109, *“Accounting
      for Income Taxes.”* It
      prescribes a recognition threshold and measurement attribute for financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken on a tax return. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. We are currently evaluating the impact, if any, of
      FIN 48 on our financial statements.




In
      September 2006, the FASB issued SFAS No. 157, *“Fair
      Value Measurements”* (SFAS 157), which provides guidance for how companies should measure fair
      value when required to use a fair value measurement for recognition or
      disclosure purposes under generally accepted accounting principle (GAAP).
      SFAS 157 is effective for fiscal years beginning after November 15,
      2007. We are currently assessing the impact, if any, the adoption of
      SFAS 157 will have on our financial statements.




In
      December 2006, FASB Staff Position No. EITF 00-19-2, *“Accounting
      for Registration Payment Arrangements,”* was
      issued. The FSP specifies that the contingent obligation to make future payments
      or otherwise transfer consideration under a registration payment arrangement,
      whether issued as a separate agreement or included as a provision of a financial
      instrument or other agreement, should be separately recognized and measured
      in
      accordance with SFAS No. 5, *“Accounting
      for Contingencies.”* We
      believe that our current accounting is consistent with the FSP. Accordingly,
      adoption of the FSP had no effect on our financial statements.





-
            28 -





In
      February 2007, the FASB issued SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities, Including
      an
      Amendment of FASB Statement No. 115”* ,
      under
      which entities will now be permitted to measure many financial instruments
      and
      certain other assets and liabilities at fair value on an
      instrument-by-instrument basis. This Statement is effective as of the beginning
      of an entity’s first fiscal year that begins after November 15, 2007. Early
      adoption is permitted as of the beginning of a fiscal year that begins on or
      before November 15, 2007, provided the entity also elects to apply the
      provisions of SFAS 157. We are currently assessing the impact, if any, the
      adoption of SFAS 159 will have on our financial statements.





Other
      accounting standards that have been issued or proposed by the FASB or other
      standards-setting bodies that do not require adoption until a future date are
      not expected to have a material impact on the consolidated financial statements
      upon adoption.




**Off
      Balance Sheet Arrangements**




As
      of the
      date of this Registration Statement, we do not have any off-balance sheet
      arrangements that have or are reasonably likely to have a current or future
      effect on our financial condition, changes in financial condition, revenues
      or
      expenses, results of operations, liquidity, capital expenditures or capital
      resources that are material to investors. The term "off-balance sheet
      arrangement" generally means any transaction, agreement or other contractual
      arrangement to which an entity unconsolidated with us is a party, under which
      we
      have: (i) any obligation arising under a guarantee contract, derivative
      instrument or variable interest; or (ii) a retained or contingent interest
      in
      assets transferred to such entity or similar arrangement that serves as credit,
      liquidity or market risk support for such assets.





ITEM
      3.
      CONTROLS AND PROCEDURES





**Overview**





In
      connection with the preparation of our quarterly report on Form 10-QSB for
      the
      period ended March 31, 2007, our management identified material weaknesses
      in
      the Company’s internal controls over financial reporting. As defined by the
      Public Accounting Oversight Board (the “PCAOB“) in Auditing Standard No. 2., a
      material weakness is a significant deficiency, or combination of significant
      deficiencies, that result in more than a remote likelihood that a material
      misstatement of the interim financial statements will not be prevented or
      detected.





The
      identified material weaknesses in the Company’s internal controls over financial
      reporting have resulted in insufficient controls related to inventory
      accounting, accounts receivable and payable cut-offs, accrued expenses and
      segregation of duties. The conclusions of the Company’s management regarding the
      effectiveness of the Company’s disclosure controls and procedures as of March
      31, 2007 , the end of the period covered by this Quarterly Report of Form
      10-QSB, are covered in more detail in the following paragraph.





**Disclosure
      Controls and Procedures**





As
      required by Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange
      Act
      of 1934, as of March 31, 2007, the end of the period covered by this quarterly
      report, our management, with the participation of our Chief Executive Officer
      and Chief Financial Officer, concluded its evaluation of the effectiveness
      of
      the design and operation of our disclosure controls and procedures. Disclosure
      controls and procedures are controls and procedures designed to reasonably
      assure that information required to be disclosed in our reports filed under
      the
      Securities Exchange Act of 1934, such as this quarterly report, is recorded,
      processed, summarized and reported within the time periods prescribed by SEC
      rules and regulations, and to reasonably assure that such information is
      accumulated and communicated to our management, including our Chief Executive
      Officer, to allow timely decisions regarding required disclosure. Based on
      that
      evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
      concluded that our disclosure controls and procedures were not effective as
      of
      the end of the period covered by this Quarterly Report on Form
      10-QSB.





-
            29 -





**Changes
      in Internal Controls**





On
      September 28, 2006, in connection with the completion of the
      Lotus International acquisition, we hired our Chief Financial Officer. Our
      CFO is becoming more familiar with the Company, its finances and accounting
      needs. Additionally, the Company’s CEO is becoming more familiar with SEC
      disclosure requirements and procedures. The Company’s management believes that
      substantial remediation measures are required in order to improve the Company’s
      internal controls. We believe that the material weaknesses identified above
      resulted in part from inadequate staffing and training within the Company’s
      finance and accounting group. We believe that we will face challenges in
      integrating procedures and operations and integration activities may affect
      our
      internal control over financial reporting. We intend on continuing to work
      to
      improve our internal controls.





**Other**





Our
      management, including our Chief Executive Officer, does not expect that our
      disclosure controls and procedures will prevent all error and all fraud. A
      control system, no matter how well designed and operated, can provide only
      reasonable, not absolute, assurance that the control system’s objectives will be
      met. Further, the design of a control system must reflect the fact that there
      are resource constraints, and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, have been detected. These
      inherent limitations include the realities that judgments in decision-making
      can
      be faulty, and that breakdowns can occur because of simple error or mistake.





The
      design of any system of controls is based in part upon certain assumptions
      about
      the likelihood of future events, and there can be no assurance that any design
      will succeed in achieving its stated goals under all potential future
      conditions.


PART
        II -
        OTHER INFORMATION


Item
                  1.
              
              Legal
                  ProceedingsNone.Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of ProceedsNone.Item
                  3.
              
              Defaults
                  Upon Senior SecuritiesNone.Item
                  4.
              
              Submissions
                  of Matters to a Vote of Security HoldersBy
                  written consent in lieu of a special meeting of stockholders, on
                  December
                  27, 2006, the Company’s Board of Directors and its consenting majority
                  stockholders adopted and approved an amendment to increase the
                  number of
                  the Company’s authorized shares of capital stock from 50,000,000 to
                  210,000,000 total authorized shares of capital
                  stock. The capital stock now consists of 200,000,000 authorized
                  shares of Common Stock, $0.001 par value per share, and 10,000,000
                  authorized shares of Preferred Stock, with a par value $0.001 per
                  share.Additional
                information regarding this matter can be found in the Company’s Definitive
                Information Statement on Schedule 14C filed with the Securities and
                Exchange Commission on January 18,
                2007.





-
            30 -





Item
                  5.
              
              Other
                  InformationNone.Item
                  6.
              
              Exhibits





31.1
            Rule
                13a-14(a)/15d-14(a) certification of Chief Executive
                Officer


31.2
            Rule
                13a-14(a)/15d-14(a) certificate of Principal Financial
                Officer


32.1
            Section
                1350 certification of Chief Executive
                Officer


32.2
            Section
                1350 certification of Principal Accounting
                Officer








SIGNATURES





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




Lotus Pharmaceuticals, Inc.Date: May
              21,
              2007
            
            By:
              /s/  Liu Zhong YiLiu
                Zhong Yi
              Chief
                Executive OfficerDate: May 21, 2007
            By:
              /s/ Adam WassermanAdam
                Wasserman
              Chief
                Financial Officer


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            31 -