UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      DC 20549





**FORM
      10-QSB**





(Mark
      One)







xQUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934.





For
      the
      Period ended September 30, 2006





or




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





For
      the
      transition period from ___________ to __________





Commission
      File No. 814-00063





CHINA
      BIOPHARMACEUTICALS HOLDINGS, INC.


(Name
      of
      small business issuer in its charter)





Delaware
      13-2949462


(State
      or
      other jurisdiction of (I.R.S. Employer Identification No.)


incorporation
      or organization)





Suite
                602, China Life Tower
              No.
                16, Chaowai Street
              Chaoyang
                District, Beijing
              China
            
            100020(Address
                of principal executive offices)
            
            (Zip
                Code)





Issuer's
      telephone number: (86) 10 8525 1616





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





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





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date:





Title
                of Each Class of
            
            Number
                of Shares OutstandingEquity
                Securities
            
            as
                of September 30, 2006Common
                Stock, $0.01 par value
            
            
            36,141,676








Transitional
      Small Business Disclosure Format: Yes: o| No: x|













**TABLE
      OF CONTENTS**





PagePART
                I - FINANCIAL INFORMATION
            2ITEM
                1. FINANCIAL STATEMENTS
            2ITEM
                2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS
                OF OPERATIONS
            32ITEM
                3. CONTROL AND PROCEDURES
            40PART
                II - OTHER INFORMATION
            40ITEM
                6. EXHIBITS
            40


References
      in this Quarterly Report on Form 10-QSB to the "Company", "we", "us" or "our"
      include China Biopharmaceuticals Holdings, Inc. and its subsidiaries, unless
      the
      context requires otherwise.













**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENT**





CHINA
          BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED
          BALANCE SHEETS
 AS
          OF
          SEPTEMBER 30, 2006
  ASSETSSeptember
                      30, 2006
                
                December
                      31, 2005Unaudited
                
                AuditedCURRENT
                    ASSETS:Cash
                
                $
                2,438,966
                
                $
                1,026,606Accounts
                    receivable, trade, net of allowance for doubtful accountsof
                    $533,297 and $528,708 for September 30, 2006and
                    December 31, 2005, respectively
                
                
                7,641,682
                
                
                4,929,659Accounts
                    receivable, related parties
                
                
                5,360
                
                
                -Other
                    receivables
                
                
                2,055,699
                
                
                262,956Other
                    receivables - related parties
                
                
                42,461
                
                
                856,754Other
                    receivable from former ENSHI's shareholder
                
                
                2,518,461
                
                
                -Advances
                    to suppliers
                
                
                523,089
                
                
                864,944Prepaid
                    expenses
                
                
                91,577
                
                
                21,101Inventories
                
                
                5,445,822
                
                
                4,782,860Loan
                    to shareholders
                
                
                41,778
                
                
                -Total
                    current assets
                
                
                20,804,895
                
                
                12,744,880PLANT
                    AND EQUIPMENT, net
                
                
                11,194,522
                
                
                5,699,211OTHER
                    ASSETS:Intangible
                    asset, net
                
                
                11,176,828
                
                
                6,835,759Long
                    term notes receivable
                
                
                806,400
                
                
                -Long
                    term other receivables - related parties
                
                
                620,000
                
                
                -Restricted
                    cash
                
                
                683,180
                
                
                1,329,280Other
                    assets
                
                
                96,204
                
                
                11,944Total
                    other assets
                
                
                13,382,612
                
                
                8,176,983Total
                    assets
                
                $
                45,382,029
                
                $
                26,621,074LIABILITIES
                    AND SHAREHOLDERS' EQUITYCURRENT
                    LIABILITIES:Accounts
                    payable
                
                $
                3,782,123
                
                $
                5,408,055Accounts
                    payable - related parties
                
                
                62,346
                
                
                240,857Short-term
                    loans
                
                
                4,089,180
                
                
                3,955,600Short-term
                    loans - related parties
                
                
                379,800
                
                
                -Other
                    payables
                
                
                608,628
                
                
                663,874Other
                    payables - related parties
                
                
                371,203
                
                
                198,156Investment
                    payable
                
                
                -
                
                
                430,000Customer
                    deposits
                
                
                648,421
                
                
                743,206Notes
                    payable
                
                
                1,823,617
                
                
                2,356,000Short-term
                    convertible notes payable
                
                
                -
                
                
                425,000Taxes
                    payable
                
                
                1,065,105
                
                
                983,107Dividends
                    payable
                
                
                -
                
                
                186,000Other
                    accrued liabilities
                
                
                679,422
                
                
                286,979Deferred
                    Revenue
                
                
                198,659
                
                
                -Total
                    current liabilities
                
                
                13,708,504
                
                
                15,876,834LONG
                    TERM LIABILITIES:Notes
                    payable
                
                
                480,905
                
                
                -Long
                    term debt
                
                
                -
                
                
                601,369Long
                    term debt - related parties
                
                
                -
                
                
                415,733Other
                    long term liabilities
                
                
                10,841,465
                
                
                -Special
                    payables
                
                
                104,795
                
                
                -Total
                    long term liabilities
                
                
                11,427,165
                
                
                1,017,102Total
                    liabilities
                
                
                25,135,669
                
                
                16,893,936MINORITY
                    INTEREST
                
                
                3,936,694
                
                
                4,458,414SHAREHOLDERS'
                    EQUITY:Preferred
                    stock, $0.01 par value, 10,000,000 shares authorized;930,000
                    and 1,152,500 shares Issued and outstanding as ofSeptember
                    30, 2006 and December 31, 2005, respectively
                
                
                9,300
                
                
                11,525Common
                    stock, $0.01 par value, 200,000,000 shares authorized;36,141,676
                    and 28,616,716 shares issued and outstanding as ofSeptember
                    30,2006 and December 31, 2005
                
                
                361,417
                
                
                286,167Paid-in
                    capital
                
                
                13,050,565
                
                
                3,572,207Capital
                    receivable
                
                
                (276,470
                )
                
                (252,471
                )Deferred
                    compensation
                
                
                -
                
                
                (24,000
                )Statutory
                    reserves
                
                
                2,980,147
                
                
                444,623Retained
                    earnings (deficit)
                
                
                (642,187
                )
                
                1,074,584Accumulated
                    other comprehensive income
                
                
                826,894
                
                
                156,089Total
                    shareholders' equity
                
                
                16,309,666
                
                
                5,268,724Total
                    liabilities and shareholders' equity
                
                $
                45,382,029
                
                $
                26,621,074
  The
        accompanying notes are an integral part of this statement.
   -2-
  CHINA
          BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED
          STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
          THE
          THREE MONTHS AND NINE MONTHS ENDED SPETEMBER 30, 2006 AND 2005
  Three
                    months ended September 30,
                
                Nine
                    months ended September 30,2006
                
                2005
                
                2006
                
                2005(Unaudited)
                
                (Unaudited)
                
                (Unaudited)
                
                (Unaudited)REVENUES
                
                $
                7,962,641
                
                $
                7,498,008
                
                $
                21,233,187
                
                $
                13,129,081COST
                    OF GOODS SOLD
                
                
                4,885,800
                
                
                5,512,480
                
                
                14,079,123
                
                
                9,446,977GROSS
                    PROFIT
                
                
                3,076,841
                
                
                1,985,528
                
                
                7,154,064
                
                
                3,682,104OPERATING
                    EXPENSESResearch
                    and development expenses
                
                
                20,636
                
                
                
                
                
                504,401Selling,
                    general and administrative expenses
                
                
                1,108,674
                
                
                1,078,393
                
                
                2,620,645
                
                
                2,039,938Total
                    Operating Expenses
                
                
                1,129,310
                
                
                1,078,393
                
                
                3,125,046
                
                
                2,039,938INCOME
                    FROM OPERATIONS
                
                
                1,947,531
                
                
                907,135
                
                
                4,029,018
                
                
                1,642,166OTHER
                    INCOME (EXPENSE)Interest
                    income ( expense)
                
                
                (383,537
                )
                
                -
                
                
                (387,739
                )
                
                -Other
                    income (expense)
                
                
                (91,844
                )
                
                (23,119
                )
                
                (336,007
                )
                
                (35,694
                )Total
                    Other Income (expense)
                
                
                (475,381
                )
                
                (23,119
                )
                
                (723,746
                )
                
                (35,694
                )INCOME
                    BEFORE INCOME TAXES AND MINORITY INTERESTS
                
                
                1,472,150
                
                
                884,016
                
                
                3,305,272
                
                
                1,606,472PROVISION
                    FOR INCOME TAXES
                
                
                197,165
                
                
                -
                
                
                346,776
                
                
                -INCOME
                    BEFORE MINORITY INTEREST
                
                
                1,274,985
                
                
                884,016
                
                
                2,958,496
                
                
                1,606,472MINORITY
                    INTERESTS
                
                
                295,384
                
                
                367,764
                
                
                954,403
                
                
                557,094INCOME
                    FROM CONTINUING OPERATIONS
                
                
                979,601
                
                
                516,252
                
                
                2,004,093
                
                
                1,049,378GAIN
                    FROM OPERATIONS OF DISCONTINUEDGain
                    from discontinued operations
                
                
                146,771
                
                
                -
                
                
                146,771
                
                
                -Income
                    tax expense
                
                
                49,902
                
                
                -
                
                
                49,902
                
                
                -Net
                    of Gain on Discontinued Operations
                
                
                96,869
                
                
                -
                
                
                96,869
                
                
                -NET
                    INCOME
                
                
                1,076,470
                
                
                516,252
                
                
                2,100,962
                
                
                1,049,378OTHER
                    COMPREHENSIVE INCOME (LOSS):Foreign
                    currency translation adjustment
                
                
                151,701
                
                
                -
                
                
                670,805
                
                
                -COMPREHENSIVE
                    INCOME (LOSS)
                
                $
                1,228,171
                
                $
                516,252
                
                $
                2,771,767
                
                $
                1,049,378INCOME
                    PER SHARE OF COMMON STOCKBASICCONTINUING
                    OPERATIONS
                
                
                0.03
                
                
                0.02
                
                
                0.06
                
                
                0.04DISCONTINUED
                    OPERATIONS
                
                
                0.00
                
                
                -
                
                
                0.00
                
                
                -NET
                    INCOME
                
                
                0.03
                
                
                0.02
                
                
                0.06
                
                
                0.04DILUTEDCONTINUING
                    OPERATIONS
                
                
                0.03
                
                
                0.02
                
                
                0.06
                
                
                0.04DISCONTINUED
                    OPERATIONS
                
                
                0.00
                
                
                -
                
                
                0.00
                
                
                -NET
                    INCOME
                
                
                0.03
                
                
                0.02
                
                
                0.06
                
                
                0.04WEIGHTED
                    AVERAGED NUMBER OF SHARES OUTSTANDING - BASIC
                
                
                34,902,548
                
                
                28,133,757
                
                
                34,902,548
                
                
                26,218,201WEIGHTED
                    AVERAGED NUMBER OF SHARES OUTSTANDING - DILUTED
                
                
                35,832,548
                
                
                26,218,201
                
                
                35,832,548
                
                
                26,218,201
  The
          accompanying notes are an integral part of this statement.
 -3-
  CHINA
        BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY
 FOR
          THE
          NINE MONTHS ENDED SEPTEMBER 30, 2006
  Preferred
                    Stock
                
                Common
                    StockShares
                
                amount
                
                Shares
                
                Amount
                
                Paid-in
                      Capital
                
                Capital
                    Receivable
                
                Deferred
                      Compensation
                
                Retained
                      Earnings
                
                Statutory
                      Reserves
                
                Accumulated
                          Other Comprehensive Income (Loss)
                
                TotalsBALANCE,
                    December 31, 2004
                
                
                
                
                
                
                
                
                24,358,757
                
                
                243,588
                
                
                1,363,601
                
                
                -
                
                
                -
                
                
                530,861
                
                
                60,750
                
                
                (3,339
                )
                
                2,195,461Shares
                    issued for services
                
                
                
                
                
                
                
                
                175,000
                
                
                1,750
                
                
                122,817
                
                
                -
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                124,567Common
                    shares issued for lab use right
                
                
                
                
                
                
                
                
                300,000
                
                
                3,000
                
                
                297,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                300,000Shares
                    issued for Erye acquisition
                
                
                
                
                
                
                
                
                3,300,000
                
                
                33,000
                
                
                1,617,000
                
                
                -
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                1,650,000Preferred
                    shares issued
                
                
                1,090,000
                
                
                10,900
                
                
                
                
                
                
                
                
                945,245
                
                
                -
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                956,145Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                533,126
                
                
                
                
                
                
                
                
                533,126Statutory
                    reserves
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                
                
                
                -Foreign
                    currency translation adjustments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -BALANCE,
                    September, 2005, Unaudited
                
                
                1,090,000
                
                
                10,900
                
                
                28,133,757
                
                
                281,338
                
                
                4,345,663
                
                
                -
                
                
                -
                
                
                1,063,987
                
                
                60,750
                
                
                (3,339
                )
                
                5,759,299Adjustment
                    for shares issued for Hengyi acquisition
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (667,974
                )
                
                -
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                (667,974
                )adjustment
                    for shares issued for lab use right
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                (270,000
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (270,000
                )Common
                    shares issued for services
                
                
                
                
                
                
                
                
                482,959
                
                
                4,829
                
                
                110,319
                
                
                -
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                115,148Capital
                    receivable
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (252,471
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (252,471
                )Deferred
                    compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (24,000
                )
                
                
                
                
                
                
                
                
                
                
                (24,000
                )Preferred
                    shares issued
                
                
                62,500
                
                
                625
                
                
                
                
                
                
                
                
                54,199
                
                
                -
                
                
                -
                
                
                
                
                
                
                
                
                
                
                
                54,824Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                394,470
                
                
                
                
                
                
                
                
                394,470Statutory
                    reserves
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (383,873
                )
                
                383,873
                
                
                
                
                
                -Foreign
                    currency translation adjustments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                159,428
                
                
                159,428BALANCE,
                    December 31, 2005
                
                
                1,152,500
                
                $
                11,525
                
                
                28,616,716
                
                $
                286,167
                
                $
                3,572,207
                
                $
                (252,471
                )
                $
                (24,000
                )
                $
                1,074,584
                
                $
                444,623
                
                $
                156,089
                
                $
                5,268,724Common
                    shares issued for cash
                
                
                
                
                
                
                
                
                7,831,863
                
                
                78,319
                
                
                6,845,090
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,923,410Common
                    shares issued for services
                
                
                
                
                
                
                
                
                50,000
                
                
                500
                
                
                4,500
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000Common
                    shares issued for note conversion
                
                
                
                
                
                
                
                
                399,820
                
                
                3,998
                
                
                421,002
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                425,000Common
                    shares issued for preferred stock conversion
                
                
                (312,500
                )
                
                (3,125
                )
                
                443,277
                
                
                4,433
                
                
                (1,308
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Common
                    shares returned from Hengyi due to divestiture
                
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                (520,026
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (520,026
                )Deferred
                    compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (24,000
                )
                
                24,000
                
                
                
                
                
                
                
                
                
                
                
                -Preferred
                    shares issued
                
                
                90,000
                
                
                900
                
                
                
                
                
                
                
                
                89,100
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                90,000Assumed
                    warrants to issue common stocks
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,640,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,640,000Shares
                    cancelled for divestiture of HengYi
                
                
                
                
                
                
                
                
                (1,200,000
                )
                
                (12,000
                )
                
                
                
                
                
                
                
                
                
                
                (1,282,209
                )
                
                
                
                
                
                
                
                (1,294,209
                )Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,100,962
                
                
                
                
                
                
                
                
                2,100,962Statutory
                    reserves
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,535,524
                )
                
                2,535,524
                
                
                
                
                
                -Foreign
                    currency translation adjustments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                670,805
                
                
                670,805BALANCE,
                    September, 2006, Unaudited
                
                
                930,000
                
                
                9,300
                
                
                36,141,676
                
                
                361,417
                
                
                13,050,565
                
                
                (276,471
                )
                
                -
                
                
                (642,187
                )
                
                2,980,147
                
                
                826,894
                
                
                16,309,666
 The
            accompanying notes are an integral part of this statement.
  
 -4-
 CHINA
          BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 FOR
        THE
        NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
  2006
                
                2005(Unaudited)
                
                (Unaudited)CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                $
                2,100,962
                
                $
                1,049,377Adjustments
                    to reconcile net income to cashprovided
                    by (used in) operating activities:Shares
                    issued for service
                
                
                5,000
                
                
                -Depreciation
                    and amortization
                
                
                680,032
                
                
                429,040Bad
                    debt expense
                
                
                4,589
                
                
                -Minority
                    interest
                
                
                954,403
                
                
                851,123Change
                    in operating assets and liabilities:(Increase)
                    decrease in assets:Accounts
                    receivable
                
                
                899,778
                
                
                3,916,849Accounts
                    receivable, related parties
                
                
                (5,291
                )
                
                -Notes
                    receivable
                
                
                (12,407
                )
                
                -Other
                    receivables and prepayments
                
                
                (956,432
                )
                
                (203,757
                )Other
                    receivables - related parties
                
                
                (1,330,189
                )
                
                -Long
                    term other receivables
                
                
                (799,920
                )
                
                -Long
                    term other receivables - related parties
                
                
                (620,000
                )
                
                -Advances
                    to suppliers
                
                
                505,679
                
                
                -Other
                    assets
                
                
                -
                
                
                428,862Inventories
                
                
                (1,128,733
                )
                
                (1,702,024
                )Increase
                    (decrease) in liabilities:Accounts
                    payable
                
                
                235,193
                
                
                -Accounts
                    payable - related parties
                
                
                (181,213
                )
                
                -Other
                    payables and accrued liabilities
                
                
                141,999
                
                
                (4,606,424
                )Other
                    payables - related parties
                
                
                1,204,960
                
                
                (115,332
                )Customer
                    deposits
                
                
                (108,957
                )
                
                185,450Taxes
                    payable
                
                
                (472,159
                )
                
                (35,683
                )Net
                    cash provided by (used in ) operating activities
                
                
                1,117,294
                
                
                197,481CASH
                    FLOWS FROM INVESTING ACTIVITIES:Business
                    acquisition - cash paid
                
                
                (930,000
                )
                
                (200,000
                )Cash
                    acquired from business acquisition
                
                
                415,361
                
                
                -Purchase
                    of intangible asset
                
                
                (1,176,980
                )
                
                -Purchase
                    of property and equipment
                
                
                (1,920,070
                )
                
                (909,771
                )Receivable
                    from Enshi's former shareholders
                
                
                (2,681,316
                )
                
                -Discontinued
                    operations effect
                
                
                (127,919
                )
                
                -Net
                    cash used in investing activities
                
                
                (6,420,924
                )
                
                (1,109,771
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Dividend
                    paid to Erye's former shareholders
                
                
                (187,470
                )
                
                -Restricted
                    cash
                
                
                512,874
                
                
                -Proceeds
                    from issuance of preferred stock
                
                
                90,000
                
                
                1,090,000Proceeds
                    from issuance of common stock
                
                
                7,351,534
                
                
                397,000Proceeds
                    (payments) on short-term convertible notes
                
                
                (425,000
                )
                
                450,000Payments
                    on long-term debts
                
                
                (131,371
                )
                
                516,073Proceeds
                    from short term loans - related parties
                
                
                (499,920
                )
                
                -Net
                    cash provided by financing activities
                
                
                6,710,647
                
                
                2,453,073EFFECT
                    OF EXCHANGE RATE ON CASH
                
                
                5,344
                
                
                -INCREASE
                    IN CASH
                
                
                1,412,360
                
                
                1,540,783CASH,
                    beginning of period
                
                
                1,026,606
                
                
                467,036CASH,
                    end of period
                
                $
                2,438,966
                
                $
                2,007,819SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOW INFORMATION:Cash
                    paid for income taxes
                
                $
                385,733
                
                $
                110,219Cash
                    paid for interest expense
                
                $
                463,563
                
                $
                237,830
 The
          accompanying notes are an integral part of this statement.
  -5-
  CHINA
        BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
        TO
        CONS OLIDATED
        FINANCIAL STATEMENTS
 September
        30, 2006
 (Unaudited)
 
 **Note
        1-**  **ORGANIZATION
        AND OPERATIONS**
 China
          Biopharmaceuticals Holdings, Inc. (CBH), a Delaware corporation, was originally
          organized as a corporation under the laws of the state of New York on August
          6,
          1976 under the name of Globuscope, Inc. On August 7, 1984, its name was
          changed
          to Globus Growth Group, Inc., which was its name until it was merged into
          CBH,
          its wholly owned subsidiary in the state of Delaware on August 28, 2004
          through
          an internal re-organizational merger. Effective August 28, 2004, CBH completed
          the acquisition of China Biopharmaceuticals Corp. ("CBC"), a British Virgin
          Islands corporation as the parent, the management company and holder of
          90% of
          the ownership interest in its then only operating subsidiary and asset,
          Nanjing
          Keyuan Pharmaceutical R&D Co., Ltd., doing business in English a.k.a.
          Nanjing Chemsource Pharmaceutical R&D Co. Ltd, ("Keyuan" or "Chemsource"), a
          company established in China and engaged in the discovery, development
          and
          commercialization of innovative drugs and related bio-pharmaceutical products
          in
          China. Nanjing Keyuan Pharmaceutical R&D Co., Ltd. was established in March
          2000 in Nanjing City of Jiangsu Province, China.
 
 On
          September 29, 2004, we signed a purchase agreement which was amended on
          December
          31, 2004 to acquire approximately 75.8% ownership interest of Suzhou Hengyi
          Pharmaceuticals of Feedstock Co., Ltd ("Hengyi"), a Chinese company established
          in Suzhou, China for 1,200,000 of common shares and $1,600,000 to be used
          for
          working capital and/or expansion purposes. The cash contribution is to
          be made
          in installments.
 
 On
          June
          11, 2005, we signed a purchase agreement, which was amended on August 3,
          2005
          under which, we acquired 51% of the controlling ownership interest of Suzhou
          Erye Pharmaceutical Limited Company ("Erye"), a company established in
          Suzhou,
          China. Total consideration paid by us to acquire the 51% ownership interest
          in
          Erye was $3,000,000 cash to be paid in installments, and 3,300,000 of common
          shares valued at $1.00 per share or $3,300,000. Out of the $3,000,000 to
          be paid
          in cash, $2,200,000 would be contributed to Erye for working capital and/or
          expansion purposes. See Note 15 - Business Combinations.
 
 On
          December 31, 2005, our wholly owned subsidiary, CBC, entered into an Agreement
          with four shareholders of Chengdu Tianyin Pharmaceutical Limited Company,
          a
          pharmaceutical company located in the city of Chengdu, Sichuan Province,
          China
          ("Tianyin") to immediately assume operational control of Tianyin in all
          aspects
          of its business operations and to acquire a 51% ownership interest in Tianyin.
          Pursuant to the Agreement, subject to certain conditions, we agreed to
          issue 3
          million shares of common stock to existing shareholders of Tianyin or their
          designees and also agreed to invest US$2 million into Tianyin operations.
          An
          additional 300,000 shares of our common stock will be issued to the existing
          shareholders of Tianyin or their designees, if Tianyin's after tax audited
          profit for the year ended December 31, 2005 reaches US$3,000,000. The unaudited
          numbers are substantially lower than the agreed to targets. We are currently
          evaluating the viability of the implementation of the Tianyin purchase
          agreement
          and will make a final determination after consulting with management of
          Tianyin.
          Based on the pre-conditions in the purchase Agreement, the Company decided
          not
          to assume the operational control of Tianyin at this moment and is exploring
          options of changing the transaction terms or abandoning the acquisition
          of
          Tianyin should Tianyin’s shareholders not compromise and meet the company’s
          request for a reasonable purchase price. Appropriate disclosure will be
          announced upon the final determination by the board of the directors. Since
          this transaction is in the process of evaluation, the final determination
          of
          this merger transaction has not reasonably reached a conclusion; the financial statements
          of
          Tianyin have not been included in the consolidated financial statements
          for the
          nine months ended September 30, 2006.
  -6-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          1 - ORGANIZATION AND OPERATIONS, (continued)**
 
 On
          May
          16, 2006 we entered into a purchase agreement which became effective at
          June 5,
          2006, under which we acquired 100% of the controlling ownership interest
          of RACP
          Pharmaceutical Holdings LTD. (“RACP”) which owns 100% ownership interest of
          Shengyang Enshi Pharmaceutical Limited Company (“Enshi”). Total consideration of
          $14,690,000 paid by us to acquire the 100% interest in both RACP and Enshi
          is
          $550,000 paid in cash, 12,000,000 of CBH warrants valued at $0.22 per warrant
          or
          $2,640,000 and to assume $11,500,000 debt of RACP. The detail information
          of
          accounting for this transaction is disclosed in Note 15 - Business
          Combinations.
 
 The
          principal activities of the Company in Mainland China (“China” or “PRC”) is
          research, manufacture and sale of drug raw materials and intermediates
          as well
          as prescription and non-prescription chemical drugs and Traditional Chinese
          Medicines. The principal activities are in China only.
 
 **Note
          2-**  **SIGNIFICANT
          ACCOUNTING POLICIES**
  **Economic
          and Political Risks**
  The
          Company faces a number of risks and challenges since its assets are located
          in
          China and its revenues are derived from its operations in China. China
          is a
          developing country with a young market economic system overshadowed by
          the
          state. Its political and economic systems are very different from the more
          developed countries and are still in the stage of change. China also faces
          many
          social, economic and political challenges that may produce major shocks
          and
          instabilities and even crises, in both its domestic arena and its relationship
          with other countries, including but not limited to the United States. Such
          shocks, instabilities and crises may in turn significantly and negatively
          affect
          the Company's performance.
 
 **Basis
          of Presentation**
  The
          consolidated financial statements include the accounts of the Company and
          all
          its majority-owned subsidiaries which require consolidation. Material
          inter-company transactions have been eliminated in the
          consolidation.
 
 Since
          the
          Tianyin’s transaction is in the evaluation process, the final determination of
          this merger transaction has not reasonably reached a conclusion; the financial
          statements of Tianyin were not included in the consolidated financial statements
          for the nine months ended September 30, 2006.
  On
          August
          4, 2004, the Company declared that the majority stockholders of Globus
          executed
          a written consent providing a merger (the “Merger”) of Globus with and into its
          wholly owned subsidiary, CBH. On July 3, 2004, an Agreement and Plan of
          Merger
          (the Merger Agreement) was signed
          by
          and between Globus and CBH. The Merger Agreement provided for a tax-free
          reorganization pursuant to the provisions of Section 368 of the Internal
          Revenue
          Code, whereby Globus would be merged with and into CBH. The separate corporate
          existence of Globus ceased and CBH continued as the surviving corporation
          of the
          merger. In the Merger, all issued and outstanding shares of Globus were
          converted into shares of common stock of CBH on the basis of  seven for
          five (7 for 5).
 
 -7-
 CHINA
              BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
              TO
              CONS OLIDATED
              FINANCIAL STATEMENTS
 September
              30, 2006
 (Unaudited)
 **Note
          2-**  **SIGNIFICANT
          ACCOUNTING POLICIES, (continued)**
  **Land
          Use Rights**
 
 According
          to Chinese law, the government owns all the land in China. Companies or
          individuals are authorized to possess and use the land only through land
          use
          rights granted by the Chinese government. Land use rights are being amortized
          using the straight-line method over the lease term of 40 to 50
          years.
 
 **Plant
          and Equipment**
  Plant
          and
          equipment are stated at cost less accumulated depreciation. Depreciation
          is
          provided on the straight-line basis over their respective estimated useful
          lives. Estimated useful lives are as follows.
  Equipment and machinery
                5 yearsMotor vehicles
                5 yearsFurniture and fixtures
                5
                  yearsBuildings
                20 yearsLand use right
                40-50 years
 
 The
          cost
          and related accumulated depreciation of assets sold or otherwise retired
          are
          eliminated from the accounts and any gain or loss is included in the statement
          of operations. The cost of maintenance and repairs is charged to income
          as
          incurred, whereas significant renewals and betterments are
          capitalized.
  Long-term
          assets of the Company are reviewed annually as to whether their carrying
          value
          has become impaired, pursuant to the guidelines established in Statement
          of
          Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment
          or
          Disposal of Long-Lived Assets. The Company also re-evaluated the periods
          of
          amortization to determine whether subsequent events and circumstances are
          warrant revised estimate of useful lives.
 
 **Cash
          and Cash Equivalents**
  For
          financial reporting purposes, the Company considers all highly liquid investment
          purchased with original maturity of three months or less to be cash equivalents.
          The Company maintains no bank accounts in the United States of
          America.
  **Inventories**
 
 Inventories
          are stated at the lower of cost or market using the first-in, first-out
          basis.
  -8-
 CHINA
              BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
              TO
              CONS OLIDATED
              FINANCIAL STATEMENTS
 September
              30, 2006
 (Unaudited)
 **Note
          2-**  **SIGNIFICANT
          ACCOUNTING POLICIES, (continued)**
 
 **Patent**
 
 The
          patent represent patented pharmaceutical formulas, on which we have obtained
          official registration certificate or official approval for clinical trials.
          No
          amortization is provided when the Company intends to and has the ability
          to sell
          the patent or formulas within not more than two months, otherwise the patent
          costs will be subject to amortization over its estimated useful life period.
          Such costs comprise purchase costs of patented pharmaceutical formulas
          and costs
          incurred for patent application. Patent costs are accounted for on an individual
          basis. The carrying value of patent costs is reviewed for impairment annually
          when events and changes in circumstances indicate that the carrying value
          may
          not be recoverable.
  **Research
          and Development Costs**
  Research
          and development (or “R&D) expenses include salaries, benefits, and other
          headcount related costs, clinical trial and related clinical manufacturing
          costs, contract and other outside service fees, and facilities and overhead
          costs. R&D costs are expensed when incurred.
 
 **Cash
          and concentration of risk**
 
 Cash
          includes cash on hand and demand deposits in accounts maintained with
          state **** owned
          banks within the People’s Republic of China and Hong Kong. Total cash in these
          banks at September 30, 2006 amounted to $2,438,966 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.
 
 **Fair
          Value of Financial Instruments**
  The
          Company's financial instruments primarily include cash and cash equivalents,
          accounts receivable, and accounts payable, accrued expenses, customer deposits
          and amounts due to related parties and shareholders. Management has estimated
          that the carrying amounts approximate their fair values due to their short-term
          nature. In addition, the Company has notes payable issued by the bank and
          special payables. Management estimates the carrying amount approximates
          fair
          values because a historical term of the notes approximates terms availability
          today.
  **Revenue
          and Revenue Recognition**
  We
          have
          three categories of revenue resources, revenue from sales of new drugs
          formulas,
          revenue from R&D service rendered by the Company and revenue from sales of
          medical product.
 
 The
          Company recognizes revenue from product and drug formula sales when title
          has
          been transferred, the risks and rewards of ownership have been transferred
          to
          the customer, the fee is fixed and determinable, and the collection of
          the
          related receivable is probable which is generally at the time of shipment.
          Allowances are established for estimated rebates, wholesaler charge backs,
          prompt pay sales discounts, product returns, and bad debts.
 
 For
          revenue from R&D service, revenue is recognized when milestone goals are
          achieved ,
          milestone payments are no longer refundable, and continued performance
          of future
          R&D services related to the milestone are not required.
  -9-
  CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          2-**  **SIGNIFICANT
          ACCOUNTING POLICIES, (continued)**
 
 **Income
          Taxes**
  Income
          taxes are provided on the liability method whereby deferred tax assets
          and
          liabilities are recognized for the expected tax consequences of temporary
          differences between the tax basis and reported amounts of assets and
          liabilities. Deferred tax assets and liabilities are computed using enacted
          tax
          rates expected to apply to taxable income in the periods in which temporary
          differences are expected to be recovered or settled. The effect on deferred
          tax
          assets and liabilities from a change in tax rates is recognized in income
          in the
          period that includes the enactment date. The Company provides a valuation
          allowance for certain deferred tax assets, if it is more likely than not
 that
          the
          Company will not realize tax assets through future operations.
 
 **Use
          of Estimates**
  The
          preparation of the financial statements in conformity with generally accepted
          accounting principles in the United States of America requires management
          to
          make estimates and assumptions that affect the reported amounts of assets
          and
          liabilities and disclosure of contingent assets and liabilities at the
          date of
          the financial statements and the reported amounts of revenues and expenses during
          the reporting periods. Management makes these estimates using the best
          information available at the time the estimate are made; however actual
          results
          could differ materially from those estimates.
 
 **Comprehensive
          Income**
 
 SFAS
          No.
          130, Reporting Comprehensive Income, established standard for the reporting
          and
          display of comprehensive income, its components and accumulated balances
          in a
          full set of general purpose financial statements. SFAS No. 130 defines
          comprehensive income to include all changes in equity except those resulting
          form investments by owners and distributions to owners. Among other disclosures,
          SPAS No. 130 requires that all items that are required to be recognized
          under
          current accounting standards as components of comprehensive income be reported
          in financial statement that is presented with the same prominence as other
          financial statements. The Company's only current component of comprehensive
          income is the foreign currency translation adjustment.
  **Foreign
          Currency Translation**
  The
          reporting currency of the Company is the US dollar. The Company’s Chinese
          subsidiaries’ financial records are maintained and the statutory financial
          statements are stated in its local currency, Renminbi (RMB), as their functional
          currency. Results of operations and cash flow are translated at average
          exchange
          rates during the period, assets and liabilities are translated at the unified
          exchange rate as quoted by the People's Bank of China at the end of each
          reporting period, and equity are stated at their historical rates.
 
 This
          quotation of the exchange rates does not imply free convertibility of RMB
          to
          other foreign currencies. All foreign exchange transactions continue to
          take
          place either through the People's Bank of China or other banks authorized
          to buy
          and sell foreign currencies at the exchange rate quoted by the People's
          Bank of
          China.
  Approval
          of foreign currency payments by the Bank of China or other institutions
          requires
          submitting a payment application form together with invoices, shipping
          documents
          and signed contracts.
  -10-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          2- SIGNIFICANT ACCOUNTING POLICIES, (continued)**
 
 **Foreign
          Currency Translation, (continued)**
 
 Translation
          adjustments resulting from this process are included in accumulated other
          comprehensive income in the consolidated statement of shareholders' equity
          and
          amounted to $826,894 and $156,089 for the nine months ended September 30,
          2006
          and 2005, respectively. The balance sheet amounts with the exception of
          equity
          at September 30, 2006 were translated at 7.90 RMB to 1.00 USD as compared
          to
          8.26 RMB at September 30, 2005. The weighted average translation rate of
          8.00
          RMB to 1.00 USD for the nine months ended September 30, 2006 was applied
          to
          income statement accounts.
 
 Transaction
          gains and losses that arise from exchange rate fluctuations on transactions
          denominated in a currency other than the functional currency are included
          in the
          results of operations as incurred.
 
 These
          amounts are not material to the consolidated financial statements.
 
 **Earnings
          Per Share**
 
 The
          Company adopted Statement of Financial Accounting Standards No. 128, “Earnings
          Per Share” (SFAS128). SFAS 128 requires the presentation of earnings per share
          (EPS) as Basic and Diluted EPS.
 
 As
          of
          September 30, 2006, the Company’s issued and outstanding shares of Series A
          convertible preferred stock was 930,000. We also took into account the
          warrants
          we issued for computation of earnings per share. We decided that all the
          warrants were anti-dilutive because the excise prices were higher than
          market
          price in the period presented. The number of shares used in computing diluted
          earnings per share for the nine months ended September 30, 2006 and 2005
          amounted to 35,832,548, which included 930,000 weighted average number
          of
          convertible preferred stock, and 26,218,201, respectively. The number of
          shares
          used in computing basic earnings per share for the nine months ended September
          30, 2006 and 2005 were 34,902,548 and 26,218,201 respectively. Basic and
          Diluted
          earnings per share for the nine months ended September 30, 2006 and 2005
          amounted to 0.06 and 0.04, respectively.
 
 **Recent
          Accounting Pronouncements**
  In
          March
          2005, the FASB published FASB Interpretation No. 47, “Accounting for
          Conditional Asset Retirement Obligations,” which clarifies that the term,
          conditional asset retirement obligations, as used in SFAS No. 143,
“Accounting for Asset Retirement Obligations,” refers to a legal obligation to
          perform an asset retirement activity in which the timing and (or) method of
          settlement are conditional on a future event that may or may not be within
          the
          control of the entity. The uncertainty about the timing and (or) method of
          settlement of a conditional asset retirement obligation should be factored
          into
          the measurement of the liability when sufficient information exists. The
          interpretation also clarifies when an entity would have sufficient information
          to reasonably estimate the fair value of an asset retirement obligation.
          This
          interpretation is effective no later than the end of the Company’s fiscal year
          2006. The adoption of this Interpretation is not expected to have a material
          effect on the Company’s consolidated financial position or results
          of operations.
  -11-
  CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          2-**  **SIGNIFICANT
          ACCOUNTING POLICIES, (continued)**
 
 **Recent
          Accounting Pronouncements, (continued)**
  In
          June
          2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
          Corrections” (“SFAS No. 154”). SFAS No. 154 replaces APB No. 20
          (“APB 20”) and SFAS No. 3, “Reporting Accounting Changes in
          Interim Financial Statements,” and applies to all voluntary changes in
          accounting principle, and changes the requirements for accounting for and
          reporting of a change in accounting principle. APB 20 previously required
          that most voluntary changes in accounting principle be recognized by including
          in net income of the period of change a cumulative effect of changing to
          the new
          accounting principle whereas SFAS No. 154 requires retrospective
          application to
          prior
          periods’ financial statements of a voluntary change in accounting principle,
          unless it is impracticable.
 
 SFAS
          No. 154 enhances the consistency of financial information between periods.
          SFAS No. 154 become beginning with the Company’s first quarter of fiscal
          year 2006. SFAS No. 154 did not have a material impact on its results of
          operations, financial position or cash flows.
 
 In
          June
          2006, the Financial Accounting Standards Board (FASB) issued an FIN 48
          “Accounting Uncertainty in Income Taxes—an interpretation of FASB Statement
          No. 109.” Under the Interpretation, a company would recognize in its
          financial statements its best estimate of the benefit of a tax position,
          only if
          the tax position is considered probable of being sustained on audit based
          solely
          on the technical merits of the tax position. In evaluating whether the
          probable
          recognition threshold has been met, the proposed Interpretation would require
          the presumption that the tax position will be evaluated during an audit
          by
          taxing authorities. The Interpretation is effective fiscal years beginning
          after
          December 31, 2006, with a cumulative effect of a change in accounting principle
          to be recorded upon the initial adoption. The
          proposed Interpretation would apply to all tax positions and only benefits
          from
          tax positions that meet the probable recognition threshold at or after
          the
          effective date would be recognized. The Company is currently analyzing
          the
          proposed Interpretation and has not determined its potential impact on
          our
          Consolidated Financial Statements. While we cannot predict with certainty
          the
          rules in the final Interpretation, there is risk that the final Interpretation
          could result in a cumulative effect charge to earnings upon adoption, increases
          in future effective tax rates, and/or increases in future interperiod effective
          tax rate volatility.
 
 In
          October 2005, FASB Staff Position (FSP) FAS 13-1, "Accounting for Rental
          Costs
          Incurred during a Construction Period" was issued. This FSP concluded that
          rental costs associated with ground or building operating leases that are
          incurred during a construction period be expensed. The
          guidance in the FSP is required to be applied to the first reporting period
          beginning. The adoption of this pronouncement did not have a material impact
          on
          the Company's financial position or results of operations.
 
 In
          February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
          Financial Instruments” (“FAS 155”), which amends SFAS No. 133, “Accounting
          for Derivative Instruments and Hedging Activities” (“FAS 133”) and SFAS
          No. 140, “Accounting for Transfers and Servicing of Financial Assets and
          Extinguishments of Liabilities” (“FAS 140”). FAS 155 provides guidance to
          simplify the accounting for certain hybrid instruments by permitting fair
          value
          remeasurement for any
          hybrid financial instrument that contains an embedded derivative, as well
          as,
          clarifies that beneficial interests in securitized financial assets are
          subject
          to FAS 133. In addition, FAS 155 eliminates a restriction on the passive
          derivative instruments that a qualifying special-purpose entity may hold
          under
          FAS 140. FAS 155 is effective for all financial instruments acquired, issued
          or
          subject to a new basis occurring after the beginning of an entity’s first fiscal
          year that begins after September 15, 2006.
  -12-
 CHINA
              BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
              TO
              CONS OLIDATED
              FINANCIAL STATEMENTS
 September
              30, 2006
 (Unaudited)
 **Note
          2-**  **SIGNIFICANT
          ACCOUNTING POLICIES, (continued)**
 
 **Recent
          Accounting Pronouncements, (continued)**
  In
          March
          2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
          Assets” (“FAS 156”), which amends SFAS No. 140. FAS 156 specifically
          provides guidance addressing the recognition and measurement of separately
          recognized servicing assets and liabilities, common with mortgage securitization
          activities, and provides an approach to simplify efforts to obtain hedge
          accounting treatment. FAS 156 is effective for all separately recognized
          servicing assets and liabilities acquired or issued after the beginning
          of an
          entity’s fiscal year that begins after September 15, 2006, with early
          adoption being permitted.
 
 In
          July
          2006, the FASB issued FASB Interpretation No. 48, “Accounting for
          Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes
          recognized in a company’s financial statements in accordance with FAS 109,
“Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and
          measurement attribute for the financial statement recognition and measurement
          of
          a tax position taken or expected to be taken in a tax return. FIN 48 also
          provides guidance on derecognition, classification, interest and penalties,
          accounting in interim periods, disclosure and transition. The requirements
          of
          FIN 48 are effective for our fiscal year beginning January 1, 2007.
 
 In
          September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
          which
          addresses the measurement of fair value by companies when they are required
          to
          use a fair value measure for recognition or disclosure purposes under GAAP.
          SFAS
          No. 157 provides a common definition of fair value to be used throughout
          GAAP
          which is intended to make the measurement of fair value more consistent
          and
          comparable and improve disclosures about those measures. SFAS No. 157 will
          be
          effective for an entity's financial statements issued for fiscal years
          beginning
          after November 15, 2007. The Company is currently evaluating the effect
          SFAS No.
          157 will have on its consolidated financial position, liquidity, or results
          of
          operations.
 
 In
          September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
          Defined
          Benefit Pension and Other Postretirement Plans−−an amendment of FASB Statements
          No. 87, 88, 106, and 132(R)". One objective of this standard is to make
          it
          easier for investors, employees, retirees and other parties to understand
          and
          assess an employer's financial position and its ability to fulfill the
          obligations under its benefit plans. SFAS No. 158 requires employers to
          fully
          recognize in their financial statements the obligations associated with
          single−employer defined benefit pension plans, retiree healthcare plans, and
          other postretirement plans. SFAS No. 158 requires an employer to fully
          recognize
          in its statement of financial position the overfunded or underfunded status
          of a
          defined benefit postretirement plan (other than a multiemployer plan) as
          an
          asset or liability and to recognize changes in that funded status in the
          year in
          which the changes occur through comprehensive income. This Statement also
          requires an employer to measure the funded status of a plan as of the date
          of
          its year-end statement of financial position, with limited exceptions.
          SFAS No.
          158 requires an entity to recognize as a component of other comprehensive
          income, net of tax, the gains or losses and prior service costs or credits
          that
          arise during the period but are not recognized as components of net periodic
          benefit cost pursuant to SFAS No. 87. This Statement requires an entity
          to
          disclose in the notes to financial statements additional information about
          certain effects on net periodic benefit cost for the next fiscal year that
          arise
          from delayed recognition of the gains or losses, prior service costs or
          credits,
          and transition asset or obligation. The Company is required to initially
          recognize the funded status of a defined benefit postretirement plan and
          to
          provide the required disclosures for fiscal years ending after December
          15,
          2006.
  -13-
 CHINA
          BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
          TO
          CONS OLIDATED
          FINANCIAL STATEMENTS
 September
          30, 2006
 (Unaudited)
 
 **Note
          2 - SIGNIFICANT ACCOUNTING POLICIES, (continued)**
 
 **Recent
          Accounting Pronouncements, (continued)**
  The
          implementation of the above pronouncements is not expected to have a material
          effect on the Company's financial statement presentation or
          disclosures.
 
 **Note
          3 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**
 
 Interest
          expense paid amounted to $463,563 and $237,830 for the nine months ended
          September 30, 2006 and 2005, respectively.
 
 Income
          tax of $385,733 and $110,219 respectively were paid for the nine months
          ended
          September 30, 2006 and 2005.
 
 During
          2005, the Company issued 657,959 shares of common stock for services. The
          fair
          market value of the services received was $239,715.
 
 On
          March
          8, 2005, the Company issued 300,000 shares of common stock to China
          Pharmaceutical University for a lab use right.
 
 **Note
          4** **-**  **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’s judgment and estimates are made in connection with
          establishing the allowance for doubtful accounts. Specifically, we analyze
          the
          aging of accounts receivables balances, historical bad debts, customer
          concentrations, customer credit-worthiness, current economic trends and
          changes
          in our customer payment terms. Significant changes in customer concentrations
          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. The reserve for bad
          debts
          increased $4,589 from $528,708 at December 31, 2005 to $533,297 at September
          30,
          2006, $4,589 mainly due to the acquisition of Enshi.
 
 -14-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          4 -**  **ACCOUNTS RECEIVABLE, (continued)**
 
 As
          of
          September 30, 3006 and December 31, 2005, accounts receivable consist of
          the
          following:
  September
                      30, 2006
                  
                  December
                      31, 2005Accounts
                      receivable
                  
                  $
                  8,174,979
                  
                  $
                  4,820,634Allowance
                      for doubtful accounts
                  
                  
                  (533,297
                  )
                  
                  (528,708
                  )Accounts
                      receivable -discontinued
                      operation (net)
                  
                  
                  -
                  
                  
                  637,733Accounts
                      receivable, net
                  
                  $
                  7,641,682
                  
                  $
                  4,929,659
 
 **Note
          5 -**  **INVENTORIES**
 
 Inventories
          consisted of the following at September 30, 2006 and December 31,
          2005:
 September
                      30, 2006
                  
                  December
                      31, 2005Raw
                      materials
                  
                  $
                  1,381,659
                  
                  $
                  424,977Packaging
                      supplies
                  
                  
                  293,719
                  
                  
                  140,373Sundry
                      supplies
                  
                  
                  9,512
                  
                  
                  9,218Work
                      in process
                  
                  
                  1,094,792
                  
                  
                  971,028Finished
                      goods
                  
                  
                  2,666,140
                  
                  
                  1,669,354Discontinued
                      operation -
                  
                  
                  -
                  
                  
                  1,567,910Inventory$
                  5,445,822
                  
                  $
                  4,782,860
 
 -15-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          6-**  **PLANT
          AND EQUIPMENT**
  Plant
          and
          equipment consist of the following as of September 30, 2006 and December
          31,
          2005:
  September
                      30, 2006
                  
                  December
                      31, 2005Plant
                  
                  $
                  6,191,537
                  
                  $
                  2,709,509Office
                      equipment
                  
                  
                  748,437
                  
                  
                  132,494Machinery
                  
                  
                  8,331,984
                  
                  
                  5,297,637Automobiles
                  
                  
                  715,397
                  
                  
                  156,191Construction
                      in progress
                  
                  
                  317,480
                  
                  
                  -Discontinued
                      operation -Fixed
                      assets (net)
                  
                  
                  -
                  
                  
                  1,716,582Total
                      plant and equipment
                  
                  
                  16,304,835
                  
                  
                  10,012,413Less:
                      accumulated depreciation
                  
                  
                  (5,110,313
                  )
                  
                  (4,313,202
                  )Plant
                      and equipment, net
                  
                  $
                  11,194,522
                  
                  $
                  5,699,211
   Depreciation
          expense for the nine months ended September 30, 2006 and 2005 was $433,097
          and
          $429,040 respectively.
  -16-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          7-**  **OTHER
          ASSETS**
 
 **Intangible
          Assets**
 
 Intangible
          assets include land use rights and drug patents.
  September
                    30, 2006
                
                December
                    31, 2005Land
                  use rightsErye
                
                $
                5,789,381
                
                $
                5,73,354Less:
                    Accumulated amortization
                
                
                (495,373
                )
                
                (321,105
                )5,294,007
                
                
                5,416,249Enshi
                
                
                4,593,816
                
                
                -Less:
                    Accumulated amortization
                
                
                (340,976
                )
                
                -4,252,840
                
                
                -Prepayment
                    on land - Enshi
                
                
                633,000
                
                
                -PatentsApproved
                    drugs
                
                
                1,367,563
                
                
                -Less:
                    Accumulated amortization
                
                
                (370,582
                )
                
                -996,981
                
                
                -Intangible
                  assets in discontinued operations
                
                
                -
                
                
                1,419,510Total
                  intangible assets, net
                
                $
                11,176,828
                
                $
                6,835,759
  Amortization
          expense for the nine months ended September 30, 2006 and 2005 was $246,935
          and
          $83,951, respectively.
 
 **Restricted
          Cash**
 
 Restricted
          cash represents cash required to be deposited to bank but subject to withdrawal
          with restrictions according to the agreement with bank. The following list
          the
          depositors, the amount and names of the bank as of September 30, 2006 and
          December 31, 2005:
 
 -17-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          7-**  **OTHER
          ASSETS, (continued)**
 
 **Restricted
          cash, (continued)**
  Depositor
                  
                  Name
                      of Bank
                  
                  Septebmer
                        30, 2006
                  
                  December
                      31, 2005Erye
                  
                  
                  Hua
                      Xia Bank, Suzhou
                  
                  $
                  683,180
                  
                  $
                  1,178,000Discontinued
                      operation
                  
                  
                  Taichang
                      Chengxiang Bank
                  
                  
                  -
                  
                  
                  151,280Total
                  
                  
                  
                  
                  $
                  683,180
                  
                  $
                  1,329,280
 
 **Long
          Term Notes Receivable**
 
 Long
          term
          notes receivable represents loans made to third parties for cash flow needs
          for
          R&D projects on new drugs. The Company has first priority to purchase the
          new drug rights if the projects are successfully completed. If the Company
          gives
          up the right, the debtors required to repay the loans plus 3% interest
          per annum
          within one month after the drug rights are sold to another party. If on
          or
          before February 28, 2010, the R&D projects are not completed or failed, the
          debtors are required to repay the loans plus 6% interest per annum within
          ten
          days after such a conclusion was made. As of September 30, 2006, the total
          amount of the long term notes receivable was $806,400. 51% of ownership
          equity
          of the debtor was pledged for the loan. The management determined the likelihood
          of repayment to be collected the Company is high based on the above conditions
          and well financial conditions of the counter parties.
 
 **Note
          8- RELATED PARTIES TRANSACTIONS**
 
 **Accounts
          Receivables - Related Parties**
 
 Subsidiary
                
                Amount
                
                Due
                    from
                
                Term
                
                Manner
                    of settlementErye
                
                $
                5,360
                
                
                Hainan
                    Kaiye
                
                
                Short
                    term
                
                
                To
                    be received in cash
  As
          of
          September 30, 2006, total accounts receivables due from related parties
          were
          $5,360.
 
 **Other
          Receivables - Related Parties**
  Subsidiary
                  
                  Amount
                  
                  Due
                      from
                  
                  Term
                  
                  Manner
                      of settlementCBC
                  
                  $
                  42,461
                  
                  
                  Advance
                      to shareholders
                  
                  
                  Short
                      term
                  
                  
                  To
                      be received in cash
  As
          of
          September 30, 2006, total receivables due from related parties were
          $42,461.
 
 -18-
 CHINA
              BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
              TO
              CONS OLIDATED
              FINANCIAL STATEMENTS
 September
              30, 2006
 (Unaudited)
 **Note
          8- RELATED PARTIES TRANSACTIONS, (continued)**
 
 **Other
          Receivables - ENSHI’s former shareholder**
  On
            September 29, 2006, the Company’s subsidiary Enshi made a distribution of
            $2,518,461 to the former shareholder of Enshi in the form of 2005 profit
            distribution. However the Enshi purchase agreement did not provide specifically
            about such distribution. The management of the Company expects to recover
            this
            amount from the former Enshi shareholder. The Company holds various amounts
            in
            terms of purchase price withholding and working capital withholding against
            the
            former Enshi shareholder. The mananagement expects to resolve this matter
            shortly.
 Subsidiary
                  
                  Amount
                  
                  Due
                      from
                  
                  Term
                  
                  Manner
                      of settlementENSHI
                  
                  $
                  2,518,461
                  
                  
                  Former
                      shareholder
                  
                  
                  Short
                      term
                  
                  
                  To
                      be received in cash
  As
          of
          September 30, 2006, total receivables due from related parties were
          $2,518,461.
 
 **Accounts
          Payable - Related Parties**
  Subsidiaries
                  
                  Amount
                  
                  Due
                      to
                  
                  Term
                  
                  Manner
                      of settlementErye
                  
                  $
                  62,346
                  
                  
                  Hainan
                      Kaiye
                  
                  
                  Short
                      term
                  
                  
                  To
                      be paid in cash
 
 As
          of
          September 30, 2006, total accounts payable due to related parties were
          $62,346.
 
 **Other
          Payables - Related Parties**
  Subsidiaries
                  
                  Amount
                  
                  Due
                      to
                  
                  Term
                  
                  Manner
                      of settlementErye
                  
                  $
                  371,203
                  
                  
                  Hainan
                      Kaiye
                  
                  
                  Short
                      term
                  
                  
                  To
                      be paid in cash
 
 As
          of
          September 30, 2006, total other payables due to related parties were
          $371,203.
 
 **Long
          Term Other Receivables - Related Parties**
 Subsidiary
                  
                  Amount
                  
                  Due
                      from
                  
                  Term
                  
                  Manner
                      of settlementCBH
                  
                  $
                  620,000
                  
                  
                  Hengyi
                  
                  
                  Long
                      term
                  
                  
                  To
                      be received in cash
  As
          of
          September 30, 2006, total other payables due to related parties were
          $620,000.
 
 -19-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          8- RELATED PARTIES TRANSACTIONS, (continued)**
 
 **Short
          Term Loans - Related Parties**
 Subsidiary
                  
                  Amount
                  
                  Due
                      from
                  
                  Term
                  
                  Manner
                      of settlementENSHI
                  
                  $
                  379,800
                  
                  
                  Erye
                      Trade Company
                  
                  
                  Long
                      term
                  
                  
                  To
                      be received in cash
  As
          of
          September 30, 2006, total other payables due to related parties were
          $379,800.
 
 **Special
          payable - Related Parties**
  Subsidiary
                  
                  Amount
                  
                  Due
                      from
                  
                  Term
                  
                  Manner
                      of settlementERYE
                  
                  $
                  104,795
                  
                  
                  Erye
                      Trade Company
                  
                  
                  Long
                      term
                  
                  
                  To
                      be received in cash
  As
          of
          September 30, 2006, total other payables due to related parties were
          $104,795.
 
 **Note** **9 - NOTES PAYABLE**
 
 The
          Company’s subsidiary Erye has $2,304,522 notes payable to Erye’s vendors for the
          purchase of drug raw materials. Notes payable are interest free and usually
          mature after a six month period.
 
 The
          Company had notes payable $425,000 and were converted to preferred stock
          in
          2006.
 
 **Note
          10 - MINORITY INTEREST**
 
 Minority
          interest consists of the interest of minority shareholders in the subsidiaries
          of the Company. The Company owns a 51% ownership interest in Erye. The
          Company’s
          wholly owned subsidiary China Biopharmaceuticals Corporation (BVI Company)
          owns
          90% ownership interest in Keyuan. There is no minority interest in Enshi
          since
          the Company owns 100% of Enshi.
 Equity
                          of theSubsidiariesas of
                  
                  Ownershipin Subsidiaries
                  
                  MinorityInterest in SubsidiariesSubsidiary
                  
                  September
                      30, 2006
                  
                  Percentage
                  
                  Amount
                  
                  Percentage
                  
                  AmountErye
                  
                  $
                  7,763,197
                  
                  
                  51.00
                  %
                  $
                  3,959,230
                  
                  
                  49.00
                  %
                  $
                  3,803,966Keyuan
                  
                  
                  1,327,273
                  
                  
                  90.00
                  %
                  
                  1,194,546
                  
                  
                  10.00
                  %
                  
                  132,727Enshi
                  
                  
                  16,798,800
                  
                  
                  100.00
                  %
                  
                  16,798,800
                  
                  
                  0.00
                  %
                  
                  -Total
                  
                  $
                  25,889,270
                  
                  
                  
                  
                  $
                  21,952,576
                  
                  
                  
                  
                  $
                  3,936,694
  -20-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          11- STATUTORY RESERVES**
 
 According
          to Chinese corporation law, a company incorporated in China is required
          to
          contribute an amount of no less then 15% of its yearly net income for its
          employees to a reserve account in the company. This statutory reserve fund
          is
          planned for future development of the company or use for employee’s benefits.
          The following list the provision of statutory reserves as of September
          30,
          2006.
  Year
                  
                  Amount2004
                  
                  $
                  1,135,0012005
                  
                  
                  1,152,0362006
                  
                  
                  693,110Total
                  
                  $
                  2,980,147
  **Note
          12 - INCOME TAXES**
  **Corporation
          Income Tax (CIT)**
  In
          accordance with the relevant tax laws and regulations of the People's Republic
          of China, a company is entitled to a full exemption from CIT for the first
          two
          years, and a 50% deduction in CIT for the next three years, commencing
          from the
          first profitable year. For 2005, of the Company’s subsidiaries, Keyuan and Enshi
          were exempt from CIT, while Erye was subject to a 33% income tax rate for
          the
          year of 2005. Erye was granted income tax exemption for two years commencing
          from January 1, 2006.
  The
          Company’s income tax expense for the nine months ended September 30, 2006 and
          2005 are $346,776 and $0,  respectively.
  According
          to China’s income tax law, company income tax is due to the State Tax Bureau
          monthly or quarterly. Subsidiaries of the Company paid its income tax by
          quarter. Before every 15 th day of
          pay
          month, subsidiaries pay its income tax base on its quarterly net profit.
          Since
          income tax rate, with income tax preference or not, is a flat rate in China,
          that there is no need for income tax reconciliation to practice in
          China.
 
 The
          Company’s operating subsidiaries operate in China. According to the Chinese
          Joint Venture Business Law, these subsidiaries have been registered and
          incorporated with the status of Sino-foreign joint venture companies and
          are
          subject to a two year tax exemption and a three year 50% reduction in income
          tax
          rates preference treatment, which generally commences from the first year
          of
          establishing a joint venture or the approval date of the income tax preference
          application.
 
 The
          following list depicts the tax preference rate applicable to the subsidiaries
          and the applicable years:
 
 -21-
  CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          12 - INCOME TAXES, (continued)**
 
 **Corporation
          Income Tax (CIT), (continued)**
 Full
                      Exemption Period
                  
                  Half-Reduction
                      PeriodSubsidiaries
                  
                  Period
                  
                  Tax
                      Rate
                  
                  Period
                  
                  Tax
                      RateNanjing
                      Keyuan
                  
                  
                  2005-2006
                  
                  
                  0.00%
                  
                  
                  2007-2009
                  
                  
                  16.50
                  %Suzhou
                      Erye
                  
                  
                  2006-2007
                  
                  
                  0.00%
                  
                  
                  2008-2010
                  
                  
                  16.50
                  %Shengyang
                      Enshi
                  
                  
                  2004-2005
                  
                  
                  0.00%
                  
                  
                  2006-2008
                  
                  
                  15.00
                  %
 After
          the
          income tax preference period expired, a 33% income tax rate is
          applicable.
  The
          following table reconciles the U.S. statutory rates to the Company's effective
          tax rate:
  June
                      30, 20062006
                  
                  2005U.S.
                      Statutory rate
                  
                  
                  34.0%
                  
                  
                  34.0%Foreign
                      income not recognized in USA
                  
                  
                  (34.0)
                  
                  
                  (34.0)China
                      income taxes
                  
                  
                  33.0
                  
                  
                  33.0Income
                      tax exempted
                  
                  
                  (33.0)
                  
                  
                  (33.0)Total
                      provision for income taxes
                  
                  
                  -
                      %
                  
                  
                  -
                      %
 
 The
          estimated tax savings due to the reduced tax rate for the nine months ended
          September 30, 2006 and 2005 amounted to $1,019,240 and $314,783, respectively.
          The net effect on earnings per share if the income tax had been applied
          would
          decrease earnings per share for June 30, 2006 and 2005 to $0.03 and $0.012,
          respectively.
 
 **Business
          Tax (“BT”)**
  The
          Company is subject to Business Tax, which is charged on the selling price
          of
          applicable product and service at a general rate of 5% in accordance with
          the
          tax law applicable. Keyuan is exempt from business tax according to local
          applicable favorable tax policy.
  **Value
          Added Tax (“VAT”)**
 
 In
          accordance with the relevant taxation laws in China, the VAT rate for domestic
          sales is 17% and 0%
          for
          export sales on the invoiced value of sales and is payable by the
          purchaser.
 
 **Note
          13 - LOANS**
 
 **Other
          Long Term Liabilities**
 
 The
          Company assumed a loan of $11,500,000 in connection with the acquisition
          of
          Enshi as presented in Notes 15-Business Combination. Interest on the loan
          will
          be paid semi-annually at an annual rate of 11%. The Company paid off $658,535
          ahead of the payment schedule. As of September 30, 2006, the balance of
          the
          long-term debt was $10,841,465. The following lists the repayment schedule
          of
          the principal of the loan.
  -22-
 CHINA
              BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
              TO
              CONS OLIDATED
              FINANCIAL STATEMENTS
 September
              30, 2006
 (Unaudited)
 **Note
          13 - LOANS**  **,
          (continued)**
 
 **Other
          Long Term Liabilities, (continued)**
  Amount2007
                
                $
                2,875,0002008
                
                
                5,750,0002009
                
                
                2,216,465Thereafter
                
                
                -$
                10,841,465
  **Short
          Term Bank Loans**
  The
          Company has a total amount of $4,089,180 in short term loans from four
          different
          banks in China. These loans mature in one year or less and renew automatically.
          The average interest rate is approximately 5.2%
  Interest
          expense for the nine months ended September 30, 2006 and 2005 was $394,435
          and
          $366,678 respectively.
 
 **Notes
          Payable**
 
 The
          Company has notes payable to the bank in amount of $480,000 which bears
          no
          interest for the first six months at which time interest will accrue at
          the
          bank’s lending rate if still outstanding.
 
 **Note
          14 - COMMITMENTS AND CONTINGENCIES**
  **Operating
          Leases**
 
 The
          Company leases office space and dormitory facilities for its employees
          from a
          third party. Accordingly, for the nine months ended September 30, 2006
          and 2005,
          the Company recognized rent expense of $13,476 and $7,030,
          respectively.
 
 As
          of
          September 30, 2006, the Company has outstanding commitments in respect
          to
          non-cancelable operating leases, which fall due as follows:
 
 -23-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 Note
            14 - COMMITMENTS AND CONTINGENCIES
            (continued)
 
 **Operating
          Leases**  **,
          (continued)**
 Amount2006
                  
                  $
                  13,4752007
                  
                  
                  29,6502008
                  
                  
                  32,6102009
                  
                  
                  35,870Thereafter
                  
                  
                  39,000$
                  150,605
  **Note
          15 - BUSINESS COMBINATIONS**
 
 **Erye
          Acquisition**
 
 On
          June
          11, 2005, the Company signed a purchase agreement, which was amended on
          August
          3, 2005 under which, the Company acquired a controlling ownership interest
          of
          approximately 51% in Erye, a company established in Suzhou City, Jiangsu
          Province, China.
 
 Assets
          acquired and debts assumed of the transaction are listed as
          below:
  
 Acquired
                    (Assumed)Item
                
                Fair
                    Value
                
                by
                    the CompanyCurrent
                    assets
                
                $
                8,601,786
                
                $
                4,386,911Property,
                    plant, and equipment
                
                
                4,305,631
                
                
                2,195,872Intangible
                    assets
                
                
                7,755,221
                
                
                3,955,162Other
                    assets
                
                
                1,178,000
                
                
                600,780Total
                    assets
                
                
                21,840,637
                
                
                11,138,725Current
                    liability
                
                
                11,465,031
                
                
                5,847,166Ling
                    term liability
                
                
                1,257,959
                
                
                641,559Total
                    liabilities
                
                
                12,722,990
                
                
                6,488,725Net
                    assets
                
                $
                9,117,647
                
                $
                4,650,000
   The
          original purchase price amounted to $80,000 in cash, 3,300,000 shares of
          common
          stock valued at $1.00 per share and $2,200,000 of additional cash to be
          contributed in installments. The original purchase price generated goodwill
          of
          approximately $4,893,113 that was reported on our September 30, 2005 financial
          statements and form 10QSB. The Board
          of
          Directors and management reevaluated the common stock value based upon
          the stock
          trading history in the past year and determined that the common stock should
          be
          valued at less than $1.00 per share for the
  -24-
  CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          15 - BUSINESS COMBINATIONS, (continued)**
 
 **Erye
          Acquisition, (continued)**
 
 purpose
          of determining the total purchase price of the acquisition. On April 12,
          2006,
          the Board Directors decided to amend the purchase price for the 51% ownership
          interest in Erye to be $3,000,000 cash to be paid in installments, and
          3,300,000
          shares of common stock valued at $0.50 per share, which amounted to a total
          amount of $4,650,000, effective as of December 31, 2005. The amendment
          resulted
          in a write down of goodwill and equity. As of December 31, 2005, $2,200,000
          of
          cash contribution has not been made. The Company contributed the $2,200,000
          in
          full by the end
 of
          April,
          2006.
 
 In
          determining the cost of the acquired equity, we considered all aspect of
          the
          acquisition and weighed the consideration we paid and the assets we received.
          Since we have an independent appraisal report on Erye’s assets and liabilities
          and according to our management’s understanding and judgment about Erye’s assets
          and liabilities, we believe that the net fair value of assets acquired
          and debt
          assumed was more determinable and evident. The value of our equity was
          recognized as a residual value of total net assets we received, deducting
          the
          $2,200,000 of cash we paid.
  We
          accounted for the business acquisition in conformity with SFAB 141 Business
          Combination in accordance
          with paragraphs 20-24 in arriving at the fair of our equity. As there was
          no
          quoted price for our stock at that point of time, we believe the fair value
          of
          assets we acquired was a reliable base for determine the fair value of
          our
          equity.
 
 **Enshi
          Acquisition**
 
 On
          May
          16, 2006 we entered into a purchase agreement which became effective at
          June 5,
          2006, under which we acquired 100% of the controlling ownership interest
          of RACP
          Pharmaceutical Holdings LTD. (“RACP”) which owns 100% ownership interest of
          Shengyang Enshi Pharmaceutical Limited Company (“Enshi”). Total consideration of
          $14,690,000 paid by us to acquire 100% interest in both RACP and Enshi
          is
          $550,000 paid in cash, 12,000,000 of CBH warrants valued at $0.22 per warrant
          or
          $2,640,000 and to assume the $11,500,000 debt of RACP.
 
 Assets
          acquired and debts assumed of the transaction are listed as below:
 Acquired
                      (Assumed)Item
                  
                  Fair
                      Value
                  
                  by
                      the CompanyCurrent
                      assets
                  
                  $
                  6,840,881
                  
                  $
                  6,840,881Property,
                      plant, and equipment
                  
                  
                  7,188,912
                  
                  
                  7,188,912Intangible
                      assets
                  
                  
                  5,253,973
                  
                  
                  5,253,973Total
                      assets
                  
                  
                  19,283,766
                  
                  
                  19,283,766Total
                      liabilities
                  
                  
                  4,593,766
                  
                  
                  4,593,766Net
                      assets
                  
                  $
                  14,690,000
                  
                  $
                  14,690,000
  -25-
  CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          15 - BUSINESS COMBINATIONS, (continued)**
 
 **Enshi
          Acquisition, (continued)**
 
 The
          acquisition generated no goodwill since total consideration was equal to
          total
          net assets acquired. In determining the cost of the acquisition, we considered
          all aspect of the acquisition and weighted the consideration we paid and
          the
          assets we received. We applied the Black-Scholes
          model method to
          determine the value of the warrants, which was at $0.22 per unit. Thus
          we
          concluded the total consideration was $14,690,000. We determined the fair
          value
          of the acquired assets of Enshi based on an independent appraisal. The
          fair
          value of Enshi’s net assets was in accordance with the independent appraisal was **$** 16,683,503.63,
          exceeding our total consideration by $1,993,504. Pursuant to *SFAS
          141, Business Combination,* the
          excess of total fair value acquired over the acquisition cost should be
          allocated as pro rata deduction of the amount of Enshi’s fixed assets and
          intangible assets that would have been assigned to those assets. As a result,
          we
          arrived at the above list of amount of assets acquired and debt
          assumed.
 
 **Pro
          Forma**
 
 The
          following unaudited pro forma condensed income statement for six months
          ended
          June 30, 2006
          and
          balance sheet were prepared under Generally Accepted Accounting Principles
          and
          as if the acquisition of Enshi had occurred on January 1, 2006. The pro
          forma
          information may not be indicative of the results that actually would have
          occurred if the acquisition had been in effect from and on the dates indicated
          or which may be obtained in the future .
  Sales
                
                $
                20,269,829Cost
                    of Goods Sold
                
                
                13,548,650Gross
                    Profit
                
                
                6,755,547Operating
                    Expenses
                
                
                2,953,483Income
                    Tax
                
                
                160,472Minority
                    Interest
                
                
                657,311Net
                    Income
                
                $
                2,984,281
 
 **Divestiture
          of Suzhou Hengyi**
 
 As
          of
          August 29, 2006, the Company entered into an agreement with the minority
          shareholders of Suzhou Hengyi to divest the Hengyi and its 50% subsidiary,
          Suzhou Sintofarm. Pursuant to the agreement all consideration paid to the
          shareholders of Hengyi of 1,200,000 shares of the Company’s common stock and
          $620,000 in cash, and the proportionate earnings earned from the inception
          of
          the acquisition of Hengyi through July 1, 2006 will be returned to the
          Company.
          T he
          Company will not
          have any other obligations to Hengyi or its shareholders. Simultaneously
          the
          75.8% ownership interest of Hengyi will be returned to Hengyi's shareholders
          or
          its designated party. As a result, Hengyi will cease to be a subsidiary
          of the
          Company.
 
 The
          Company believes that in view of the unsatisfactory performance of Hengyi,
          this
          recission of the agreement and the disposal of Hengyi’s operations will have a
          positive impact on the Company's performance and financial results. TheCompany
          will use the returned consideration for the acquisition of better prospective
          companies.
  -26-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          15 - BUSINESS COMBINATIONS, (continued)**
 
 **Divestiture
          of Suzhou Hengyi, (continued)**
 
 All
          the
          parties to the divestiture agreed that the transaction took effect as of
          July 1,
          2006, considering the fact that there was a significant change in the financial
          condition and operating performance of the two divested companies. The
          Company
          recognized a gain, net of tax, on the divestiture of $96,869 during the
          quarter
          ended September 30, 2006. The following demonstrates the carrying value
          of the
          assets at July 1, 2006.
 
 Items
                
                Suzhou
                    Hengyi
                
                Suzhou
                    SintofarmCurrent
                    Assets
                
                $
                2,171,080
                
                
                1,819,444Property,
                    Plant and Equipment
                
                
                1,425,215
                
                
                598,172Intangible
                    Assets and Other Assets
                
                
                4,877,130
                
                
                12,194Total
                    Assets
                
                
                8,473,426
                
                
                2,429,810Current
                    Liabilities
                
                
                3,882,815
                
                
                667,428Long-term
                    Liabilities
                
                
                1,076,100Minority
                    InterestShareholders'
                    Equity
                
                
                3,514,511
                
                
                1,762,382Total
                    Liabilities and Shareholders' Equity
                
                $
                8,473,426
                
                
                2,429,810
 
 According
          to agreement, Hengyi agreed to return $620,000 in three installments before
          the
          end of year 2007. In addition, Hengyi agreed to pay back the Company one
          third
          of retained earnings after acquisition before the end of year 2008 and
          two third
          of retained earnings after acquisition before the end of year 2009. However,
          the
          Company did not record a receivable because management cannot reasonably
          estimate the amount if any that might be paid.
 
 **Note
          16 - SHAREHOLDERS’ EQUITY**
 
 *Private
          placement closed on December 31, 2004 (the “Notes Private
          Placement”)*
 
 In
          January, 2005, we raised gross proceeds of $500,000 through the sales of
          promissory notes, pursuant to a subscription agreement (referred to as
          the Notes
          Subscription Agreement), which we entered into with twenty (20) accredited
          investors (referred to as the Notes Subscribers. Pursuant to the Notes
          Subscription Agreement, the Notes Subscribers received convertible notes
          (“Notes” or “Convertible Notes”) for a total aggregate amount of $500,000 with a
          maturity date of 180 days from the Notes issuance (the “Maturity”), bearing an
          interest rate on the principal balance of the Notes of 7% per annum payable
          at
          Maturity or upon satisfaction or discharge of the Note. Holder of the Note
          has
          the right to convert all, but not less than all, of the Notes into shares
          of our
          common stock (each a "Share") at one dollar per share. In September, 2005,
          the
          Notes Subscribers have agreed to extend the maturity date of the Notes
          until
          December 31, 2005. As of March 31, 2006, all of the Notes have been either
          converted into shares or have been redeemed.
  -27-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          16 - SHAREHOLDERS’ EQUITY, (continued)**
 
 In
          addition, as an inducement for the Notes Subscribers to extend the maturity
          date, the Company has issued 42,500 additional shares to these Notes Holders
          who
          agreed to grant the extension as described above. Management determined the warrants have no value.
 
 Upon
          the
          execution of the Notes Subscription Agreement, we also issued to the Notes
          Subscribers one (1) warrant for every one (1) Share that the convertible
          notes
          can convert into under the Notes Subscription Agreement (the “Note Warrants”).
          The exercise price of the majority of Note
 
 Warrants
          is $1.50 per share. Pursuant to the Note Warrants, the Notes Subscribers
          are
          entitled to purchase an aggregate amount of 341,657 shares. The Note Warrants
          may be exercised only in full. The Note Warrants will expire three (3)
          years
          from issuance date of the Note Warrants. See also “Selling
          Shareholders.” Management determined the warrants have no value.
 
 WestPark
          Capital Inc. ("WestPark") acted as our placement agent in the private placement
          described above. In consideration of WestPark’s services, we issued to WestPark
          or its designees 65,000
          shares in consideration of its service as our private placement agent and
          26,666
          warrants representing the right to purchase up to 26,666 shares under the
          same
          terms as described in the preceding paragraph. Management determined the
          warrants have no value.
 
 Pursuant
          to the Notes Subscription Agreement, we are required to file with the Securities
          and Exchange Commission ("SEC") a registration statement within 120 days
          after
          the issuance date of the Notes and the Note Warrants, which registers all
          the
          shares to which the Notes may be converted and the shares underlying the
          Note
          Warrants issued or issuable to the Notes Subscribers and WestPark in the
          private
          placement. In addition, pursuant to the Notes Subscription Agreement, we
          are
          required to pay a penalty of 5% per month if the registration statement
          has not
          become effective before the required date. The related penalties prior
          to the
          SB-2 registration effective date were accrued for and recorded by the Company.
          The SB-2 registration was filed and effective on May 11, 2006.
 
 *Common
          stock issued for lab use right*
 
 On
          March
          8, 2005, the Company issued 300,000 shares of common stock to China
          Pharmaceutical University located in Nanjing, China, pursuant to a joint
          laboratory agreement and agreed to invest $36,245 into the laboratory in
          the
          next five years. The value of the 300,000 shares has not been stated in
          the
          agreement. The management originally estimated the stock value as $1.00
          share.
          However, the management reevaluated the value of the stock based upon the
          stock
          performance in the
          past
          year and decided to discount the value of the stock to $0.10 per share
          as of
          December 31, 2005.
 
 *Private
          placement closed in June, 2005 (the “Initial Preferred A Private
          Placement”)*
 
 In
          June,
          2005, we entered into a June subscription agreement, to which we refer
          as the
          Initial Preferred A Subscription Agreement, with each of twenty eight (28)
          accredited investors, to which we
          collectively refer as the Initial Preferred A Subscribers. Pursuant to
          the
          Initial Preferred A Subscription Agreement, the Initial Preferred A Subscribers
          received shares of our Series
          A
          Convertible Preferred Stock ("Series A Convertible Preferred Stock"), face
          value
          $1.00 per share, purchase price $1.00 per share convertible at a ratio
          of 1:1
          into shares. For more information on Series A Convertible Preferred Stock,
          see
“Description of Securities.”
  -28-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          16** **- SHAREHOLDERS’ EQUITY, (continued)**
 
 Upon
          the
          execution of the Initial Preferred A Subscription Agreements, we also issued
          to
          the Initial Preferred A Subscribers one (1) warrant for every one (1) share
          of
          Series A Convertible Preferred Stock subscribed under the Initial Preferred
          A
          Subscription Agreements (“Initial Preferred A Warrants”). The exercise
          price of the Initial Preferred A Warrants is $2.00 per Share. Pursuant
          to the
          Initial Preferred A Warrants, the Initial Preferred A Subscribers are entitled
          to purchase an aggregate amount of 1,090,000 shares. The Initial Preferred
          A
          Warrants may be exercised only in full. The Initial Preferred A Warrants
          will
          expire three (3) years from the issuance date of the Initial Preferred
          A
          Warrants. Management
          determined the warrants have no value.
 
 WestPark
          acted as our placement agent in the private placement described above.
          In
          consideration of WestPark’s services, we issued to WestPark or its designees
          76,500 shares of common stock in consideration of its service as our private
          placement agent and 76,500 Initial Preferred A Warrants representing the
          right
          to purchase up to 76,500 shares under the same terms as described in the
          preceding paragraph. Management determined the warrants have no value.
 
 *Private
          placement closed on October 19, 2005 (the “Subsequent Preferred A Private
          Placement”)*
 
 On
          October 19, 2005, we entered into a subscription agreement, to which we
          refer to
          as the Subsequent Preferred A Subscription Agreement (together with the
          Initial
          Preferred A Subscription Agreement, the “Preferred A Subscription Agreement”),
          with each of three (3) accredited investors, to which we collectively refer
          to
          as the Subsequent Preferred A Subscribers (together with the Initial Preferred
          A
          Subscribers, the “Preferred A Subscribers”). Pursuant to the Subsequent
          Preferred A Subscription Agreement, the Subsequent Preferred A Subscribers
          received 62,500 shares of our Series
          A
          Convertible Preferred Stock.
 
 Upon
          the
          execution of the Subsequent Preferred A Subscription Agreement, we also
          issued
          to the Subsequent Preferred A Subscribers one (1) warrant for every one
          (1)
          share of Series A Convertible Preferred Stock subscribed under the Subsequent
          Preferred A Subscription Agreement (“Subsequent Preferred A Warrants”, and
          together with the Initial Preferred A Warrants, the “Preferred A Warrants”). The
          Subsequent Preferred A Warrants has the same terms as of those of the Initial
          Preferred A Warrants and the Subsequent Preferred A Subscribers are entitled
          to
          purchase an aggregate amount of 62,500 shares. Management determined the
          warrants have no value.
 
 WestPark
          acted as our placement agent in the private placement described above.
          In
          consideration of WestPark’s services, we issued to WestPark or its designees
          5,625 common stock in consideration of its service as our private placement
          agent and 5,625 warrants representing the right to
          purchase up to 5,625 shares of our common stock under the same terms as
          described in the preceding paragraph. Management determined the warrants
          have no
          value. Pursuant to the Preferred A Subscription Agreement, we are required
          to
          file with the SEC a registration statement within 120 days, which registers
          all
          the shares to which the Series A Preferred Convertible Stock may be converted
          and the shares underlying the Preferred A Warrants issued or issuable to
          the
          Preferred A Subscribers and WestPark in the private placements.
 
 In
          addition, pursuant to Initial Preferred A Subscription Agreement and Subsequent
          Preferred A Subscription Agreement we are required to pay a penalty of
          5% per
          month if the registration statement has not become effective before the
          required
          date. The related penalties prior to the SB-2 effective date were accrued
          by the
          Company. The SB-2 was filed and effective on May 11, 2006.
  -29-
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          16 - SHAREHOLDERS’ EQUITY, (continued)**
 
 *Dividend
          Paid on the Preferred Stocks*
 
 Pursuant
          to the Initial Preferred A Subscription Agreement, the Initial Preferred
          A
          Subscribers were entitled to receive annual dividend of 7% of the amount
          invested. The total dividends paid was $8,400 in January 2006.
 
 *Issuance
          of Shares for Requisitions*
 
 On
          May
          31, 2005, the Company issued 3,300,000 shares of common stock to 38 persons
          including and represented by Shi Ming Sheng or its assigned natural person
          or
          legal representative, all 38 persons are shareholders of Suzhou Erye
          Pharmaceutical Limited Co., pursuant to the acquisition of Erye effective
          June
          11, 2005.
 
 *Issuance
          of Shares/Warrants for Services*
 
 During
          2005, the Company engaged with
          Consulting For Strategic Growth 1, Ltd. for
          six
          months ending May 14, 2006. The terms of the agreement are for the consultant
          to
          receive cash payment of $4,000 plus value at $2,500 common stocks and 10,000
          three year warrants to purchase common stock
          at
          $0.50 per share, each month during the agreement. In December 2005, the
          Company
          reengaged this company for a period of six months and the terms of the
          agreement
          are for the consultant to receive a cash payment of $4,000 plus common
          stock
          valued at $2,500 and 10,000 three year warrants to purchase common stock
          at
          $0.50 per share, each month during the agreement. The shares of common
          stock
          will be issued to the consultant in 2006.
 
 On
          April
          1, 2005, the Company entered into an advisory agreement with Robin Smith
          as the
          Chairman of the Company's Advisory Board for a period of one year. The
          terms of
          the agreement are for Ms. Smith to receive 60,000 shares of unregistered
          common
          stock plus three year warrants to purchase 35,000 shares of common stock
          of the
          Company at an exercise price equal to $2.00. The shares of common stock
          were
          issued to Ms. Smith in 2005.
 
 On
          April
          1, 2005, the Company engaged a consultant for a period of seven months
          ending
          October 31, 2005. The terms of the agreement are for the consultant to
          receive a
          cash payment of $50,000 plus 50,000 shares of common stock of the Company.
          On
          December 20, 2005, the Company reengaged this consultant for a period ending
          December 31, 2006 and the terms of the agreement are for the consultant
          to
          receive a cash payment of $50,000 plus 50,000 shares of common stock of
          the
          Company.
  *Private
          placement closed in February 2, 2006 (the “Initial Common Stock Private
          Placement”)*
 
 On
          February 2, 2006, we entered into a securities purchase agreement, to which
          we
          refer as the Initial Common Stock Securities Purchase Agreement, with GCE
          Property Holdings, Inc. ("GCE"), to which we refer as the Initial Common
          Stock
          Purchaser. Pursuant to the Initial Common Stock
 
 Securities
          Purchase Agreement, we issued one million (1,000,000) shares of our common
          stock
          to the Initial Common Stock Purchaser at $1.00 per share.
 
 Upon
          the
          execution of the Initial Common Stock Securities Purchase Agreement, we
          also
          issued to the Initial Common Stock Purchaser one million (1,000,000) warrant
          with an exercise price of $1.25 per share of common stock (“Initial Common Stock
          Warrants”). The Initial Common Stock Warrants will expire four (4) years from
          the date of the issuance.
  -30-
  CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
            TO
            CONS OLIDATED
            FINANCIAL STATEMENTS
 September
            30, 2006
 (Unaudited)
 **Note
          16 - SHAREHOLDERS’ EQUITY, (continued)**
 
 Under
          the
          Initial Common Stock Securities Purchase Agreement, we have agreed not
          to issue
          shares
 or
          securities convertible or exchangeable into shares at a price equal to
          or lower
          than $1.00 per share and not issue any warrants or securities that are
          exercisable into shares at a price lower than $1.25 per share.
 
 Pursuant
          to the Initial Common Stock Securities Purchase Agreement, the Initial
          Common
          Stock Purchaser was granted a right to participate up to 100% in any of
          our
          subsequent financing by offering of common stock or common stock equivalents
          in
          the twelve (12) months the effective date of the registration
          statement..
 
 Pursuant
          to a registration rights agreement entered between the Initial Common Stock
          Purchaser and us, we have agreed to file a registration statement with
          the SEC
          covering the shares and shares underlying the Warrants, within 65 days
          from this
          closing and obtain effectiveness of such registration statement within
          170 days
          from closing. In case the Company does not meet the filing deadlines listed
          above we will pay a penalty of 1% of the aggregate investment made by Investors
          and on each monthly anniversary of such default an amount equal to 1.5%
          of the
          aggregate investment amount of Investors, respectively. The SB-2 registration
          statement was filed timely and beame effective on May 11, 2006. Therefore,
          no
          penalties were incurred.
 
 *Private
          placement closed on March 10, 2006 (the “Subsequent Common Stock Private
          Placement”)*
 
 On
          March
          10, 2006, we entered into a securities purchase agreement, to which we
          refer as
          the Subsequent Common Stock Securities Purchase Agreement, with various
          investors, to which we refer as the Subsequent Common Stock Purchaser.
          Pursuant
          to the Subsequent Common Stock Securities Purchase Agreement, we issued
          6,831,863 shares to the Subsequent Common Stock Purchaser at $1.01 per
          share.
 
 Upon
          the
          execution of the Subsequent Common Stock Securities Purchase Agreement,
          we also
          issued to the Subsequent Common Stock Purchaser 6,831,684 warrants
          with an exercise price of $1.26 per share of common stock (“Subsequent Common
          Stock Warrants”). The Subsequent Common Stock Warrants will expire four (4)
          years from the date of the issuance.
 
 Under
          the
          Subsequent Common Stock Securities Purchase Agreement, we have agreed not
          to
          issue shares or securities convertible or exchangeable into shares at a
          price
          equal to or lower than $1.01 per share and not to issue any warrants or
          securities that are exercisable into shares at a price lower than $1.26
          per
          share.
 
 Pursuant
          to the Subsequent Common Stock Securities Purchase Agreement, subject and
          subordinated to the participation rights of the Initial Common Stock Purchasers,
          the Subsequent Common Stock Purchaser was granted a right to participate
          up to
          100% in any of our subsequent financing
          by offering of common stock or common stock equivalents in the twelve (12)
          months from the effective date of the registration statement of which this
          prospectus constitutes a part.
  -31-
  ITEM
          2.
          MANAGEMENT'S DISCUSSION and ANALYSIS and of FINANCIAL CONDITION ANDRESULTS
          of OPERATIONS
 The
            following discussion and analysis should be read in conjunction with
            the
            consolidated financial statements and related notes thereto. The following
            discussion contains forward-looking statements. China Biopharmaceuticals
            Holdings, Inc. is referred to herein as "we", "our,", "us", or "the Company".
            The words or phrases "would be," "will allow," "expect to", "intends
            to," "will
            likely result," "are expected to," "will continue," "is anticipated,"
            "estimate," or similar expressions are intended to identify forward-looking
            statements. Such statements include those concerning our expected financial
            performance, our corporate strategy and operational plans. Actual results
            could
            differ materially from those projected in the forward-looking statements
            as a
            result of a number of risks and uncertainties, including: (a) those risks
            and
            uncertainties related to general economic conditions in China, including
            regulatory factors that may affect such economic conditions; (b) whether
            we are
            able to manage our planned growth efficiently and operate profitable
            operations,
            including whether our management will be able to identify, hire, train,
            retain,
            motivate and manage required personnel or that management will be able
            to
            successfully manage and exploit existing and potential market opportunities;(c)
            whether we are able to generate sufficient revenues or obtain financing
            to
            sustain and grow our operations; and (d) whether we are able to successfully
            fulfill our primary requirements for cash which are explained below under
            "Liquidity and Capital Resources". Statements made herein are as of the
            date of
            the filing of this Form 10-QSB with the Securities and Exchange Commission
            ("SEC") and should not be relied upon as of any subsequent date. Unless
            otherwise required by applicable law, we do not undertake, and we specifically
            disclaim any obligation, to update any forward-looking statements to
            reflect
            occurrences, developments, unanticipated events or circumstances after
            the date
            of such statement.
 
 OUR
            BUSINESS
  We
            are a
            vertically integrated bio-pharmaceutical company focused on developing,
            manufacturing and distributing innovative drugs in the People's Republic
            of
            China ("China" or PRC"). Our mission is to maximize investment returns
            for our
            shareholders by integrating our strong drug discovery and development
            strength
            with manufacturing and commercialization capabilities and by actively
            participating in the consolidation and privatization of the pharmaceutical
            industry in China to become a dominant player in the bio-pharmaceutical
            industry
            in China.
  On
            May
            16, 2006, we entered into a Conditional Stock Purchase Agreement with
            RACP
            Pharmaceutical Holdings Ltd., a British Virgin Islands company ("RACP")
            and
            certain other parties to ultimately acquire 100% ownership interest in
            Shenyang
            Enshi Pharmaceutical Co, Ltd. ("Enshi"), a pharmaceuticals manufacturer.
            On
            September 6, 2006, our management moved into Enshi's offices and acquired
            effective control of Enshi's operations. On September 30, 2006, all required
            paperwork and legal procedures and audit procedures have been completed
            and the
            title ownership of 100% of Enshi has been transferred to us.
  On
            August
            3, 2006, we filed an application with the American Stock Exchange ("AMEX")
            to
            list our shares of common stock on the AMEX.
  On
            August
            29, 2006, we entered into an agreement with the minority shareholders
            of our
            subsidiary, Suzhou Hengyi Pharmaceuticals of Feedstock Co., Ltd. ("Suzhou
            Hengyi") to divest the subsidiary and another grand-subsidiary, Suzhou
            Sintofarm, in which Suzhou Hengyi has 50% controlling ownership interest
            from
            its subsidiary portfolio. Pursuant to the agreement all consideration
            paid to
            the shareholders of Suzhou Hengyi, namely, 1,200,000 shares of our common
            stock
            and $620,000 was to be returned to us and we no longer have any other
            obligations to Suzhou Hengyi or its shareholders. Simultaneously our
            75.8%
            ownership interest of Suzhou Hengyi has been returned to Suhzou Hengyi's
            shareholders or its designated party. As a result, Suzhou Hengyi ceased
            to be a
            subsidiary of our company. We believe that in view of the unsatisfactory
            performance of Suzhou Hengyi, this recession and disposal will have a
            positive
            impact on our performance and financial results We will use the returned
            consideration for acquisitions of better candidates.
  On
              December 31, 2005, our wholly owned subsidiary, CBC, entered into an
              Agreement
              with four shareholders of Chengdu Tianyin Pharmaceutical Limited Company,
              a
              pharmaceutical company located in the city of Chengdu, Sichuan Province,
              China
              ("Tianyin") to acquire a 51% ownership interest in Tianyin. We are
              currently
              evaluating the viability of the implementation of and may terminate
              the Tianyin
              purchase agreement in view of Tianyin's performance. Based on the pre-conditions
              in the purchase Agreement, the Company decided not to assume the operation
              control of Tianyin and is exploring options of changing the transaction
              terms or
              abandoning the acquisition of Tianyin should Tianyin's shareholders
              not
              compromise and meet the company's request for a reasonable purchased
              price.
              Appropriate disclosure will be made upon the final determination by
              the board of
              the directors.
 CRITICAL
            ACCOUNTING POLICIES
  We
            have
            identified the policies below as critical to understanding of our financial
            statements. The application of these polices requires management to make
            estimates and assumptions that affect the valuation of assets and expenses
            during the reporting period. There can be no assurance that actual results
            will
            not differ from these estimates. The impact and any associated risks
            related to
            these policies on our business operations are discussed below.
 
 REVENUE
            AND REVENUE RECOGNITION
  We
            have
            three categories of revenue resources, revenue from sales of new drugs
            formulas,
            revenue from R&D service rendered by the Company and revenue from sales of
            medical product. The Company recognizes revenue from product and drug
            formula
            sales when title has been transferred, the risks and rewards of ownership
            have
            been transferred to the customer, the fee is fixed and determinable,
            and the
            collection of the related receivable is probable which is generally at
            the time
            of shipment. Allowances are established for estimated rebates, wholesaler
            charge
            backs, prompt pay sales discounts, product returns, and bad debts. For
            revenue
            from R&D service, revenue is recognized when milestone goals are achieved,
            milestone payments are no longer refundable, and continued performance
            of future
            R&D services related to the milestone are not required.
 
 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.
 
 Our
            accounts receivable are concentrated in numbers of pharmaceutical manufacturers.
            We believe that a significant change in the liquidity or financial position
            of
            few of our big customers would have a material adverse impact on the
            collectibility of the Company's accounts receivable. Based upon our historical
            experience, payment delays may materially influence our financial and
            operating
            results.
  -32-
  INCOME
            TAX
 
 Significant
            judgment is required in determining our income tax provision. In the
            ordinary
            course of business, there are many transactions and calculations where
            the
            ultimate tax outcome is uncertain. Although we believe that our estimates
            are
            reasonable, no assurance can be given that the final outcome of these
            matters
            will not be different than that which is reflected in our historical
            income tax
            provisions and accruals. Such differences could have a material
            effect on our income tax provision and net income in the period in which
            such
            determination is made. We apply an asset and liability approach to accounting
            for income taxes. Deferred tax liabilities and assets are recognized
            for the
            expected future tax consequences of temporary differences between the
            financial
            statement and tax bases of assets and liabilities using enacted tax rates
            in
            effect for the year in which the differences are expected to reverse. The
            recoverability of deferred tax assets is dependent upon our assessment
            of
            whether it is more likely than not that sufficient future taxable income
            will be
            generated to utilize the deferred tax asset. In the event we determine
            that
            future taxable income will not be sufficient to utilize the deferred
            tax asset,
            a valuation allowance is recorded.
 
 RESULTS
            OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO
            THREE
            MONTHS ENDED SEPTEMBER 30, 2005
 
 On
            June
            11, 2005, the Company signed a purchase agreement which was amended on
            August 3,
            2005 to acquire approximately 51% ownership interest of Suzhou Erye
            Pharmaceutical Limited Company ("Erye"). The operating results for the
            three
            months ended September 30, 2005 reported in our quarterly report on Form
            10-QSB
            filed with the SEC on August 15, 2005 included Erye's results for the
            period of
            September 11, 2005 to September 30, 2005. We took actual control of Enshi
            on
            September 6, 2006. and the operating results for the three months ended
            September 30, 2006 reported in this quarterly report includes Enshi's
            results
            for the period of September 6, 2006 to September 30, 2006. On
            August
            28, 2006, the Company entered into an agreement with the minority shareholders
            of Suzhou Hengyi to divest the subsidiary and another grand-subsidiary,
            Suzhou
            Sintofarm, in which Suzhou Hengyi has 50% controlling ownership interest
            from
            its subsidiary portfolio. All the parties to the divestiture agreement
            that the
            transaction took effect as of June 30, 2006. The
            operating results for the three months ended September 30, 2006 reported
            in this
            quarterly report does not include Suzhou Henyi's results for the period
            of July
            1, 2006 to September 30, 2006.
 
 -33-
 
 CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
            STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
            THE
            THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
  Three
                      months ended September 30,2006
                  
                  2005(Unaudited)
                  
                  (Unaudited)REVENUES
                  
                  $
                  7,962,641
                  
                  $
                  7,498,008COST
                      OF GOODS SOLD
                  
                  
                  4,885,800
                  
                  
                  5,512,480GROSS
                      PROFIT
                  
                  
                  3,076,841
                  
                  
                  1,985,528OPERATING
                      EXPENSESResearch
                      and development expenses
                  
                  
                  20,636Selling,
                      general and administrative expenses
                  
                  
                  1,108,674
                  
                  
                  1,078,393Total
                      Operating Expenses
                  
                  
                  1,129,310
                  
                  
                  1,078,393INCOME
                      FROM OPERATIONS
                  
                  
                  1,947,531
                  
                  
                  907,135OTHER
                      INCOME (EXPENSE)Interest
                      income ( expense)
                  
                  
                  (383,537
                  )
                  
                  -Other
                      income (expense)
                  
                  
                  (91,844
                  )
                  
                  (23,119
                  )Total
                      Other Income (expense)
                  
                  
                  (475,381
                  )
                  
                  (23,119
                  )INCOME
                      BEFORE INCOME TAXES
                  
                  
                  1,472,150
                  
                  
                  884,016PROVISION
                      FOR INCOME TAXES
                  
                  
                  197,165
                  
                  
                  -INCOME
                      BEFORE MINORITY INTEREST
                  
                  
                  1,274,985
                  
                  
                  884,016MINORITY
                      INTEREST
                  
                  
                  295,384
                  
                  
                  367,764INCOME
                      FROM CONTINUING OPERATION
                  
                  
                  979,601
                  
                  
                  516,252GAIN
                      FROM OPERATION OF DISCONTINUEDGain
                      from operation of discontinued
                  
                  
                  146,771
                  
                  
                  -Income
                      tax liability
                  
                  
                  49,902
                  
                  
                  -Net
                      of Gain on Operation Discontinued
                  
                  
                  96,869
                  
                  
                  -NET
                      INCOME
                  
                  
                  1,076,470
                  
                  
                  516,252OTHER
                      COMPREHENSIVE INCOME (LOSS):Foreign
                      currency translation adjustment
                  
                  
                  151,701
                  
                  
                  -COMPREHENSIVE
                      INCOME (LOSS)
                  
                  $
                  1,228,171
                  
                  $
                  516,252INCOME
                      PER SHARE OF COMMON STOCKBASICCONTINUING
                      OPERATIONS
                  
                  $
                  0.03
                  
                  $
                  0.02DISCONTINUED
                      OPERATIONS
                  
                  
                  0.00
                  
                  
                  0.00NET
                      INCOME
                  
                  $
                  0.03
                  
                  $
                  0.02DILUTEDCONTINUING
                      OPERATIONS
                  
                  $
                  0.03
                  
                  $
                  0.02DISCONTINUED
                      OPERATIONS
                  
                  
                  0.00
                  
                  
                  0.00NET
                      INCOME
                  
                  $
                  0.03
                  
                  $
                  0.02WEIGHTED
                      AVERAGED NUMBER OF SHARES OUTSTANDING - BASIC
                  
                  
                  34,902,548
                  
                  
                  28,133,757WEIGHTED
                      AVERAGED NUMBER OF SHARES OUTSTANDING - DILUTED
                  
                  
                  35,832,548
                  
                  
                  26,218,201
  -34-
  REVENUE
 
 Revenue
            for the three months ended on September 30, 2006 was $7,962,641, while
            the
            revenue for the three months ended September 30, 2005 was $7,498,008,
            representing an approximately 6.2% increase. The increase is attributable
            mainly
            to organic growth of revenue generated by Erye, as well as to revenue
            generated
            as a result of the acquisitions of Enshi and which was not reflected
            in the
            Company's financial statements for the three months ended September 30,
            2005. In
            addition, due to the effect of divestiture of Hengyi, effective of July
            1, 2006,
            revenue of Hengyi was not included in the period for the three months
            ended
            September 30, 2006 but was included in September 30, 2005. Otherwise,
            the
            increase in revenue for the three months ended September 20, 2006 would
            have
            been higher if revenue of Hengyi was included in comparison to revenue
            for the
            three months ended September 30, 2005.
 
 COST
            OF
            GOODS SOLD
  Cost
            of
            goods sold for the three months ended on September 30, 2006 was $4,885,800
            as
            compared to $5,512,480 for the three months ended September 30, 2005.
            Cost of
            goods sold as a percentage of sales revenues was approximately 61% for
            the three
            months ended September 30, 2006 as compared to approximately 74% for
            the three
            months ended September 30, 2005. The decrease of cost of goods sold as
            a
            percentage of sales revenues is primarily attributable to the reduced
            manufactured cost on some products and the high gross profit margin of
            ENSHI’S
            products. Also, due to the effect of divestiture of Hengyi, its cost
            of goods
            sold was not included in the period for the three months ended September
            30,
            2006 but was included in September 30, 2005. Accordingly, cost of goods
            would
            have been higher if Hengyi’s cost of goods sold was included the period for the
            three months ended September 30, 2006 in comparison to cost of goods
            for the
            three months ended September 30, 2005.
 
 GROSS
            PROFIT
  Gross
            profit in the three months ended on September 30, 2006 amounted at $3,076,841,
            as compared to $1,985,528 for the three months ended September 30, 2005,
            representing approximately 55% increase. The gross profit margin for
            the three
            months ended September 30, 2006 was 39% as compared to approximately
            26% for the
            three months ended September 30, 2005. The increase in gross profit margin
            is
            mainly due to Enshi's high gross profit margin.
 
 OPERATING
            EXPENSES
 
 Operating
            expenses for the three months ended September 30, 2006 were $1,129,310
            as
            compared to $1,078,393 for the three months ended September 30, 2005,
            representing 5% increase. The increase in operating expenses is primarily
            attributable to small increase in SG&A expense.
 
 R&D
 
 Research
            and Development cost for the three months ended September 30, 2006 was
            $20,636
            as compared to $0 for the three months ended September 30, 2005. The
            increase is
            mainly due to the research and development activities conducted by
            Keyuan.
  -35-
  NET
            INCOME
 
 Net
            Income for the three months ended September 30, 2006 was $1,076,470 as
            compared
            to net income of $516,252 for the three months ended September 30, 2005,
            representing 109% increase. The increase of the net income of the Company
            is
            mainly due to the strong organic growth of Erye as well as to net income
            generated as a result of the acquisitions of Enshi and which was not
            reflected
            in the Company's financial statements for the three months ended September
            30,
            2005.
 
 
 RESULTS
            OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO NINE
            MONTHS
            ENDED SEPTEMBER 30, 2005
 
 On
            June
            11, 2005, the Company signed a purchase agreement which was amended on
            August 3,
            2005 to acquire approximately 51% ownership interest of Erye. The operating
            results for the nine months ended September 30, 2005 reported in our
            quarterly
            report on Form 10-QSB filed with the SEC on August 15, 2005 included
            Erye's
            results for the period of September 11, 2005 to September 30, 2005. We
            took
            actual control of Enshi on September 6, 2006 and the operating results
            for the
            nine months ended September 30, 2006 reported in this quarterly report
            includes
            Enshi's results for the period of September 6, 2006 to September 30,
            2006. On
            August
            29, 2006, the Company entered into an agreement with the minority shareholders
            of Suzhou Hengyi to divest the subsidiary and another grand-subsidiary,
            Suzhou
            Sintofarm, in which Suzhou Hengyi has 50% controlling ownership interest
            from
            its subsidiary portfolio. The
            operating results for the nine months ended September 30, 2006 reported
            in this
            quarterly report does not include Suzhou Hengyi's results for the period
            of July
            1, 2006 to September 30, 2006.
   CHINA
            BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
            STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
            THE
            NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 
 
 Nine
                      months ended September 30,2006
                  
                  2005(Unaudited)
                  
                  (Unaudited)REVENUES
                  
                  $
                  21,233,187
                  
                  $
                  13,129,081COST
                      OF GOODS SOLD
                  
                  
                  14,079,123
                  
                  
                  9,446,977GROSS
                      PROFIT
                  
                  
                  7,154,064
                  
                  
                  3,682,104OPERATING
                      EXPENSESResearch
                      and development expenses
                  
                  
                  504,401Selling,
                      general and administrative expenses
                  
                  
                  2,620,645
                  
                  
                  2,039,938Total
                      Operating Expenses
                  
                  
                  3,125,046
                  
                  
                  2,039,938INCOME
                      FROM OPERATIONS
                  
                  
                  4,029,019
                  
                  
                  1,642,166OTHER
                      INCOME (EXPENSE)Interest
                      income ( expense)
                  
                  
                  (387,739
                  )
                  
                  -Other
                      income (expense)
                  
                  
                  (336,007
                  )
                  
                  (35,694
                  )Total
                      Other Income (expense)
                  
                  
                  (723,746
                  )
                  
                  (35,694
                  )INCOME
                      BEFORE INCOME TAXES
                  
                  
                  3,305,272
                  
                  
                  1,606,472PROVISION
                      FOR INCOME TAXES
                  
                  
                  346,776
                  
                  
                  -INCOME
                      BEFORE MINORITY INTEREST
                  
                  
                  2,958,496
                  
                  
                  1,606,472MINORITY
                      INTEREST
                  
                  
                  954,403
                  
                  
                  557,094INCOME
                      FROM CONTINUING OPERATIONS
                  
                  
                  2,004,093
                  
                  
                  1,049,378GAIIN
                      FROM DISCONTINUED OPERATIONGain
                      from operations of discontinued
                  
                  
                  146,771
                  
                  
                  -Income
                      tax liability
                  
                  
                  49,902
                  
                  
                  -Net
                      of Gain on Operation Discontinued
                  
                  
                  96,869
                  
                  
                  -NET
                      INCOME
                  
                  
                  2,100,962
                  
                  
                  1,049,378OTHER
                      COMPREHENSIVE INCOME (LOSS):Foreign
                      currency translation adjustment
                  
                  
                  670,805
                  
                  
                  -COMPREHENSIVE
                      INCOME (LOSS)
                  
                  $
                  2,771,767
                  
                  $
                  1,049,378INCOME
                      PER SHARE OF COMMON STOCKBASICCONTINUING
                      OPERATIONS
                  
                  
                  0.06
                  
                  
                  0.04DISCONTINUED
                      OPERATIONS
                  
                  
                  0.00
                  
                  
                  0.00NET
                      INCOME
                  
                  
                  0.06
                  
                  
                  0.04DILUTEDCONTINUING
                      OPERATIONS
                  
                  
                  0.06
                  
                  
                  0.04DISCONTINUED
                      OPERATIONS
                  
                  
                  0.00
                  
                  
                  0.00NET
                      INCOME
                  
                  
                  0.06
                  
                  
                  0.004WEIGHTED
                      AVERAGED NUMBER OF SHARES OUTSTANDING - BASIC
                  
                  
                  34,902,548
                  
                  
                  26,218,201WEIGHTED
                      AVERAGED NUMBER OF SHARES OUTSTANDING - DILUTED
                  
                  
                  35,832,548
                  
                  
                  26,218,201
  -36-
  REVENUE
 
 Revenue
            for the nine months ended on September 30, 2006 was $21,233,188, while
            the
            revenue for the nine months ended September 30, 2005 was $13,129,081,
            representing an approximately 62% increase. The increase is attributable
            mainly
            to strong organic growth of revenue generated by Erye, as well as to
            revenue
            generated as a result of the acquisition of Enshi and which was not reflected
            in
            the Company's financial statements for the nine months ended September
            30, 2005.
            In addition, due to divestiture effective as of July 1, 2006, Hengyi’s revenue
            was included for the six months ended June 30, 2006 but was not included
            for the
            three months ended September 30, 2006 in comparison with revenue for
            the nine
            months ended September 30, 2005 which Hengyi’s revenue was included. Therefore,
            the revenue would have been higher if revenue of Hengyi was included
            for the
            three months ended September 30, 2006.
 
 COST
            OF
            GOODS SOLD
 
 Cost
            of
            goods sold for the nine months ended on September 30, 2006 was $14,079,123
            as
            compared to $9,446,977 for the nine months ended September 30, 2005.
            Cost of
            goods sold as a percentage of sales revenues was approximately 66% for
            the nine
            months ended September 30, 2006 as compared to approximately 72% for
            the nine
            months ended September 30, 2005. The increase of cost of goods sold as
            a
            percentage of sales revenues is primarily attributable to the acquisition
            of
            Enshi. In addition, due to divestiture effective as of June 30, 2006,
            Hengyi’s
            cost of goods sold was included for the six months ended June 30, 2006
            but was
            not included for the three months ended September 30, 2006 in comparison
            with
            cost of goods sold for the nine months ended September 30, 2005 which
            Hengyi’s
            cost of goods sold was included for the nine months ended September 30,
            2005.
            Therefore, the cost of goods sold would have been higher if cost of goods
            sold
            of Hengyi was included for the three months ended September 30,
            2006.
 
 GROSS
            PROFIT
 
 Gross
            profit in the nine months ended on September 30, 2006 amounted at $7,154,064,
            as
            compared to $3,682,104 for the nine months ended September 30, 2005,
            representing approximately 94% increase. The gross profit margin for
            the nine
            months ended September 30, 2006 was 34% as compared to approximately
            28% for the
            nine months ended September 30, 2005. The increase in gross profit margin
            is
            mainly due to Enshi's high gross profit margin. In addition, due to divestiture
            effective as of June 30, 2006, Hengyi’s revenue and cost of goods sold was
            included for the six months ended June 30, 2006 but was not included
            for the
            three months ended September 30, 2006 in comparison with revenue and
            cost of
            goods sold for the nine months ended September 30, 2005 which Hengyi’s revenue
            and cost of goods sold were included for the nine months ended September
            30,
            2005. Accordingly, gross profit would have been higher if revenue and
            cost of
            goods sold of Hengyi were included for the three months ended September
            30,
            2006.
 
 
 OPERATING
            EXPENSES
 
 Operating
            expenses for the nine months ended September 30, 2006 was $3,125,046
            as compared
            to $2,039,938 for the nine months ended September 30, 2005, representing
            53%
            increase. The increase in operating expenses is primarily attributable
            to
            increase in SG&A expense and R&D expenses incurred by Keyuan and
            acquisition of ENSHI.
 
 -37-
  R&D
 
 Research
            and Development cost for the nine months ended September 30, 2006 was
            $504,401
            as compared to $297,864 for the nine months ended September 30, 2005,
            representing a 69% increase. The increase is mainly due to the research
            and
            development activities conducted by Keyuan and Erye.
 
 NET
            INCOME
  Net
            Income for the nine months ended September 30, 2006 was $2,100,962 as
            compared
            to net income of $1,049,378 for the nine months ended September 30, 2005,
            representing 100% increase. The increase of the net income of the Company
            is
            mainly due to strong organic growth of Erye, as well as to net income
            generated
            as a result of the acquisitions of Enshi and which was not reflected
            in the
            Company's financial statements for the nine months ended September 30,
            2005.
 
 LIQUIDITY
            AND CAPITAL RESOURCES
 
 For
            the
            nine months ended September 30, 2005, net cash provided by operating
            activities
            was $197,481, compared to an inflow of $1,117,294 for the nine months
            ended
            September 30, 2006. Net cash used by operating activities mainly results
            from
            large amount of account receivables. Net cash used in investing activities
            was
            $1,109,771 for the nine months ended September 30, 2005, compared to
            an outflow
            of $6,420,924 for the nine months ended September 30, 2006. Cash used
            by
            investing activities in the nine months ended September 30, 2006 mainly
            results
            from purchase of intangible assets, purchase of property and equipment,
            and
            dividend paid to shareholders. Net cash provided by financing activities
            was
            $2,453,073 for the nine months ended September 30, 2005, compared to
            an inflow
            of $6,710,647 for the nine months ended September 30, 2006. Cash provided
            by
            financing activities for the nine months ended September 30, 2006 results
            primarily from private placement offset by repayments of short term bank
            credit.
            Cash and cash equivalents as of nine month ended September 30, 2006 was
            $2,438,966.
  For
            the
            nine months ended September 30, 2006, cash flow performance is below
            our
            management's expectation. This is mainly due to large amount of account
            receivables occurred during this period and extended aging of the account
            receivable. This has negative impact on the Company's working capital
            and
            weakened the Company's capital strength. During the nine month period
            of 2006,
            the pharmaceutical industry in China was significantly influenced by
            new
            government regulatory policies. For example, the government initialized
            an
            anti-corruption program prohibiting doctors to receive commissions and
            set price
            cap for drugs sold through hospitals. This has created significant negative
            impacts to all prescription drug manufacturers and drug distribution
            companies
            in the market. The Company's prescription drugs were mainly sold to hospitals
            through major drug distribution companies. During this period of time,
            such
            distribution companies have difficulties to sell the Company's prescription
            drugs to hospitals and collect money. It is still not clear how long
            the
            negative market environment will remain and how fast the market will
            recover
            from these regulatory impacts. Our management has been putting great
            efforts to
            strengthen the Company's cash flows by providing incentives to our distributors
            such as bonus discount on drug price, attracting these distributors to
            collect
            money from hospitals and shortening the age of account receivables. We
            believe
            that this government campaign shall gradually create a healthy and fair
            market
            for every player in the Chinese pharmaceutical industry and provide better
            opportunities for companies having clear competitive advantages. In addition,
            this is a unique period for merger and acquisition in China. To achieve
            our goal
            of continued acquisitions in the industry, we need to raise additional
            funding
            in the near future to fund such future acquisitions. In January of 2005,
            we
            raised gross proceeds of $500,000 through the sales of promissory note
            to
            accredited investors. In September of 2005, pursuant to an exemption
            under the
            Securities Act, we have conducted a private placement of approximately
            $1,090,000 with 28 accredited investors, through issuance of Series A
            Convertible Preferred Stock. In October of 2005, we conducted a private
            placement of additional Series A Convertible Preferred Stock worth $62,500.
            In
            February 2006, we conducted a private placement of our common stock with
            gross
            proceeds of $1,000,000. In March 2006, we sold additional shares of our
            common
            stock with gross proceeds of $6,900,000. We have filed a registration
            statement
            on form SB-2 covering the shares issued and issuable on March 24, 2006,
            which
            became effective on May 11, 2006. We have assumed a loan of $11,500,000
            which
            was contracted on September 29, 2006("Grant Date") due to RimAsia Capital
            Partners, L.P. in connection with the acquisition of Enshi. The interest
            of the
            loan is to be paid semi-annually with an annual rate of 11%. We paid
            off
            $500,000 ahead of the down payment schedule. At September 30, 2006, the
            balance
            of the other long term liabilities $10,841,465.
 On
              September 29, 2006, the Company's subsidiary Enshi made a distribution
              of
              $2,518,461 to the former shareholder of Enshi in the form of 2005 profit
              distribution. However the Enshi purchase agreement did not provide
              specificly
              about such distribution. The management of the Company expects to recover
              this
              amount from the former Enshi shareholder. The Company holds various
              amounts in
              terms of purchase price withholding and working capital withholding
              against the
              former Enshi shareholder. The management expects to resolve this matter
              shortly.
  Going
            forward, our primary requirements for cash consist of: (1) acquisition
            of
            additional pharmaceutical manufacturing companies with GMP standard facilities
            in order to commercialize new drugs in our extensive new drug pipeline
            and
            further extend of product pipeline and expand the our sales network (2)
            Continued R&D for more selected new drug projects (3) build up sales network
            for new drug distribution (4) working capital requirements. We anticipate
            that
            our internal source of liquid assets may enable us to continue our operation
            activities other than acquisition activities for next three months. However,
            we
            anticipate that our current operating activities may not enable us to
            meet the
            anticipated cash requirements for future acquisition activities. External
            source
            of capital may be needed for our expansion. We are exploring bank loans
            and
            private equity financing to finance such expenditures and intend to raise
            equity
            through the capital market to allow us to accomplish our future acquisition
            goals.
 
 MANAGEMENT
            ASSUMPTIONS
  Management
            anticipates, based on internal forecasts and assumptions relating to
            our current
            operations, that existing cash and funds generated from operations may
            not be
            sufficient to meet capital requirements for future acquisition activities.
            We
            could therefore be required to seek additional financing. There can be
            no
            assurance that we will be able to obtain such additional financing at
            acceptable
            terms to us, or at all.
 
 EFFECT
            OF
            FLUCTUATION IN FOREIGN EXCHANGE RATES
  Our
            operating subsidiaries are located in China. Their business activities
            are
            mainly in China using Chinese Renminbi as the functional currency. The
            value of
            the Renminbi against the U.S. dollar and other currencies may fluctuate
            and is
            affected by, among other things, changes in China's political and economic
            conditions. As we rely entirely on revenues earned in China, any significant
            revaluation of the Renminbi may materially and adversely affect our cash
            flows,
            revenues and financial condition. For example, to the extent that we
            need to
            convert U.S. dollars we receive from an offering of our securities into
            Renminbi
            for our operations, appreciation of the Renminbi against the U.S. dollar
            could
            have a material adverse effect on our business, financial condition and
            results
            of operations.
  Conversely,
            if we decide to convert our Renminbi into U.S. dollars for the purpose
            of making
            payments for dividends on our common shares or for other business purposes
            and
            the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent
            of
            the Renminbi we convert would be reduced. To date, however, we have not
            engaged
            in transactions of either type.
  Since
            1994 China has pegged the value of the Renminbi to the U.S.dollar. We
            do not
            believe that this policy has had a material effect on our business. However,
            there have been indications that the Chinese government may be reconsidering
            its
            monetary policy in light of the overall devaluation of the U.S. dollar
            against
            the Euro and other currencies during the last two years. In July 2005,
            the
            Chinese government revalued the Renminbi by 2.1% against the U.S. dollar,
            moving
            from Renminbi 8.28 to Renminbi 8.11 per dollar. The value of the Renminbi
            to the
            U.S. dollar was translated at 8.26 RMB to $1.00 USD at the end of September
            30,
            2005 and 7.90 RMB to $1.00 USD at the end of September 30, 2006. Because
            of the
            pegging of the Renminbi to the U.S. dollar is loosened, we anticipate
            that the
            value of the Renminbi appreciate against the dollar with the consequences
            discussed above.
 
 -38-
  NEW
            ACCOUNTING PRONOUNCEMENTS
  In
            December 2004, the Financial Accounting Standards Board ("FASB") issued
            a
            revised Statement of Financial Accounting Standard (“SFAS”) No. 123, Accounting
            for Stock-Based Compensation (SFAS No. 123(R)”, which supersedes APB opinion No.
            25, Accounting for Stock Issued to Employees, and its related implementation
            guidance. This statement requires a public entity to recognize and measure
            the
            cost of employee services it receives in exchange for an award of equity
            instruments based on the grant-date fair value of the award (with limited
            exceptions). These costs will be recognized over the period during which
            an
            employee is required to provide service in exchange for the award-the
            requisite
            service period (usually the vesting period). This statement also establishes
            the
            standards for the accounting treatment of these share-based payment transactions
            in which an entity exchanges its equity instruments for goods or services.
            It
            addresses transactions in which an entity incurs liabilities in exchange
            for
            goods or services that are based on the fair value of the entity's equity
            instruments or that may be settled by the issuance of those equity instruments.
            We implemented SFAS No. 123(R) effective January 1, 2006 which did not
            have a
            material impact on the Company’s results of operations, cash flow, or financial
            position.
 
 In
            September 2005, the FASB issued SFAS No. 154, "Accounting Changes and
            Error
            Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB No. 20 ("APB
            20") and
            SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
            and
            applies to all voluntary changes in accounting principle, and changes
            the
            requirements for accounting for and reporting of a change in accounting
            principle. APB 20 previously required that most voluntary changes in
            accounting principle
            be recognized by including in net income of the period of change a cumulative
            effect of changing to the new accounting principle whereas SFAS No. 154
            requires
            retrospective application to prior periods' financial statements of a
            voluntary
            change in accounting principle, unless it is impracticable.
  SFAS
            No.
            154 enhances the consistency of financial information between periods.
            We
            implemented SFAS No. 154 beginning with the Company's first quarter of
            fiscal
            year 2006. Currently SFAS No. 154 did not have a material impact on the
            Company's results of operations, financial position or cash flows.
 
 In
            September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
            which
            addresses the measurement of fair value by companies when they are required
            to
            use a fair value measure for recognition or disclosure purposes under
            GAAP. SFAS
            No. 157 provides a common definition of fair value to be used throughout
            GAAP
            which is intended to make the measurement of fair value more consistent
            and
            comparable and improve disclosures about those measures. SFAS No. 157
            will be
            effective for an entity's financial statements issued for fiscal years
            beginning
            after November 15, 2007. The Company is currently evaluating the effect
            SFAS No.
            157 will have on its consolidated financial position, liquidity, or results
            of
            operations.
 
 In
            September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
            for Defined
            Benefit Pension and Other Postretirement Plans−−an amendment of FASB Statements
            No. 87, 88, 106, and 132(R)". One objective of this standard is to make
            it
            easier for investors, employees, retirees and other parties to understand
            and
            assess an employer's financial position and its ability to fulfill the
            obligations under its benefit plans. SFAS No. 158 requires employers
            to fully
            recognize in their financial statements the obligations associated with
            single−employer defined benefit pension plans, retiree healthcare plans, and
            other postretirement plans. SFAS No. 158 requires an employer to fully
            recognize
            in its statement of financial position the overfunded or underfunded
            status of a
            defined benefit postretirement plan (other than a multiemployer plan)
            as an
            asset or liability and to recognize changes in that funded status in
            the year in
            which the changes occur through comprehensive income. This Statement
            also
            requires an employer to measure the funded status of a plan as of the
            date of
            its year−end statement of financial position, with limited exceptions. SFAS No.
            158 requires an entity to recognize as a component of other comprehensive
            income, net of tax, the gains or losses and prior service costs or credits
            that
            arise during the period but are not recognized as components of net periodic
            benefit cost pursuant to SFAS No. 87. This Statement requires an entity
            to
            disclose in the notes to financial statements additional information
            about
            certain effects on net periodic benefit cost for the next fiscal year
            that arise
            from delayed recognition of the gains or losses, prior service costs
            or credits,
            and transition asset or obligation. The Company is required to initially
            recognize the funded status of a defined benefit postretirement plan
            and to
            provide the required disclosures for fiscal years ending after December
            15,
            2006.
 
   -39-
 
 **ITEM
              3. CONTROLS and PROCEDURES**





Evaluation
      of Disclosure Controls and Procedures - We maintain a system of disclosure
      controls and procedures that are designed for the purposes of ensuring that
      information required to be disclosed in our SEC reports is recorded, processed,
      summarized and reported within the time periods specified in the SEC's rules
      and
      forms, and that such information is accumulated and communicated to our
      management, including our Chief Executive Officer (CEO) and Chief Financial
      Officer (CFO), as appropriate to allow timely decisions regarding required
      disclosures.





As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our CEO and CFO, of the
      effectiveness of our disclosure controls and procedures as defined in Rule
      13a-15(e) of the Securities Exchange Act of 1934, as amended. Based on that
      evaluation, our CEO and CFO concluded that our disclosure controls and
      procedures are effective.





Changes
      in Internal Control Over Financial Reporting - There has been no change in
      our
      internal control over financial reporting during the third quarter of 2006
      that
      has materially affected, or is reasonably likely to materially affect, our
      internal control over financial reporting.





**PART
      II - OTHER INFORMATION**





**ITEM
      6. EXHIBITS**





The
      following exhibits are filed as part of this quarterly report on Form
      10-QSB:





**EXHIBIT****NUMBER**
            
            **DESCRIPTION**31.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1
            
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 200232.2
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002







40





**SIGNATURES**





In
      accordance with the requirements of the Securities Exchange Act of 1934, as
      amended, the Registrant has duly caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized.




CHINA
                BIOPHARMACEUTICALS HOLDINGS, INC.Date: November
              14, 2006
            By:
            /s/ Chris
              Peng MaoName:
            Chris
              Peng MaoTitle:
            Chief
              Executive Officer   Date: November
                  14, 2006
                By:
                /s/ HUNAG
                  ChentaiName:
                HUNAG
                  ChentaiTitle:
                Chief
                  Financial Officer






41