U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


EXCHANGE
ACT OF 1934





For the
quarterly period ended March 31, 2009.





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


EXCHANGE
ACT OF 1934





For the
transition period from _____ to_____.





Commission
File Number: 001-32477





TIENS
BIOTECH GROUP (USA), INC.


(Exact
name of registrant as specified in its charter)


Delaware
                75-2926439(State
      or other jurisdiction
                (I.R.S.
      Employerof
      incorporation or organization)
                Identification
      No.)





No. 6,
Yuanquan Rd.


Wuqing
New Tech Industrial Park


Tianjin, China
301700


(Address
of principal executive offices)  (Zip code)





Registrant’s
Telephone Number, including area code: +86-22-8213-7914





Former
name, former address and former fiscal year, if changed since last
report





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes ̈No ̈





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




Large Accelerated Filer   ̈
                      
                      Accelerated Filer   ̈Non-Accelerated Filer ̈(Do not check if a smaller reporting company)
                      
                      Smaller Reporting Company x




Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).


Yes ̈                      Nox





There
were 71,333,586 shares of the registrant’s common stock outstanding on May 14,
2009.









TIENS
BIOTECH GROUP (USA), INC.


INDEX
TO FORM 10-Q




PAGEPART
      I - FINANCIAL INFORMATION
                  
                  3ITEM
      1. FINANCIAL STATEMENTS
                  
                  3Consolidated
      Balance Sheets as of March 31, 2009 (Unaudited) and December 31,
      2008
                  
                  3Consolidated
      Statements of Income and Other Comprehensive Income for the Three Months
      Ended March 31, 2009 and 2008 (Unaudited)
                  
                  4Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2009 and
      2008 (Unaudited)
                  
                  5Notes
      to Consolidated Financial Statements (Unaudited)
                  
                  6ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                  
                  24ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                  
                  35ITEM
      4T. CONTROLS AND PROCEDURES
                  
                  35PART
      II - OTHER INFORMATION
                  
                  35ITEM
      6. EXHIBITS
                  
                  35





2





PART I -
FINANCIAL INFORMATION





ITEM 1. FINANCIAL
STATEMENTS








TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


AS OF
MARCH 31, 2009 AND DECEMBER 31, 2008





March 31,
                                  
                                  
                                  December 31,2009
                                  
                                  
                                  2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                                  
                                  $
                                  20,293,635
                                  
                                  
                                  $
                                  20,992,573Cash
      related to assets held for sale
                                  
                                  
                                  23,857,787
                                  
                                  
                                  
                                  23,861,938Total
      cash
                                  
                                  
                                  44,151,422
                                  
                                  
                                  
                                  44,854,511Accounts
      receivable, trade - related parties, net ofallowance for doubtful
      accounts of $925,565 and $1,108,789 as of March 31, 2009 and December 31,
      2008, respectively
                                  
                                  
                                  25,648,895
                                  
                                  
                                  
                                  23,941,431Inventories
                                  
                                  
                                  6,985,983
                                  
                                  
                                  
                                  8,365,607Other
      receivables
                                  
                                  
                                  830,579
                                  
                                  
                                  
                                  813,591Other
      receivables - related parties
                                  
                                  
                                  18,360,639
                                  
                                  
                                  
                                  15,729,076Employee
      advances
                                  
                                  
                                  189,686
                                  
                                  
                                  
                                  112,591Prepaid
      expenses
                                  
                                  
                                  892,240
                                  
                                  
                                  
                                  301,898Prepaid
      taxes
                                  
                                  
                                  1,727,363
                                  
                                  
                                  
                                  1,531,207Assets
      held for sale
                                  
                                  
                                  10,930,860
                                  
                                  
                                  
                                  10,904,842Total
      current assets
                                  
                                  
                                  109,717,667
                                  
                                  
                                  
                                  106,554,754PROPERTY,
      PLANT AND EQUIPMENT, net
                                  
                                  
                                  10,719,838
                                  
                                  
                                  
                                  10,274,643OTHER
      ASSETS:Construction
      in progress
                                  
                                  
                                  77,345,874
                                  
                                  
                                  
                                  72,300,104Construction
      deposits
                                  
                                  
                                  3,517,428
                                  
                                  
                                  
                                  2,586,302Intangible
      assets, net
                                  
                                  
                                  13,077,072
                                  
                                  
                                  
                                  13,137,195Other
      assets
                                  
                                  
                                  80,345
                                  
                                  
                                  
                                  87,541Total
      other assets
                                  
                                  
                                  94,020,719
                                  
                                  
                                  
                                  88,111,142Total
      assets
                                  
                                  $
                                  214,458,224
                                  
                                  
                                  $
                                  204,940,539LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                  
                                  $
                                  5,724,468
                                  
                                  
                                  $
                                  6,283,849Advances
      from customers - related parties
                                  
                                  
                                  4,608,494
                                  
                                  
                                  
                                  3,239,650Wages
      and benefits payable
                                  
                                  
                                  1,110,191
                                  
                                  
                                  
                                  1,449,146Other
      taxes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  117,818Contractor
      deposits
                                  
                                  
                                  212,386
                                  
                                  
                                  
                                  163,248Contractor
      payables
                                  
                                  
                                  12,261,342
                                  
                                  
                                  
                                  11,871,456Other
      payables
                                  
                                  
                                  1,370,326
                                  
                                  
                                  
                                  1,933,743Other
      payables - related parties
                                  
                                  
                                  6,367,301
                                  
                                  
                                  
                                  6,373,900Current
      portion of long term debt, related party
                                  
                                  
                                  2,130,000
                                  
                                  
                                  
                                  2,130,000Liabilities
      directly associated with assets classified as held for
sale
                                  
                                  
                                  117,380
                                  
                                  
                                  
                                  122,047Total
      current liabilities
                                  
                                  
                                  33,901,888
                                  
                                  
                                  
                                  33,684,857NON-CURRENT
      LIABILITIESLong
      term debt, net of current portion, related party
                                  
                                  
                                  2,137,742
                                  
                                  
                                  
                                  2,137,742Deferred
      income
                                  
                                  
                                  11,222,672
                                  
                                  
                                  
                                  11,208,844Total
      non current liabilities
                                  
                                  
                                  13,360,414
                                  
                                  
                                  
                                  13,346,586Total
      liabilities
                                  
                                  
                                  47,262,302
                                  
                                  
                                  
                                  47,031,443EQUITY:Shareholders'
      equity of the Company:Common
      stock, $0.001 par value, 250,000,000 shares authorized,71,333,586
      issued and outstanding, respectively
                                  
                                  
                                  71,334
                                  
                                  
                                  
                                  71,334Paid-in-capital
                                  
                                  
                                  9,302,605
                                  
                                  
                                  
                                  9,234,123Statutory
      reserves
                                  
                                  
                                  9,420,783
                                  
                                  
                                  
                                  9,420,783Retained
      earnings
                                  
                                  
                                  114,918,181
                                  
                                  
                                  
                                  106,325,356Accumulated
      other comprehensive income
                                  
                                  
                                  24,051,065
                                  
                                  
                                  
                                  23,851,062Total
      shareholders' equity of the Company
                                  
                                  
                                  157,763,968
                                  
                                  
                                  
                                  148,902,658Noncontrolling
      interest
                                  
                                  
                                  9,431,954
                                  
                                  
                                  
                                  9,006,438Total
      equity
                                  
                                  
                                  167,195,922
                                  
                                  
                                  
                                  157,909,096Total
      liabilities and equity
                                  
                                  $
                                  214,458,224
                                  
                                  
                                  $
                                  204,940,539
  The
accompanying notes are an integral part of this
statement.





3





TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)





Three months ended March 31,2009
                      
                      
                      2008REVENUE
      - RELATED PARTIES
                      
                      $
                      18,237,545
                      
                      
                      $
                      12,820,821COST
      OF SALES - RELATED PARTIES
                      
                      
                      5,735,059
                      
                      
                      
                      4,040,060GROSS
      PROFIT
                      
                      
                      12,502,486
                      
                      
                      
                      8,780,761SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                      
                      
                      3,130,936
                      
                      
                      
                      3,247,199INCOME
      FROM OPERATIONS
                      
                      
                      9,371,550
                      
                      
                      
                      5,533,562(Interest
      expense)
                      
                      
                      (52,616
                      )
                      
                      
                      (52,584
                      )Interest
      income
                      
                      
                      85,768
                      
                      
                      
                      237,332Other
      (expense) income
                      
                      
                      (45,288
                      )
                      
                      
                      259,423OTHER
      (EXPENSE) INCOME, NET
                      
                      
                      (12,136
                      )
                      
                      
                      444,171INCOME
      BEFORE INCOME TAXES
                      
                      
                      9,359,414
                      
                      
                      
                      5,977,733INCOME
      TAXES
                      
                      
                      359,615
                      
                      
                      
                      1,480,394NET
      INCOME
                      
                      
                      8,999,799
                      
                      
                      
                      4,497,339LESS:
      Net income attributable to the noncontrolling interest
                      
                      
                      (406,974
                      )
                      
                      
                      (888,437
                      )NET
      INCOME ATTRIBUTABLE TO THE COMPANY
                      
                      
                      8,592,825
                      
                      
                      
                      3,608,902OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                      
                      
                      200,003
                      
                      
                      
                      4,423,860COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE COMPANY
                      
                      
                      8,792,828
                      
                      
                      
                      8,032,762COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
                      
                      
                      419,595
                      
                      
                      
                      1,163,584COMPREHENSIVE
      INCOME
                      
                      $
                      9,212,423
                      
                      
                      $
                      9,196,346EARNINGS
      PER SHARE, BASIC AND DILUTED
                      
                      $
                      0.12
                      
                      
                      $
                      0.05WEIGHTED
      AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                      
                      
                      71,333,586
                      
                      
                      
                      71,333,586


The
accompanying notes are an integral part of this statement.
  4





TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)





Three months ended March 31,2009
                                            
                                            
                                            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                            
                                            $
                                            8,999,799
                                            
                                            
                                            $
                                            4,497,339Adjustments
      to reconcile net income to cash provided by (used in) operating
      activities:Provision
      for doubtful accounts
                                            
                                            
                                            (184,568
                                            )
                                            
                                            
                                            (12,288
                                            )Depreciation
                                            
                                            
                                            544,811
                                            
                                            
                                            
                                            683,155Amortization
                                            
                                            
                                            97,143
                                            
                                            
                                            
                                            60,894Interest
      income
                                            
                                            
                                            1,372
                                            
                                            
                                            
                                            (53,159
                                            )Gain
      on sale of assets
                                            
                                            
                                            (11,652
                                            )
                                            
                                            
                                            (8,431
                                            )(Increase)
      decrease in assets:Accounts
      receivable, trade - related parties
                                            
                                            
                                            (1,493,130
                                            )
                                            
                                            
                                            (3,914,933
                                            )Accounts
      receivable, trade - third parties
                                            
                                            
                                            -
                                            
                                            
                                            
                                            106,413Other
      receivables
                                            
                                            
                                            (17,415
                                            )
                                            
                                            
                                            255,386Other
      receivables - related parties
                                            
                                            
                                            (2,567,169
                                            )
                                            
                                            
                                            (198,638
                                            )Inventories
                                            
                                            
                                            1,398,175
                                            
                                            
                                            
                                            (441,968
                                            )Employee
      advances
                                            
                                            
                                            (76,407
                                            )
                                            
                                            
                                            (48,871
                                            )Prepaid
      expense
                                            
                                            
                                            (589,907
                                            )
                                            
                                            
                                            112,341Increase
      (decrease) in liabilities:Accounts
      payable
                                            
                                            
                                            (567,056
                                            )
                                            
                                            
                                            (169,891
                                            )Advances
      from customers - related parties
                                            
                                            
                                            1,364,661
                                            
                                            
                                            
                                            1,102Wages
      and benefits payable
                                            
                                            
                                            (393,303
                                            )
                                            
                                            
                                            (200,580
                                            )Other
      taxes payable
                                            
                                            
                                            (270,424
                                            )
                                            
                                            
                                            649,299Other
      payables
                                            
                                            
                                            (565,726
                                            )
                                            
                                            
                                            158,270Other
      payables - related parties
                                            
                                            
                                            106,916
                                            
                                            
                                            
                                            125,300Net
      cash provided by operating activities
                                            
                                            
                                            5,776,120
                                            
                                            
                                            
                                            1,600,740CASH
      FLOWS FROM INVESTING ACTIVITIES:Repayment
      of loan from related parties
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,403,831Construction
      deposits
                                            
                                            
                                            (1,163,628
                                            )
                                            
                                            
                                            96,237Contractor
      deposits
                                            
                                            
                                            48,930
                                            
                                            
                                            
                                            (284,016
                                            )Addition
      to construction in progress
                                            
                                            
                                            (4,483,010
                                            )
                                            
                                            
                                            (4,257,203
                                            )Proceeds
      from sales  of properties
                                            
                                            
                                            17,031
                                            
                                            
                                            
                                            -Purchase
      of equipment and automobiles
                                            
                                            
                                            (1,035,910
                                            )
                                            
                                            
                                            (123,344
                                            )Net
      cash used in investing activities
                                            
                                            
                                            (6,616,587
                                            )
                                            
                                            
                                            (3,164,495
                                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Loan
      from related parties
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,489,184Increase
      in paid in capital
                                            
                                            
                                            81,626
                                            
                                            
                                            
                                            -Net
      cash provided by financing activities
                                            
                                            
                                            81,626
                                            
                                            
                                            
                                            3,489,184EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                                            
                                            
                                            55,752
                                            
                                            
                                            
                                            2,153,552INCREASE
      (DECREASE) IN CASH
                                            
                                            
                                            (703,089
                                            )
                                            
                                            
                                            4,078,981CASH,
      beginning of period
                                            
                                            
                                            44,854,511
                                            
                                            
                                            
                                            54,081,848CASH,
      end of period
                                            
                                            $
                                            44,151,422
                                            
                                            
                                            $
                                            58,160,829Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Income
      taxes
                                            
                                            $
                                            447,440
                                            
                                            
                                            $
                                            455,480







5


Note
1 - Background
 
 Tiens
Biotech Group (USA), Inc. (the "Company" or "Tiens") was incorporated on July
13, 1990 as Super Shops, Inc. in the State of Michigan. In October 2000, Super
Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition
Corp., and subsequently to Strategika, Inc. in February 2002. On December 31,
2003, the Company changed its name from Strategika, Inc. to Tiens Biotech Group
(USA), Inc.
 
 The
Company is currently owned 4.91% by public stockholders and 95.09% by Jinyuan
Li, the Company’s current Chairman, CEO and President. The Company owns 100% of
Tianshi International Holdings Group Limited ("Tianshi Holdings"). Tianshi
Holdings owns 80% of Tianjin Tianshi Biological Development Co., Ltd.
("Biological"), 96% of Tiens Yihai Co., Ltd. ("Tiens Yihai") and 100% of Tianjin
Tiens Life Resources Co., Ltd. (“Life Resources”).
 
 The
Company plans to sell Tiens Yihai, a joint venture owned by the Company and
Tianjin Tianshi Pharmaceuticals Co., Ltd. (”Tianshi Pharmaceuticals”), in 2009.
In anticipation of this sale, the registered capital requirement of Tiens Yihai
was decreased from $200 million to $29,989,361, which coincided with its
then-current paid in capital. This reduction was approved by the local
government on October 14, 2008. Pursuant to the change of the registered capital
requirement and the capital contributions from both investors, the share held by
Tianshi Holding decreased from 99.4% to 96% and the share held by Tianshi
Pharmaceuticals increased to 4% from 0.06%.
 
 Nature of
operations
 
 The
Company through its subsidiaries is primarily engaged in the manufacturing of
nutritional supplement products, including wellness products and dietary
supplement products. In the People’s Republic of China (“PRC”), the Company
sells its products to Tianjin Tianshi Biological Engineering Co., Ltd. (“Tianshi
Engineering”). Tianshi Engineering, in turn, sells the products to customers
through its branches and affiliated companies and at chain stores which are
owned by individual distributors. Outside the PRC, the Company sells its
products to overseas affiliated companies located in 46 countries that in
turn re-package them and sell to independent direct sales
distributors.
 
 Note
2 – Summary of significant accounting policies
 
 Basis of
presentation
 
 The
financial statements of the Company and its subsidiaries are prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”). These Consolidated Financial Statements for interim
periods are unaudited. In the opinion of management, the consolidated financial
statements include all adjustments, consisting only of normal, recurring
adjustments, necessary for their fair presentation.The results reported in
these Consolidated Financial Statements are not necessarily indicative of the
results that may be reported for the entire year. The accompanying consolidated
financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and do not include all
information and footnotes necessary for a complete presentation of financial
statements in conformity with U.S. GAAP. These Consolidated Financial Statements
should be read in conjunction with the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008, filed with the Securities and Exchange
Commission on March 31, 2009.
  6
  
 
 The reporting
entity
 
 The
Company’s consolidated financial statements reflect the activities of the
following Company subsidiaries:
 
 Subsidiary
                            
                            Jurisdiction of Formation
                            
                            
                            % OwnershipTianshi
      Holdings
                            
                            British
      Virgin Islands
                            
                            
                            
                            100.0
                            %Biological
                            
                            P.R.C.
                            
                            
                            
                            80.0
                            %Tiens
      Yihai
                            
                            P.R.C.
                            
                            
                            
                            96.0
                            %Life
      Resources
                            
                            P.R.C.
                            
                            
                            
                            100.0
                            %
 Principles of
consolidation
 
 The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions and
balances are eliminated in consolidation.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes.
Management believes that the estimates utilized in preparing its financial
statements are reasonable and prudent. Actual results could differ from these
estimates.
 
 Foreign currency
translation
 
 The
reporting currency of the Company is the US dollar. Biological, Tiens Yihai and
Life Resources' financial records are maintained and the statutory financial
statements are stated in the local currency, Renminbi (RMB), as their functional
currency. Results of operations and cash flows are translated at average
exchange rates during the period, and 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. Translation adjustments resulting from this process are
included in other comprehensive income in the statement of income and other
comprehensive income.
 
 Translation
adjustments amounted to $200,003 and $4,423,860 for the three months ended March
31, 2009 and 2008, respectively. Asset and liability accounts at March 31,
2009 and December 31, 2008 were translated at 6.85 RMB to $1.00 USD. Equity
accounts are stated at their historical rate. The average translation rates
applied to income statement accounts for the three months ended March 31, 2009
and 2008 were 6.85 RMB and 7.18 RMB, respectively. Cash flows are also
translated at average translation rates for the period. Therefore, amounts
reported on the statements of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheets.
  7
 
  Fair value of financial
instruments
 
 The
Company's financial instruments consist primarily of cash, trade accounts
receivable, trade payables, advances, other receivables, and debt instruments.
The carrying amounts of the Company's financial instruments generally
approximate their fair values at March 31, 2009 and December 31, 2008, except
for long-term debt, which has a fixed interest rate. The fair value of the
long-term debt is estimated based on the borrowing rates currently available to
the Company for bank loans with similar terms and average maturities. The
carrying value and fair value of long-term debt is as follows:
 
 March 31, 2009
                    
                    
                    December 31, 2008Balancesheet
                      amount
                    
                    
                    Fair value
                    
                    
                    Balancesheet
                      amount
                    
                    
                    Fair valueLong-term
      debt - related party
                    
                    $
                    4,267,742
                    
                    
                    $
                    4,300,268
                    
                    
                    $
                    4,267,742
                    
                    
                    $
                    4,244,098
 
 Cash
 
 Cash
includes cash on hand and demand deposits in accounts maintained with banks 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 significant risks
on its cash in bank accounts.
 
 Accounts
receivable
 
 The
Company's trade accounts receivable are mainly due from related companies. The
Company has made full provision for accounts receivable-related parties aged
over one year based upon the related parties ability to collect their
receivables and a general allowance for doubtful debt of 0.5% of the remaining
accounts receivable-related parties. Management reviews its accounts receivable
on a regular basis to determine if the bad debt allowance is adequate, paying
particular attention to the age of receivables outstanding. At March 31, 2009
and December 31, 2008, receivables due from Tianshi Engineering outstanding more
than 90 days totaled $2,562,017 and $0, respectively. At March 31, 2009 and
December 31, 2008, receivables due from overseas related companies outstanding
more than 180 days totaled $3,245,827 and $3,316,115, respectively. The Company
did not incur any losses on receivables for the periods reported. The following
table represents the changes in the allowance for doubtful
accounts:
 
 Balance at
                                Beginningof
                                Period
                              
                              
                              Increase(Decrease)
                                ofprovision for
                                Doubtful Accounts
                              
                              
                              Balance at
                                End ofPeriodPeriod
      ended March 31, 2009Reserves
      and allowancesdeducted
      from assets accounts:Allowance
      for doubtful accounts:
                              
                              $
                              1,108,789
                              
                              
                              $
                              (183,224
                              )
                              
                              $
                              925,565Period
      ended March 31, 2008Reserves
      and allowancesdeducted
      from assets accounts:Allowance
      for doubtful accounts:
                              
                              $
                              71,700
                              
                              
                              $
                              (12,288
                              )
                              
                              $
                              59,412
 
 Inventories
 
 Inventories
are stated at the lower of cost or market using the moving average basis. The
Company reviews its inventory annually for possible obsolete goods or to
determine if any reserves are necessary for potential obsolescence.
  8
  
  Employee
advances
 
 Employee
advances represent cash advances to various employees of the Company. In the
PRC, a majority of business transactions are completed in cash. These cash
advances represent monies advanced to certain employees to pay for various
expenses and purchases related to the Company's daily operations.
 
 Prepaid
expenses
 
 Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
Company reviews its advances to suppliers annually to determine whether
provisions should be made. The amount included in prepaid expense is net of any
provisions. Provisions for prepaid expenses are as follows:
 
 Balanceat
                                Beginningof
                                Period
                              
                              
                              Increase(Decrease)of
                                provisionforDoubtful
                                Accounts
                              
                              
                              BalanceatEnd
                                ofPeriodPeriod
      ended March 31, 2009Reserves
      and provisionsdeducted
      from assets accounts:Provision
      for prepaid expenses:
                              
                              $
                              952,071
                              
                              
                              $
                              1,175
                              
                              
                              $
                              953,246Period
      ended March 31, 2008Reserves
      and provisionsdeducted
      from assets accounts:Provision
      for prepaid expenses:
                              
                              $
                              872,053
                              
                              
                              $
                              36,293
                              
                              
                              $
                              908,346
 
 Property, plant and
equipment, net
 
 Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives of the assets are as
follows:
 
 Estimated Useful LifeBuildings
      and improvements
                    20
      yearsMachinery
      and equipment
                    10
      yearsComputer,
      office equipment and furniture
                    5
      yearsAutomobiles
                    5
      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
consolidated statements of income and other comprehensive income. Maintenance,
repairs and minor renewals are charged directly to expenses as incurred. Major
additions and betterments to buildings and equipment are
capitalized.
  9
 
  Construction in
progress
 
 Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company's plant facilities. No depreciation is
provided for construction in progress until such time as the relevant assets are
completed and are ready for their intended use.
 
 Construction
deposits
 
 Construction
deposits represent advances paid by the Company to contractors for construction
in progress.
 
 Intangible
assets
 
 Intangible
assets mainly consist of land use rights. All land located in the PRC is owned
by the government and cannot be sold to any individual or company. However, the
government grants "land use rights" for a specified period of time. The Company
amortizes its land use rights according to the actual useful life of 50 years.
Other intangible assets include patents and trademarks and are amortized over
their estimated useful life ranging from five to ten years.
 
 Other
assets
 
 Other
assets mainly consist of a deposit and a related loan made to a local government
agency for the acquisition of land use rights in Shanghai. Originally, the
deposit related to the proposed acquisition of land use rights for 263 acres of
land by Tiens Yihai. However, on November 10, 2006, Tianshi Holdings and the
local government entered a supplemental agreement pursuant to which the parties
agreed to the acquisition of land use rights by Tiens Yihai of a reduced 80
acres parcel of land. As of March 31, 2009, land use rights for only 50 of the
80 acres had been received. Since the Company plans to sell its 96% share of
Tiens Yihai in 2009, the loan made to local government agency was included in
assets held for sale in the consolidated financial statements of the Company as
of March 31, 2009.
 
 Impairment of long-lived
assets
 
 Long-lived
assets, including intangible assets, of the Company are reviewed annually as to
whether their carrying value has become impaired. The Company considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from related operations. The Company also re-evaluates the periods of
depreciation and amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives.
 
 Deferred
income
 
 Deferred
income consists of government grants. On August 2, 2005 and November 20, 2006,
the Company received two government grants related to the purchase of land use
rights in the amount of RMB 35,803,461 (or US $5,230,169). On August 28, 2008,
Life Resources paid RMB 41,022,061 (or US $5,992,503) for the zoning changes to
one parcel of land on which the land use rights were changed from “industrial”
to “educational”. On September 12, 2008, the Company received RMB 41,022,061 (or
US $5,992,503) from a government grant. The grants are treated as deferred
income and will be amortized over the life of the buildings on the
land.
 
 Noncontrollinginterest
 
 Noncontrolling
interest represents the outside shareholder’s 20% ownership of Biological and 4%
ownership of Tiens Yihai as of March 31, 2009. Prior to January 1, 2009, the
share of Tiens Yihai owned by noncontrolling shareholders was 0.6%.
  10
 
 Revenue
recognition
 
 The
Company sells both semi-finished products and finished products to Tianshi
Engineering domestically. Revenue from the sale of semi-finished products is
recognized at FOB Tianjin shipping point. Revenue from the sale of finished
products is recognized only when the related party Chinese distributor
recognizes sales of the Company's products to unaffiliated third parties.
Revenues in both cases are net of taxes.
 
 For
overseas sales, the Company sells mostly finished products. The Company
recognizes revenue from international sales (non-Chinese) to affiliated parties,
net of taxes as goods are shipped and clear review by the customs department of
the Chinese government.
 
 The
Company is generally not contractually obligated to accept returns. However, on
a case-by-case negotiated basis, the Company permits customers to return their
products. In accordance with SFAS No. 48, "Revenue Recognition when the Right of
Return Exists", revenue is recorded net of an allowance for estimated returns.
Such reserves are based upon management's evaluation of historical experience
and estimated costs. The amount of the reserves ultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements. As the Company did not receive any returns of
products during the past three years, and management does not anticipate
allowing any returns in 2009 related to previous revenues, no allowance for
estimated returns has been recorded as of March 31, 2009 and December 31,
2008.
 
 Advertising
costs
 
 The
Company sells all of its products to related parties and these related parties
are primarily responsible for marketing. Advertising costs of the Company for
the three months ended March 31, 2009 and 2008 amounted to $0 and $126,640,
respectively, and were expensed as incurred.
 
 Shipping and
handling
 
 Shipping
and handling costs totaled $140,702 and $50,715 for the three months ended March
31, 2009 and 2008, respectively. The Company sells products on FOB condition,
however, it usually prepays shipping and handling expenses to transportation
companies on behalf of customers and collects these shipping and handling
expenses when it receives payments from customers. The payments received from
customers were included in revenue and the related shipping and handling costs
were included in selling, general and administrative expenses.
 
 Research and
development
 
 Research
and development expenses include salaries, supplies, and overhead such as
depreciation, utilities and other costs. These costs are expensed as incurred,
in accordance with SFAS No. 2, "Accounting for Research and Development Costs."
The Company expensed research and development costs of $379,460 and $230,610 for
the three months ended March 31, 2009 and 2008, respectively. These costs are
included in selling, general and administrative expenses in the accompanying
statements.
  11
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes”. Under this method, deferred income taxes are recognized for
the estimated tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
year-end, based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established to reduce deferred tax assets to the amount
expected to be realized when, in management’s opinion, it is more likely than
not that some portion of the deferred tax assets will not be realized. The
provision for income taxes represents current taxes payable, net of the change
during the period in deferred tax assets and liabilities. The Company adopted
FIN 48, Accounting for Uncertainty in Tax Positions.
 
 The
Company has not been subjected to income tax examinations by taxing authorities
for the three months ended March 31, 2009 and the year ended December 31, 2008.
During the three months ended March 31, 2009 and the year ended December 31,
2008, the Company did not recognize any amount in interest and penalties. The
Company did not accrue any amount for the payment of interest and penalties at
March 31, 2009 and December 31, 2008, respectively.
 
 Earnings per
share
 
 The
Company has adopted SFAS No. 128, "Earnings per Share". SFAS No. 128 requires
the presentation of earnings per share (“EPS”) as Basic EPS and Diluted EPS.
Basic EPS excludes dilution and is computed by dividing net income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. There are no differences between Basic and
Diluted EPS for the three months ended March 31, 2009 and 2008.
 
 Other comprehensive
income
 
 Other
comprehensive income represents foreign currency translation adjustments for the
period. The amounts shown in the Consolidated Statements of Income and Other
Comprehensive Income and Consolidated Statements of Shareholders’ Equity do not
include other comprehensive income attributed to noncontrolling
interest.
 
 Recently issued accounting
pronouncements
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements the
identifiable assets, the liabilities and any non-controlling interest in the
acquiree, and the goodwill acquired in a business combination or a gain from a
bargain purchase. It also determines what information to disclose. The objective
of SFAS 141R is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS141R became effective in
the first quarter of 2009. The Company adopted this statement
beginning January 1, 2009.
 
 In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements – An amendment of ARB No. 51" (“SFAS 160”).
SFAS 160 provides guidance on how to report a non-controlling interest in
consolidated financial statements. The objective of SFAS 160 is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. SFAS160 became effective in
the first quarter of 2009. As a
result of the adoption of SFAS 160 from January 1, 2009,  the Company
reclassified minority interest of $9.4 million to noncontrolling interest as a
component of equity on the Consolidated Balance Sheet for the quarter ended
March 31, 2009.
  12
 
  In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosure
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. The objective of SFAS 161 is to provide
adequate information about how derivative and hedging activities affect an
entity’s financial position, financial performance, and cash flows. SFAS 161
became effective in the first quarter of 2009. The
adoption of SFAS No. 161 from January 1, 2009 had no effect on the Company’s
consolidated financial statements.
 
 In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, "Determination of
the Useful Life of Intangible Assets" (“FSP 142-3”).  FSP 142-3 amends
the factors an entity should consider in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FASB Statement No. 142, "Goodwill and Other Intangible Assets." The intent
of this FSP if to improve the consistency between the useful life of a
recognized intangible asset under Statement 142 and the period of expected cash
flows to measure the fair value of the asset under SFAS 141R, and other U.S.
generally accepted accounting principles (GAAP). FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The adoption of FSP 142-3 had no
material impact on the Company’s consolidated financial statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with U.S. GAAP. SFAS 162 shall be effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
(“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” The adoption of this
Statement had no effect on the consolidated financial statements.
 
 In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts” (“SFAS 163”). SFAS 163 requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured
event) when there is evidence that credit deteriorations have occurred in an
insured financial obligation. SFAS 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The adoption of SFAS
163 had no material impact on the Company’s consolidated financial
statements.
 
 In
October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market For That Asset Is Not Active  (“FSP
No. FAS 157-3”), with an immediate effective date, including prior periods for
which financial statements have not been issued. FSP No. FAS 157-3 amends SFAS
No. 157 to clarify the application of fair value in inactive markets and allows
for the use of management’s internal assumptions about future cash flows with
appropriately risk-adjusted discount rates when relevant observable market data
does not exist. The objective of SFAS No. 157 has not changed and continues to
be the determination of the price that would be received in an orderly
transaction that is not a forced liquidation or distressed sale at the
measurement date. The adoption of FSP No. FAS 157-3 did not have a material
impact on the Company’s consolidated financial statements.
  13
 
 Note
3 – Inventories
 
 Inventories
consist of the following at March 31, 2009 and December 31, 2008:
 
 March 31,
                      
                      
                      December31,2009
                      
                      
                      2008Raw
      materials
                      
                      $
                      2,655,394
                      
                      
                      $
                      2,507,073Packing
      materials
                      
                      
                      1,089,222
                      
                      
                      
                      1,131,252Miscellaneous
      supplies
                      
                      
                      362,444
                      
                      
                      
                      402,630Work
      in process
                      
                      
                      438,939
                      
                      
                      
                      699,205Finished
      goods
                      
                      
                      2,439,984
                      
                      
                      
                      3,625,447Total
                      
                      $
                      6,985,983
                      
                      
                      $
                      8,365,607
 
 The
Company has written off obsolete goods in the amount of $0 and $7,351 for the
three months ended March 31, 2009 and 2008, respectively.
 
 Note
4 – Prepaid expenses
 
 Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
details of prepaid expenses at March 31, 2009 and December 31, 2008 are as
follows:
 
 March 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Advance
      to suppliers
                    
                    $
                    889,229
                    
                    
                    $
                    297,576Short-term
      prepaid expenses
                    
                    
                    3,011
                    
                    
                    
                    4,322Total
                    
                    $
                    892,240
                    
                    
                    $
                    301,898
 
 Note
5 – Property, plant and equipment, net
 
 Property,
plant and equipment consist of the following at March 31, 2009 and December 31,
2008:
 
 March 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Buildings
      and improvements
                    
                    $
                    1,560,447
                    
                    
                    $
                    1,558,524Office
      equipment
                    
                    
                    384,151
                    
                    
                    
                    383,678Computer
      equipment and software
                    
                    
                    2,863,174
                    
                    
                    
                    2,900,333Machinery
      and equipment
                    
                    
                    13,355,590
                    
                    
                    
                    12,835,301Automobiles
                    
                    
                    4,484,069
                    
                    
                    
                    4,145,367Total
                    
                    
                    22,647,431
                    
                    
                    
                    21,823,203Less:
      accumulated depreciation
                    
                    
                    (11,927,593
                    )
                    
                    
                    (11,548,560
                    )Property,
      plant and equipment, net
                    
                    $
                    10,719,838
                    
                    
                    $
                    10,274,643
 
 Depreciation
expense for the three months ended March 31, 2009 and 2008 amounted to $544,811
and $683,155,respectively.
  14
 
 
 Note
6 - Intangible assets
 
 Intangible
assets consist of the following at March 31, 2009 and December 31,
2008:
 
 March 31,
                      
                      
                      December 31,2009
                      
                      
                      2008Land
      use rights
                      
                      $
                      13,514,801
                      
                      
                      $
                      13,498,149Other
      intangible assets
                      
                      
                      343,850
                      
                      
                      
                      343,426Less
      accumulated amortization
                      
                      
                      (781,579
                      )
                      
                      
                      (704,380
                      )Intangible
      assets, net
                      
                      $
                      13,077,072
                      
                      
                      $
                      13,137,195
 
 Amortization
expense for the three months ended March 31, 2009 and 2008 amounted to
$97,143 and $60,894, respectively.
 
 The
estimated amortization expense for the next five years is as
follows:
 
 Estimated amortization expense forthe year ending December 31,
                      
                      Amount2009
                      
                      $
                      304,9382010
                      
                      $
                      304,5532011
                      
                      $
                      304,5532012
                      
                      $
                      298,0492013
                      
                      $
                      286,968
 
 Note
7 – Assets held for sale
 
 Due to
the continued uncertainty relating to the Tiens Yihai project, the Company plans
to sell Tiens Yihai in 2009. Tianshi Holdings, Tianshi Pharmaceuticals and
Tianjin Tianshi Group Co., Ltd. ("Tianshi Group”) entered a letter of intent on
December 31, 2008, pursuant to which Tianshi Pharmaceuticals agreed to buy
Tianshi Holdings’ 96% share of Tiens Yihai, with Tianshi Group guaranteeing
payment.
 
 The
assets and liabilities of Tiens Yihai have been classified as assets held for
sale and liabilities directly associated with assets classified as held for
sale, respectively, for the consolidated balance sheets presented herein. The
assets and liabilities of Tiens Yihai as of March 31, 2009 and December 31, 2008
were as follows:
  15
 
  March 31, 2009
                        
                        
                        December 31, 2008Cash
                        
                        $
                        23,857,787
                        
                        
                        $
                        23,861,938Other
      receivables-third parties
                        
                        
                        7,567
                        
                        
                        
                        6,126Employee
      advances
                        
                        
                        803
                        
                        
                        
                        1,341Property,
      plant, and equipment,net
                        
                        
                        479,523
                        
                        
                        
                        548,717Construction
      In progress
                        
                        
                        2,508,957
                        
                        
                        
                        2,462,108Intangible
      assets, net
                        
                        
                        2,585,710
                        
                        
                        
                        2,596,029Long-term
      prepaid expense
                        
                        
                        5,348,300
                        
                        
                        
                        5,290,521Assets
      held for sale
                        
                        $
                        34,788,647
                        
                        
                        $
                        34,766,780Accounts
      payable
                        
                        
                        3,316
                        
                        
                        
                        3,312Wages
      and benefits payable
                        
                        
                        83,941
                        
                        
                        
                        88,648Other
      taxes payable
                        
                        
                        -
                        
                        
                        
                        2Other
      payables
                        
                        
                        29,935
                        
                        
                        
                        29,898Other
      payables - related parties
                        
                        
                        188
                        
                        
                        
                        187Liabilities
      directly associted withassets
      classified as held for sale
                        
                        $
                        117,380
                        
                        
                        $
                        122,047
 
 Note
8 – Related party transactions and balances
 
 The
Company mainly conducted related party transactions with Tianshi Group, Tianshi
Engineering, Tianshi International Investment Group Co., Ltd. (“Tianshi
Investment”) and overseas related companies of Tianshi Group. Tianshi Group is
owned 90% by Jinyuan Li and 10% by his daughter, Baolan Li. Tianshi Engineering
is owned 51% by Tianshi Group and 49% by Baolan Li. Tianshi Investment is 100%
owned by Jinyuan Li. Jinyuan Li owns or controls the overseas related companies
of Tianshi Group.
  The
Company’s related party transactions are required to be reviewed and approved or
ratified by the Board of Directors. No director that is a related person in a
related party transaction may participate in any discussion, approval or
ratification of the related party transaction except to provide information
concerning it. The following tables are provided to facilitate an understanding
of the transactions and outstanding balances between those related
parties.
 
 ThreemonthsendedMarch31,2009
                    
                    
                    2008Revenue-related
      parties
                    
                    $
                    18,237,545
                    
                    
                    $
                    12,820,821
  16
 
 
 March 31, 2009
                    
                    
                    December 31, 2008Accounts
      receivable, trade – related parties, net of allowance for doubtful
      accounts of $925,565 and $1,108,789 as of March 31, 2009 and December 31,
      2008, respectively
                    
                    $
                    25,648,895
                    
                    
                    $
                    23,941,431Other
      receivables – related parties
                    
                    $
                    18,360,639
                    
                    
                    $
                    15,729,076Advances
      from customers – related parties
                    
                    $
                    4,608,494
                    
                    
                    $
                    3,239,650Other
      payables – related parties
                    
                    $
                    6,367,301
                    
                    
                    $
                    6,373,900Current
      portion of long-term debt - related party
                    
                    $
                    2,130,000
                    
                    
                    $
                    2,130,000Long
      term debt – related party
                    
                    $
                    2,137,742
                    
                    
                    $
                    2,137,742
  Revenue -related
parties
  The
details of revenue-related parties are as follows:
  Three months ended March 31,2009
                          
                          
                          2008Tianshi
      Engineering
                          
                          $
                          2,742,620
                          
                          
                          $
                          6,105,779Overseas
      Related Companies
                          
                          
                          15,494,925
                          
                          
                          
                          6,715,042Total
                          
                          $
                          18,237,545
                          
                          
                          $
                          12,820,821
  The
Company markets all of its products through various domestic and international
business entities that are related to the Company through common ownership. As a
result, almost all of the Company’s total consolidated sales were to related
parties. During 2008 the Company sold products to a non-affiliated agent in
China for the purpose of exporting the Company’s products to overseas
affiliated parties in light of the slow-down and backlog of export clearances in
China during 2008. These sales did not occur in the first quarter of 2008 and
accounted for less than 5% of the Company’s total revenues in 2008.
  In China,
the Company sells products to Tianshi Engineering, a related party through
common ownership. Tianshi Engineering, in turn, markets and sells the products
to customers through its branches and affiliated companies and at chain stores
owned by individual distributors. Tianshi Engineering is solely responsible for
all marketing and payments of sales commissions to independent
distributors.
  Internationally,
the Company sells its products directly to overseas affiliates. These
overseas related companies re-packagethe Company’s products
and then sell to overseas independent distributors or end users of the products.
Due to the common ownership, there are no formal sales or administrative
agreements among Biological and those overseas related companies. The business
operations among these related entities are regulated through internal
ordinances.
  17
 
  Accounts receivable, trade -
related parties
  The
details of accounts receivable, trade - related parties are as
follows:
 
 March 31, 2009
                    
                    
                    December 31, 2008Tianshi
      Engineering
                    
                    $
                    2,310,618
                    
                    
                    $
                    4,362,355Overseas
      Related Companies
                    
                    
                    24,263,842
                    
                    
                    
                    20,687,865Allowance
      for Doubtful Accounts
                    
                    
                    (925,565
                    )
                    
                    
                    (1,108,789
                    )Total
                    
                    $
                    25,648,895
                    
                    
                    $
                    23,941,431
  Other receivables - related
parties
 
 Other
receivables - related parties are generated by the Company making various cash
advances and short term loans, the allocation of various expenses to related
parties, and amounts transferred from accounts receivable. The following table
summarizes the other receivables - related parties balances:
 
 March 31,
                      
                      
                      December 31,2009
                      
                      
                      2008Tianshi
      Engineering
                      
                      $
                      15,091,666
                      
                      
                      $
                      11,636,208Tianshi
      Group
                      
                      
                      3,144,259
                      
                      
                      
                      4,018,078Tianshi
      Xiangda Logistic Co.,Ltd.
                      
                      
                      57,105
                      
                      
                      
                      -Tianshi
      Yinshi Hotel
                      
                      
                      36,520
                      
                      
                      
                      36,475Tianjin
      Xingda Travel Co., Ltd.
                      
                      
                      10,317
                      
                      
                      
                      12,932Tianshi
      Pharmaceuticals
                      
                      
                      3,048
                      
                      
                      
                      5,922Shengshi
      Real Estate Development
                      
                      
                      1,093
                      
                      
                      
                      1,657Beijin
      Xingda Travel Co., Ltd.
                      
                      
                      868
                      
                      
                      
                      1,195Shanghai
      Tianshi Jinquan Investment Co.
                      
                      
                      -
                      
                      
                      
                      1,846Others
                      
                      
                      15,763
                      
                      
                      
                      14,763Total
                      
                      $
                      18,360,639
                      
                      
                      $
                      15,729,076
  Historically,
Tianshi Engineering remitted payment to the Company upon sales to third party
customers. However, to support Tianshi Engineering’s marketing efforts in
anticipation of receiving a direct selling license in China, the Company agreed
to allow Tianshi Engineering to defer payment. Balances not remitted to the
Company within 90 days are converted to other receivables - related parties.
Beginning January 1, 2007, the other receivables - related parties became
interest bearing. The stated interest rate is the interest rate for the same
level of loan stipulated by the People’s Bank of China. As of March 31, 2009,
$2,562,017 in receivables over 90 days due had been converted from account
receivables - related parties to other receivables - related parties, with an
interest rate of 4.86%.
 
 The
Company and Tianshi Group use common meters at the Company’s headquarters for
electricity and water, and also used the same employee insurance account. When
making payments to these outside parties, the Company usually pays the fees
first and then is reimbursed by Tianshi Group. These pro-rated amounts relating
to Tianshi Group are categorized as other receivables - related
parties.
  18
 
  On
December 25, 2008, Biological entered a Real Property Transfer Agreement (the
“2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or US $4,785,520).
Pursuant to the 2008 Transfer Agreement, Tianshi Group will pay Biological over
several installments during 2009. For the first quarter of 2009, Tianshi Group
paid RMB 5,000,000 (or US $730,400).
  Advances from customers -
related parties
  These
advances represent prepayments made to the Company to insure that overseas
related companies could obtain enough of the Company’s products to meet their
market demands. As of March 31, 2009 and December 31, 2008, advances from
related party customers amounted to $4.6 million and $3.2 million,
respectively.
  Other payables - related
parties
  The
details of other payable-related parties are as follows:
 March 31, 2009
                    
                    
                    December 31, 2008Tianshi
      Investment
                    
                    $
                    6,080,385
                    
                    
                    $
                    6,080,385Tianshi
      Germany Co., Ltd.
                    
                    
                    98,826
                    
                    
                    
                    105,553Tianyuan
      Capital Development Co. Ltd. ("Tianyuan Capital")
                    
                    
                    84,359
                    
                    
                    
                    84,359Beijin
      Xingda Travel Co., Ltd.
                    
                    
                    80,344
                    
                    
                    
                    80,245Tianjin
      Tianshi Globlal International Trade Co., Ltd.
                    
                    
                    23,373
                    
                    
                    
                    23,344Tianshi
      Administrative Committee of Industrial Park
                    
                    
                    14
                    
                    
                    
                    14Total
                    
                    $
                    6,367,301
                    
                    
                    $
                    6,373,900
  These
amounts arose primarily from previous cash advances from related parties such as
management fees due to related parties and various non-operational transactions
incurred with related parties.
  On
January 21, 2008, Life Resources and Tianshi Investment entered a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources for $6.5 million without interest. The loan was due on June 30, 2008.
On June 30, 2008, the parties extended the loan to December 31, 2008. In
November 2008, the Company has paid approximately $420,000 to Tianshi
Investment. The remaining loan was extended to June 30, 2009 by the parties on
December 31, 2008.
  Long term debt - related
party
 
 On
September 10, 2004, Tianshi Holdings entered a loan agreement with Tianyuan
Capital to borrow $10.65 million to fund Tianshi Holdings' contribution due to
Tiens Yihai. Jinyuan Li is a director of Tiens Yihai and a director of Tianyuan
Capital. Jinyuan Li owns 100% of Tianyuan Capital.
 19
 The
principal of the loan is being paid in consecutive semi-annual installments of
$1,065,000 on the last day of June and December, commencing June 2006 and ending
June 31, 2011. Interest of $266,273 and $399,543 accrued for the three months
ended March 31, 2009 and 2008, respectively, and six installment payments had
been made by the end of March 31, 2009.
 
 The loan
balance at March 31, 2009 and December 31, 2008 consisted of the
following:
 
 March 31, 2009
                    
                    
                    December 31,2008Note
      payable to Tianyuan CapitalDevelopment
      Corp. Ltd., related party
                    
                    $
                    4,267,742
                    
                    
                    $
                    4,267,742Less
      current portion of long term debt
                    
                    
                    (2,130,000
                    )
                    
                    
                    (2,130,000
                    )Total
                    
                    $
                    2,137,742
                    
                    
                    $
                    2,137,742
 
 Total
principal payments for the remaining three years on all long-term debt-related
parties are as follows:
 
 Year EndingDecember 31,
                    
                    Amount2009
      (9 months remaining)
                    
                    $
                    2,130,0002010
                    
                    $
                    2,130,0002011
                    
                    $
                    7,742
 
 Other Transactions with
Tianshi Engineering
 
 On
December 31, 2005, Biological entered four lease agreements with Tianshi
Engineering which enabled Tianshi Engineering to share the use of certain of
Biological’s production workshops and equipment to manufacture products which
Tianshi Engineering owns, or jointly owns with Biological for one year beginning
January 1, 2006. These four lease agreements were renewed in December 2006 for
the 2007 fiscal year and in October 2007 for the 2008 and 2009 fiscal
year.
 
 On
December 25, 2008, Biological entered the 2008 Transfer Agreement with Tianshi
Group, pursuant to which Biological transferred to Tianshi Group four buildings
subject to the Lease Agreements. Accordingly, the two production workshop
leases expired at the end of fiscal 2008.
 
 Rent
revenue accrued from these leases amounted to $54,856 and $79,309 for the three
months ended March 31, 2009 and 2008, respectively.
 
 Other Transactions with
Tianshi Group
 
 On June
30, 2002, the Company entered an office and facilities lease agreement with
Tianshi Group. Under the terms of the five year agreement, the Company’s annual
rent is equal to 1% of the Company’s gross revenues. In addition, the Company is
obligated to pay insurance, maintenance and other expenses related to the
premises. This agreement expired on December 31, 2007 and was renewed, effective
as of January 1, 2008, for 2008 and again, effective as of January 1, 2009, for
2009. Rent expense totaled $160,988 and $188,391 for the three months ended
March 31, 2009 and 2008, respectively.
  20
 
  On
January 1, 2009, each of Biological and Life Resources entered a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy some workshop spaces belonged to Tianshi Group. The
leases are rent-free, except that, Biological and Life Resources are required to
pay Tianshi Group for utility charges and maintenance costs on the buildings.
The leases continues until the earlier of the date that Biological and Life
Resources acquire use of alternate facilities or the land use rights on the
underlying property expire.
 
 Note
9 – Additional product sales information
 
 The
Company has a single operating segment. All of the Company's revenues were
generated from related parties. Summarized enterprise-wide financial
information concerning the Company’s revenues based on geographic area and
product groups is shown in the following tables:
 
 Revenue
by Geographic Area:
 
 Three months ended March
31,2009
                          
                          
                          2008Indonesia
                          
                          $
                          5,552,338
                          
                          
                          $
                          2,193,888China
                          
                          
                          2,742,620
                          
                          
                          
                          6,105,779Vietnam
                          
                          
                          1,565,135
                          
                          
                          
                          54,486Russia
                          
                          
                          1,448,321
                          
                          
                          
                          2,005,873Other
                          
                          
                          6,929,131
                          
                          
                          
                          2,460,795Total
                          
                          $
                          18,237,545
                          
                          
                          $
                          12,820,821
 
 Revenue
by Product Group:
 
 ThreemonthsendedMarch31,2009
                            
                            
                            2008Wellness
      products
                            
                            $
                            17,163,712
                            
                            
                            $
                            11,757,053Dietary
      supplement products
                            
                            
                            1,073,833
                            
                            
                            
                            1,029,966Personal
      care products
                            
                            
                            -
                            
                            
                            
                            33,802Total
                            
                            $
                            18,237,545
                            
                            
                            $
                            12,820,821
  Note
10 - Income taxes
 
 The
Company is subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdiction in which each entity is domiciled. The
Company's subsidiary, Tianshi Holdings, was incorporated in the British Virgin
Islands and is not liable for income taxes.
 
 The
Company's subsidiaries, Biological, Tiens Yihai and Life Resources, are
Sino-Foreign Joint Ventures incorporated in the PRC. According to US GAAP, the
following are the income tax credits granted by the Chinese government, which
are significant components of income taxes associated with continuing operations
required to be disclosed by FAS 109.
  21
 
 Beginning
January 1, 2008, new Enterprise Income Tax (“EIT”) laws became effective
and replaced the laws for Domestic Enterprises (“DES”) and Foreign Invested
Enterprises (“FIEs”). The new standard EIT rate of 25% replaced the 33% rate
formerly applicable to both DES and FIEs. According to the new EIT, high-tech
companies could be subject to a special reduced tax rate of 15%. The
qualification of a high-tech company is to be reviewed annually. In November
2008, Biological was qualified as a high-tech company . However,
Biological was required by the local tax authority to prepay income tax at a tax
rate of 25% every year, although the prepaid income tax could be refunded in the
next year.
 
 According
to the new EIT, Life Resources could still be fully exempt from PRC income taxes
for two years starting from January 1, 2008, followed by a 12.5% reduced tax
rate for the next three years. However, before the tax exemption qualification
of Life Resources was approved by the tax authority, Life Resources was required
by local tax authority to prepay income tax at a tax rate of 25%. On October 10,
2008 the approval was issued and the prepaid income tax in Life Resources could
be refunded in 2009. The prepaid income tax in Life Resources of $685,475 is
treated as prepaid income taxes in the consolidated financial statements of the
Company.
 
 Provisions
for income taxes were all current income tax expenses and for the three months
ended March 31, 2009 and 2008 were $359,615 and $1,480,394,
respectively.
 
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate:
 
 Three months ended March
31,2009
                                          
                                          2008Biological
                                          
                                          
                                          Life Resources
                                          
                                          BiologicalU.S.
      Statutory rate
                                          
                                          
                                          34.0
                                          %
                                          
                                          
                                          34.0
                                          %
                                          
                                          
                                          34.0
                                          %Foreign
      income not recognized in USA
                                          
                                          
                                          (34.0
                                          )
                                          
                                          
                                          (34.0
                                          )
                                          
                                          
                                          (34.0
                                          )China
      income taxes
                                          
                                          
                                          25.0
                                          
                                          
                                          
                                          25.0
                                          
                                          
                                          
                                          25.0Effect
      of reduced tax rate
                                          
                                          
                                          (10.0
                                          )
                                          
                                          
                                          (25.0
                                          )
                                          
                                          
                                          (10.0
                                          )Total
      provision for income taxes
                                          
                                          
                                          15.0
                                          %
                                          
                                          
                                          0.0
                                          %
                                          
                                          
                                          15.0
                                          %
 
 The
estimated tax savings due to the reduced tax rate for the three months ended
March 31, 2009 and 2008 amounted to $1,324,958 and $592,158, respectively. The
net effect on earnings per share if the income tax had been applied would
decrease earnings per share for the three months ended March 31, 2009 and 2008
by $0.01and $0.02, respectively.
 
 Note11–Retirement plan
 
 Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all employees. All Company employees are entitled to a
retirement pension amount calculated based upon their salary at their date of
retirement and their length of service in accordance with a government managed
pension plan. The PRC government is responsible for the pension liability to the
retired staff.
 
 The
Company is required to make contributions to the state retirement plan at 20% of
the employees' monthly salary. Employees are required to contribute 8% of their
salary to the plan. Total pension expense incurred by the Company amounted to
$220,913 and $186,370 for the three months ended March 31, 2009 and 2008,
respectively.
  22
 
 The
Company also has an unemployment insurance plan for its employees. The plan
requires each employee to contribute 1% of his or her salary to the plan. The
Company matches the contributions in an amount equal to two times the
contribution of each participant. The Company made contributions to the
unemployment insurance plan of $22,421 and $18,376 for the three months ended
March 31, 2009 and 2008, respectively. All contributions are paid to a PRC
insurance company, which in turn, is responsible for the unemployment liability.
On January 1, 2002, the Company introduced a basic medical insurance plan for
its employees. Pursuant to that medical insurance plan, the Company is required
to pay an amount equal to 10% of its employees' salary to a PRC insurance
company, which amounted to $113,430 and $95,110 for the three months
ended March 31, 2009 and 2008, respectively.
  23




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





In this
Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United
States Dollars and references to “renminbi” or “RMB” are to the People’s
Republic of China Renminbi. References to “we”, “us”, “our”, the “Company” or
“Tiens” include Tiens Biotech Group (USA), Inc. and its subsidiaries, except
where the context requires otherwise.





FORWARD-LOOKING
STATEMENTS





The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The words or phrases “would be,” “will allow,” “expect to”,
“intends to,” “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimate,” “project,” 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; (d) whether we
are able to successfully fulfill our primary requirements for cash which are
explained below under “Liquidity and Capital Resources”; and (e) whether Tianshi
Engineering, our affiliate who sells our products in China, obtains a direct
selling license in China. Statements made herein are as of the date of the
filing of this Form 10-Q with the Securities and Exchange Commission 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.





The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-Q.





OVERVIEW





Tiens
researches, develops, manufactures, and markets nutrition supplement products,
including wellness products and dietary supplement products. Our operations are
conducted from our headquarters in Tianjin, People’s Republic of China (“China”
or the “PRC”) through our 80% owned subsidiary, Tianjin Tianshi Biological
Development Co. Ltd. (“Biological”) and our wholly-owned subsidiary, Tianjin
Tiens Life Resources Co., Ltd. (“Life Resources”). We sell our products to
affiliated companies in China and internationally.





Tiens is
a Delaware corporation. We own 100% of Tianshi International Holdings Group
Ltd., a British Virgin Islands company (“Tianshi  Holdings”). Tianshi
Holdings owns 80% of Biological.





Tianjin
Tianshi Biological Engineering Co. Ltd. (“Tianshi Engineering”), a Chinese
company and the entity to which we sell all of our products for consumption in
China, owns the remaining 20% of Biological. Tianshi Engineering is 100% owned
by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”).  Tianshi Group
is 90% owned by Jinyuan Li, our Chairman, President and CEO, and 10% owned by
Baolan Li, Jinyuan Li’s daughter.




Life
Resources is currently constructing research and development, manufacturing and
logistic facilities, as well as administrative offices in Tianjin, China
totaling approximately 420,000 square meters.  We intend to move our
headquarters to these new facilities once they are completed.





24




RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2008





Three months ended March 31,2009
                                                            
                                                            
                                                            2008(Unaudited)
                                                            
                                                            
                                                            (Unaudited)
                                                            
                                                            
                                                            ChangeREVENUE
      - RELATED PARTIES
                                                            
                                                            $
                                                            18,237,545
                                                            
                                                            
                                                            $
                                                            12,820,821
                                                            
                                                            
                                                            
                                                            42.2
                                                            %COST
      OF SALES
                                                            
                                                            
                                                            5,735,059
                                                            
                                                            
                                                            
                                                            4,040,060
                                                            
                                                            
                                                            
                                                            42.0
                                                            %GROSS
      PROFIT
                                                            
                                                            
                                                            12,502,486
                                                            
                                                            
                                                            
                                                            8,780,761
                                                            
                                                            
                                                            
                                                            42.4
                                                            %SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                                                            
                                                            
                                                            3,130,936
                                                            
                                                            
                                                            
                                                            3,247,199
                                                            
                                                            
                                                            
                                                            -3.6
                                                            %INCOME
      FROM OPERATIONS
                                                            
                                                            
                                                            9,371,550
                                                            
                                                            
                                                            
                                                            5,533,562
                                                            
                                                            
                                                            
                                                            69.4
                                                            %OTHER
      (EXPENSE) INCOME, NET
                                                            
                                                            
                                                            (12,136
                                                            )
                                                            
                                                            
                                                            444,171
                                                            
                                                            
                                                            
                                                            -102.7
                                                            %INCOME
      BEFORE PROVISION FOR INCOME TAXES
                                                            
                                                            
                                                            9,359,414
                                                            
                                                            
                                                            
                                                            5,977,733
                                                            
                                                            
                                                            
                                                            56.6
                                                            %PROVISION
      FOR INCOME TAXES
                                                            
                                                            
                                                            359,615
                                                            
                                                            
                                                            
                                                            1,480,394
                                                            
                                                            
                                                            
                                                            -75.7
                                                            %NET
      INCOME
                                                            
                                                            
                                                            8,999,799
                                                            
                                                            
                                                            
                                                            4,497,339
                                                            
                                                            
                                                            
                                                            100.1
                                                            %LESS:
      Net income attributable to the noncontrolling interest
                                                            
                                                            
                                                            406,974
                                                            
                                                            
                                                            
                                                            888,437
                                                            
                                                            
                                                            
                                                            -54.2
                                                            %NET
      INCOME ATTRIBUTABLE TO TIENS BIOTECH GROUP
                                                            
                                                            $
                                                            8,592,825
                                                            
                                                            
                                                            $
                                                            3,608,902
                                                            
                                                            
                                                            
                                                            138.1
                                                            %WEIGHTED
      AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                                                            
                                                            
                                                            71,333,586
                                                            
                                                            
                                                            
                                                            71,333,586EARNINGS
      PER SHARE, BASIC AND DILUTED
                                                            
                                                            $
                                                            0.12
                                                            
                                                            
                                                            $
                                                            0.05





Revenue.  For
the first quarter of 2009, revenue was $18.2 million, an increase of 42.2%
compared to $12.8 million for the same period in 2008.  The breakdown
of revenue between Chinese and international sales is as follows.





Three months ended March 31,2009
                                            
                                            
                                            2008
                                            
                                            
                                            ChangeChina
                                            
                                            $
                                            2,742,620
                                            
                                            
                                            $
                                            6,105,779
                                            
                                            
                                            
                                            -55.1
                                            %International
                                            
                                            $
                                            15,494,925
                                            
                                            
                                            $
                                            6,715,042
                                            
                                            
                                            
                                            130.7
                                            %Total
                                            
                                            $
                                            18,237,545
                                            
                                            
                                            $
                                            12,820,821
                                            
                                            
                                            
                                            42.2
                                            %





For the
first quarter of 2009, revenue in China was $2.7 million, a decrease of 55.1%
compared to $6.1 million for the same period in 2008. This decrease of domestic
revenue was due to the decrease of orders for wellness products, which
management believes was due to customers stocking up on certain products during
the third quarter of 2008 as a result of the price increase announcement by
Tianshi Engineering during that quarter.





For the
first quarter of 2009, international revenue was $15.5 million, an increase of
130.7% compared to $6.7 million for the same period in 2008. This increase
in international revenue was mainly due to an increase in sales in Indonesia
and Vietnam.  Additionally, export restrictions have been reduced
since China’s Administration of Quality Supervision, Inspection and
Quarantine ended its national campaign, which began in August 2007, against
unsafe food and substandard products at the end of 2008.





Cost of Sales. Cost
of sales for the first quarter of 2009 increased to $5.7 million, an increase of
42% compared to $4.0 million for the same period in 2008. This increase was
mainly due to the increase in sales for the period.  Cost of sales for
the period increased at a slightly lower rate than revenue, primarily due
to fixed costs, which do not increase or decrease in line with revenue
changes.





Gross Profit. Gross
profit for the first quarter of 2009 was $12.5 million, an increase of 42.4%
compared to $8.8 million for the same period in 2008. This increase reflects the
increase in sales. The gross profit margin for the first quarter of 2009 was
68.6%, compared to 68.5% for the same period in 2008. This increase
reflects the slightly lower rate of increase of cost of sales compared with that
of revenue.





25




Selling, general and
administrative expenses.  Selling, general and administrative
expenses were $3.1 million for the first quarter of 2009, a decrease of 3.6%
compared to $3.2 million for the same period in 2008.  The decrease
was primarily due to decreases in salary expenses as a result of salary
reductions and reduced headcount and business tax expenses. The selling and
administrative expenses as a percentage of sales was 17.2% for the first quarter
of 2009 compared to 25.3% for the same period in 2008, because of the increase
in sales.





Other income (expense),
net.  Other expense was $0.01 million for the first quarter of
2009, compared to $0.4 million of income for the same period in 2008. The
difference was mainly due to decrease in interest received by Tiens Yihai
Co. Ltd. (“Tiens Yihai”), our subsidiary, from seven days notice deposits
and a loan to the government, and gain on currency
translation.





Provision for income
taxes.  Provision for income taxes was $0.4 million for the
first quarter of 2009 compared to $1.5 million for the same period in
2008.  Beginning on January 1, 2008, new Enterprise Income Tax (“EIT”)
laws became effective and replaced the previous laws for Foreign Invested
Enterprises (“FIEs”). A new standard EIT rate of 25% will apply to
FIEs.  According to the new EIT, high-tech companies could be subject
to a special reduced tax rate of 15%. The qualification of a high-tech company
is to be reviewed annually.  In November 2008, Biological was
qualified as a high-tech company.  Previously, Biological paid income
tax at the rate of 25%.  However, Biological was required by the local
tax authority to prepay income tax at tax rate of 25% every year, and the
prepaid income tax could be refunded in the next year. In
addition, beginning in June 2008, we transferred production and sale of
semi-finished products from Biological to Life Resources. Life Resources is
located in Tianjin Wuqing Development Area, a national new technology
development zone. Pursuant to the approval of the relevant PRC tax authorities,
Life Resources is fully exempt from PRC income taxes for two years starting from
the year profits are first made, followed by a 7.5% reduced tax rate for the
next three years.





Net
income.  As a result of the foregoing factors, net income for
the first quarter of 2009 was $9.0 million, an increase of 100.1% compared to
$4.5 million for the same period in 2008.  This increase reflects the
increase in sales. In addition, beginning in June 2008, we transferred
production of semi-finished products and sale from Biological to Life
Resources, which has the exemption from PRC income taxes described
above.





Other comprehensive
income.  Other comprehensive income decreased to $0.2 million
for the first quarter of 2009, compared to $4.7 million for the same period in
2008. This decrease was mainly due to the slowdown in the  rate of
increase in the value of the renminbi against the dollar for the first quarter
of 2009 compared to the same period in 2008. Other comprehensive income
represents foreign currency translation adjustments for the period. Accumulated
other comprehensive income was recorded in Biological, Tiens Yihai and Life
Resources due to balance sheet translations. Accumulated other comprehensive
income was recorded in Tianshi Holdings due to the effect of foreign exchange
rate on dividend receivables from Biological.





Financial
Condition, Liquidity and Capital Resources





We have
historically met our working capital and capital expenditure requirements,
including funding for expansion of operations, through net cash flow provided by
operating activities. Our principal source of liquidity is our operating cash
flow.





Net cash
provided by operating activities was $5.8 million for the three months ended
March 31, 2009, compared to net cash provided by operating activities of $1.6
million for the same period of 2008. This increase was primarily due to the
increase in income during the first quarter of 2009.





As of
March 31, 2009, we had positive working capital of $75.8 million. Cash was $44.2
million as of March 31, 2009, compared to $44.9 million as of March 31,
2008.





Net cash
used in investing activities increased by $3.5 million for the three months
ended March 31, 2009 compared to the same period of 2008. During the first three
months of 2008, we received a payment for loan to related parties in the amount
of $1.4 million. In addition, we purchased $1.0 million of equipment and
vehicles in the first quarter of 2009. Net cash provided by financing
activities was $0.08 million for the three months ended March 31, 2009,
compared to $3.5 million for the same period of 2008. During the first three
months of 2008, we received a loan from Tianshi International Investment Group
Co., Ltd. (“Tianshi Investment”), a company wholly-owned by Jinyuan Li, in the
amount of $3.5 million relating to Life Resources.





26




Going
forward, our primary requirements for cash consist of:





o
            construction
      by Life Resources of new research and development, manufacturing and
      logistic facilities, and administrative
offices;





o
            the
      continued production of existing products and general overhead and
      personnel related expenses to support these
  activities;





o
            the
      development costs of new products;
and





o
            expansion
      of production scale to meet the demands of our
  markets.





Critical
Accounting Policies





Management’s
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies, which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following reflect the more
critical accounting policies that currently affect our financial condition and
results of operations.





Revenue
recognition.





We sell
both semi-finished products and finished products to Tianshi Engineering
domestically.Life
Resources mainly sells semi-finished products, and Biological mainly sells
finished products. Revenue from the sale of  semi-finished products is
recognized at FOB Tianjin shipping point, when the semi-finished products
are sold to Tianshi Engineering.  Revenue from the sale of
finished products is recognized only when the related party Chinese distributor
recognizes sales of our products to unaffiliated third parties. Revenues in both
cases are net of value added taxes.





For
overseas sales, we sell mostly finished products. We recognize revenue from
international sales (outside of China) to affiliated parties, net of value added
taxes as goods are shipped and clear review by the customs department of the
Chinese government.





We are
generally not contractually obligated to accept returns. However, on a
case-by-case negotiated basis, we permit customers to return their products. In
accordance with SFAS No. 48, “Revenue Recognition when the Right of Return
Exists”, revenue is recorded net of an allowance for estimated returns. Such
reserves are based upon management’s evaluation of historical experience and
estimated costs. The amount of the reserves ultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements.  As we did not receive any returns
of products during the past three years, and management does not anticipate
allowing any returns in 2009 related to previous revenues, no allowance for
estimated returns has been recorded as of March 31, 2009.





Bad
debts.





Our trade
accounts receivables are mainly due from related companies. We have made full
provision for accounts receivable-related parties aging over one year and a
general allowance for doubtful debts of 0.5% of the remaining accounts
receivable-related parties.  Management reviews its accounts
receivable on a regular basis to determine if the bad debt allowance is adequate
at each year-end, paying particular attention to the age of receivable
outstanding.





27




Inventories.





Inventories
are stated at the lower of cost or market, using the moving average basis. We
review our inventory annually for possible obsolete goods or to determine if any
reserves are necessary for potential obsolescence.





Recent
Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combination” (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements the
identifiable assets, the liabilities and any non-controlling interest in the
acquiree, and the goodwill acquired in business combination or a gain from a
bargain purchase. It also determines what information to disclose. The objective
of SFAS 141R is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS 141R became
effective in the first quarter of 2009. We adopted this statement beginning
January 1, 2009.




In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – An amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 provides guidance on how to report a non-controlling interest in
consolidated financial statements. The objective of SFAS 160 is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. SFAS 160
became effective in the first quarter of 2009. As a
result of the adoption of SFAS 160 from January 1, 2009,  we
reclassified minority interest of $9.4 million to noncontrolling interest as a
component of equity on the Consolidated Balance Sheet for the quarter ended
March 31, 2009.




In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”).
SFAS 161 requires an enhanced disclosure about an entity’s derivative and
hedging activities and thereby improves the transparency of financial reporting.
The objective of SFAS 161 is to provide adequate information about how
derivative and hedging activities affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 became effective in the first
quarter of 2009. The
adoption of SFAS No. 161 from January 1, 2009 had no effect on the consolidated
financial statements.




In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets”  (“FSP 142-3”).  FSP
142-3 amends the factors an entity should consider in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible
Assets.” The intent of this FSP if to improve the consistency between the useful
life of a recognized intangible asset under Statement 142 and the period of
expected cash flows to measure the fair value of the asset under FASB Statement
No. 141 (Revised 2007), “Business Combinations,” and other U.S. generally
accepted accounting principles (GAAP). FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The adoption of FSP 142-3 had no
material impact on the consolidated financial statements.




In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS
162 shall be effective 60 days following the Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board (“PCAOB”)
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles.” The adoption of this
Statement had no effect on the consolidated financial
statements.




In May
2008, the FASB issued Statement of Financial Accounting Standards No. 163,
“Accounting for Financial Guarantee Insurance Contracts” (“SFAS 163”). SFAS 163
requires that an insurance enterprise recognize a claim liability prior to an
event of default (insured event) when there is evidence that credit
deteriorations have occurred in an insured financial obligation. SFAS 163 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The adoption of SFAS 163 had no material impact on the
consolidated financial statements.





28




In
October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market For That Asset Is Not Active  (“FSP
No. FAS 157-3”), with an immediate effective date, including prior periods for
which financial statements have not been issued. FSP No. FAS 157-3 amends SFAS
No. 157 to clarify the application of fair value in inactive markets and allows
for the use of management’s internal assumptions about future cash flows with
appropriately risk-adjusted discount rates when relevant observable market data
does not exist. The objective of SFAS No. 157 has not changed and continues to
be the determination of the price that would be received in an orderly
transaction that is not a forced liquidation or distressed sale at the
measurement date. The adoption of FSP No. FAS 157-3 did not have a material
impact on the consolidated financial statements.





CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS





We market
all of our products through various domestic and international business entities
that are related to us through common ownership. As a result, all of our
consolidated sales are to related parties.





In China,
we sell our products to Tianshi Engineering, an affiliated company. Tianshi
Engineering, in turn, markets and sells the products to customers through
its branches and affiliated companies and at chain stores owned by individual
distributors.





We have a
sales contract with Tianshi Engineering which requires Tianshi Engineering to
purchase all of our products to be sold in China. We sell our finished products
to Tianshi Engineering at a price equal to 25% of the Chinese market price for
the products. This 25% figure was negotiated between the parties in 2003, before
we acquired Tianshi Holdings, and we believe that it is a reasonable sales price
for us to receive. The price of semi-finished goods sold to Tianshi Engineering
was originally set at the beginning of 2006 to provide us with a 75% gross
profit margin. However, based on fluctuations in the cost of raw materials and
quantities produced, the gross profit margin percentage varied during the year.
This 75% figure was negotiated between the parties, and we believe that it is
reasonable. The goal of this new pricing policy was to try to maintain the our
gross margins on semi-finished goods at a similar level to historical gross
margins for finished goods. All of Tianshi Engineering’s Chinese affiliated
companies are owned in whole or in part by Jinyuan Li’s immediate family
members.





Internationally,
we sell our products directly to overseas affiliates located in
46 countries, who in turn re-package the products to meet the needs of the
local markets and sell to independent distributors or end users of our
products. Our CEO, Jinyuan Li, owns or controls these overseas related
companies. Due to the common ownership, there are no formal sales or
administrative agreements among us and those overseas related parties. The
business operations among these related entities are regulated through internal
policies.





During
2008 we sold products to a non-affiliated agent in China for the purpose of
exporting our products to overseas affiliated parties in light of the slow-down
and backlog of export clearances in China during 2008.  These sales
did not occur in the first quarter of 2008 and accounted for less than 5% of our
total revenues in 2008.





Our
related party transactions are required to be reviewed and approved or ratified
by a majority of our non-interested Board of Directors. The following tables are
provided to facilitate your understanding of the transactions and outstanding
balances between those related parties and our company.





29





March 31, 2009
                      
                      
                      December 31, 2008Revenue
      – related parties
                      
                      $
                      18,237,545
                      
                      
                      $
                      12,820,821Accounts
      receivable, trade – related parties, net of allowance for doubtful
      accounts of $925,565 and $1,108,789 as of March 31, 2009 and December 31,
      2008, respectively
                      
                      $
                      25,648,895
                      
                      
                      $
                      23,941,431Other
      receivables – related parties
                      
                      $
                      18,360,639
                      
                      
                      $
                      15,729,076Advances
      from customers – related parties
                      
                      $
                      4,608,494
                      
                      
                      $
                      3,239,650Other
      payables – related parties
                      
                      $
                      6,367,301
                      
                      
                      $
                      6,373,900Current
      portion of long-term debt - related party
                      
                      $
                      2,130,000
                      
                      
                      $
                      2,130,000Long
      term debt – related party
                      
                      $
                      2,137,742
                      
                      
                      $
                      2,137,742





Revenue
- Related Parties





The
details of revenue-related parties are as follows:





Three months ended March 31,2009
                          
                          
                          2008Tianshi
      Engineering
                          
                          $
                          2,742,620
                          
                          
                          $
                          6,105,779Overseas
      RelatedCompanies
                          
                          
                          15,494,925
                          
                          
                          
                          6,715,042Total
                          
                          $
                          18,237,545
                          
                          
                          $
                          12,820,821





Accounts
Receivable, Trade - Related Parties





March 31, 2009
                        
                        
                        December 31, 2008Tianshi
      Engineering
                        
                        $
                        2,310,618
                        
                        
                        $
                        4,362,355Overseas
      Related Companies
                        
                        
                        24,263,842
                        
                        
                        
                        20,687,865Allowance
      for Doubtful Accounts
                        
                        
                        (925,565
                        )
                        
                        
                        (1,108,789
                        )Total
                        
                        $
                        25,648,895
                        
                        
                        $
                        23,941,431





Accounts
receivables-related parties increased from December 31, 2008 as a result of the
increase in revenue.




Other
Receivables - Related Parties





Other
receivables - related parties are generated by our making various cash
advances and short term loans, the allocation of various expenses to related
parties, and amounts transferred from accounts receivable. The details of other
receivables-related parties are as follows:




30





March 31,
                              
                              
                              December 31,2009
                              
                              
                              2008Tianshi
      Engineering
                              
                              $
                              15,091,666
                              
                              
                              $
                              11,636,208Tianshi
      Group
                              
                              
                              3,144,259
                              
                              
                              
                              4,018,078Tianshi
      Xiangda Logistic Co.,Ltd.
                              
                              
                              57,105
                              
                              
                              
                              -Tianshi
      Yinshi Hotel
                              
                              
                              36,520
                              
                              
                              
                              36,475Tianjin
      Xingda Travel Co., Ltd.
                              
                              
                              10,317
                              
                              
                              
                              12,932Tianshi
      Pharmaceuticals
                              
                              
                              3,048
                              
                              
                              
                              5,922Shengshi
      Real Estate Development
                              
                              
                              1,093
                              
                              
                              
                              1,657Beijin
      Xingda Travel Co., Ltd.
                              
                              
                              868
                              
                              
                              
                              1,195Shanghai
      Tianshi Jinquan Investment Co.
                              
                              
                              -
                              
                              
                              
                              1,846Others
                              
                              
                              15,763
                              
                              
                              
                              14,763Total
                              
                              $
                              18,360,639
                              
                              
                              $
                              15,729,076




Historically,
Tianshi Engineering remitted payment to us upon sales to third party customers.
However, to support Tianshi Engineering’s marketing efforts in anticipation of
receiving a direct selling license in China, we agreed to allow Tianshi
Engineering to defer payment. Balances not remitted to us within 90 days
are converted to other receivables - related parties. Beginning January 1, 2007,
the other receivables - related parties became interest bearing. The stated
interest rate is the interest rate for the same level of loan stipulated by the
People’s Bank of China. As of March 31, 2009, $2,562,017 of recievables over 90
days past due had been converted from account receivables - related parties
to other receivables - related parties, with an interest rate of
4.86%.





Tianshi
Group and our company use common meters at our headquarters for electricity and
water and also use the same employee insurance account. When making payments to
these outside parties, we usually pay the fees first and then are reimbursed by
Tianshi Group. These pro-rated amounts relating to Tianshi Group are categorized
as other receivables - related parties.





On
December 25, 2008, Biological entered a Real Property Transfer Agreement (the
“2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or US $4,785,520).
Pursuant to the 2008 Transfer Agreement, Tianshi Group will pay Biological over
several installments during 2009. For the first quarter of 2009, Tianshi Group
paid RMB 5,000,000 (or US $730,400).





Advances
from Customers - Related Parties





Advances
from related party customers were $4.6 million and $3.2 million as of March 31,
2009 and December 31, 2008, respectively. These advances represented prepayments
made to us to insure that overseas customers could obtain enough of our products
to meet their market demands.




Other
Payables - Related Parties





These
amounts arose primarily from previous cash advances from related parties such as
management fees due to related parties and various non-operational transactions
incurred with related parties. The details of other payable-related parties are
as follows:




31





March 31, 2009
                        
                        
                        December 31, 2008Tianshi
      Investment
                        
                        $
                        6,080,385
                        
                        
                        $
                        6,080,385Tianshi
      Germany Co., Ltd.
                        
                        
                        98,826
                        
                        
                        
                        105,553Tianyuan
      Capital Development Co. Ltd.
                        
                        
                        84,359
                        
                        
                        
                        84,359Beijin
      Xingda Travel Co., Ltd.
                        
                        
                        80,344
                        
                        
                        
                        80,245Tianjin
      Tianshi Globlal International Trade Co., Ltd.
                        
                        
                        23,373
                        
                        
                        
                        23,344Tianshi
      Administrative Committee of Industrial Park
                        
                        
                        14
                        
                        
                        
                        14Total
                        
                        $
                        6,367,301
                        
                        
                        $
                        6,373,900





On
January 21, 2008, Life Resources and Tianshi Investment entered a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources for $6.5 million without interest. The loan was due on June 30, 2008.
On June 30, 2008, the parties extended the loan to December 31, 2008. In
November 2008, we have paid approximately $420,000 to Tianshi Investment. The
remaining loan was extended to June 30, 2009 by the parties on December 31,
2008.





Long
Term Debt - Related Party





On
September 10, 2004, Tianshi Holdings entered a term loan agreement with Tianyuan
Capital Development Co. Ltd. (“Tianyuan Capital”), pursuant to which Tianyuan
Capital agreed to lend $10.65 million (in aggregate principal amount) to Tianshi
Holdings, at an interest rate of 5% per year, with interest payable on June 30
and December 31, commencing December 31, 2004. Tianshi Holdings must repay the
loan in ten consecutive semi-annual installments of $1,065,000 ending June 30,
2011. Tianshi Holdings used the loan proceeds to fund its capital contribution
to Tiens Yihai. Mr. Jinyuan Li owns 100% of Tianyuan Capital. Interest of
$266,273 and $399,543 accrued for the three months ended March 31, 2009 and
2008, respectively,and
six installment payments had been made by the end of March 31,
2009.





Other
Transactions with Tianshi Engineering





On
December 31, 2005, Biological entered four lease agreements with Tianshi
Engineering, which enabled Tianshi Engineering to share the use of certain of
Biological’s production workshops and equipment to manufacture products which
Tianshi Engineering owns, or jointly owns, with Biological, for one year
beginning January 1, 2006. These four lease agreements were renewed in December
2006 for 2007 and on October 31, 2007 for 2008 and 2009.




On
December 31, 2007, Biological entered into two supplemental agreements, which
added fourteen pieces of personal care products production equipment to, and
removed two health products production workshops from, two of the lease
agreements Biological entered into on October 31, 2007. Following is a summary
of the monthly rent payable to Biological under the four leases Biological
entered into on October 31, 2007 (as amended by the two supplemental agreements
entered into on December 31, 2007):





Lease Agreement
                  
                  Monthly rentLease
      Agreement for Health Products Production Equipment
                  
                  $
                  12,252Lease
      Agreement for Health Products Production Workshops
                  
                  $
                  6,326Lease
      Agreement for Personal Care Product Production Equipment
                  
                  $
                  6,014Lease
      Agreement for Personal Care Products Production Workshops
                  
                  $
                  3,086





On
December 25, 2008, Biological entered the 2008 Transfer Agreement with Tianshi
Group, pursuant to which Biological transferred to Tianshi Group four buildings
subject to the above described lease agreements. Accordingly, the two production
workshop leases expired at the end of 2008.





Rent
revenue accrued from these leases amounted to $54,856 and $79,309 for the three
months ended March 31, 2009 and 2008, respectively.




32




In
October 2005, Biological entered into two agreements with Tianshi Engineering
regarding the joint ownership of certain certificates issued by the PRC
government to enable Tianshi Engineering to distribute Biological’s products in
China. Biological and Tianshi Engineering continue to have joint ownership of
these certificates.




On
October 26, 2005, Biological entered an agreement with Tianshi Engineering (the
“Wellness Products Agreement”) relating to the joint ownership of the
Certificates of Domestic Wellness Product issued by the State Food and Drug
Administration of the PRC (the “SFDA”) covering 18 of Biological’s wellness
products (the “Wellness Certificates”) and the relevant production technology.
Pursuant to the Wellness Products Agreement, Biological will jointly share the
ownership of the Wellness Certificates and relevant production technology with
Tianshi Engineering. Under the agreement, Biological and Tianshi Engineering
both have the right to use the Wellness Certificates and all technology to
produce, manufacture and sell wellness products pursuant to local
law.




On
October 26, 2005, Biological entered an agreement with Tianshi Engineering (the
“Dietary Supplement Products Agreement”) relating to the joint ownership of the
Certificates of Domestic Dietary Supplement Product covering ten of Biological’s
dietary supplement products (the “Dietary Supplement Certificates”) and the
relevant production technology. Pursuant to the Dietary Supplement Products
Agreement, Biological will jointly share the ownership of the Dietary Supplement
Certificates and relevant production technology with Tianshi Engineering.
Tianshi Engineering is agreeing to share ownership of the Dietary Supplement
Certificates and relevant production technology with Biological. Under the
agreement, Biological and Tianshi Engineering both have the right to use the
Dietary Supplement Certificates and all technology to produce, manufacture and
sell the dietary supplement products pursuant to local law.




Tianshi
Engineering paid Biological the full purchase price for the rights to the
certificates in 2005. The Nutrition Supplements Market Committee of the China
Health Care Association (“CHCA”) assessed the value of the certificates subject
to the agreements. The CHCA is an independent, non-profit organization composed
of manufacturing enterprises, research and development institutions in the
medical and health industry and entrepreneurs and professionals from related
fields.





Other
Transactions with Tianshi Group





On June
30, 2002, we entered an office and facilities lease agreement with Tianshi
Group. Under the terms of the five year agreement, our annual rent is equal to
1% of our gross revenues. In addition, we are obligated to pay
insurance, maintenance and other expenses related to the premises. This
agreement expired on December 31, 2007 and was renewed, effective as
of January 1, 2008, for 2008 and again, effective as of January 1, 2009,
for 2009. Rent expense totaled $160,988 and $188,391 for the three
months ended March 31, 2009 and 2008, respectively.




On
December 14, 2007, Biological entered into a Real Property Transfer Agreement
(the “2007 Transfer Agreement”) with Tianshi Group. Under the 2007 Transfer
Agreement, Biological transferred to Tianshi Group title to buildings consisting
of approximately 34,000 square meters total of office, workshop, conference and
exhibition space, located at our headquarters in Tianjin China for
$15,316,496.  Land use rights on the underlying land, which is owned
by the government of China and which rights continue through December 30, 2054
with respect to the conference center property and May 31, 2043 with respect the
other properties were also transferred.  Biological also assigned
certain contracts with third parties related to the servicing and upkeep of the
buildings transferred (collectively, the “Third Party Contracts”).  In
consideration for the transfer of the buildings and land-use rights, Tianshi
Group paid Biological $15,334,037, plus $3,190,773 to cover pre-payments
previously made by Biological under the Third Party Contracts.




On
December 14, 2007, Biological and Tianshi Group also entered a Lease
Agreement  (the “2007 Lease Agreement”) pursuant to which Biological
has the right to use and occupy the office and workshop spaces transferred under
the 2007 Transfer Agreement. The lease is rent-free, but Biological is required
to pay Tianshi Group for utility charges and maintenance costs on the buildings.
The lease continues until the earlier of the date that we move to the new
administrative facilities being constructed by Life Resources, or the land use
rights on the underlying property expire.




33




On
January 1, 2009, the 2007 Lease Agreement was terminated and each of Biological
and Life Resources entered a new Lease Agreement (the “2009 Lease Agreement”)
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy the workshop spaces transferred under the 2007 Transfer
Agreement and the 2008 Transfer Agreement. The leases are rent-free, except
that, Biological and Life Resources are required to pay Tianshi Group for
utility charges and maintenance costs on the buildings. The leases continues
until the earlier of the date that Biological and Life Resources acquire use of
alternate facilities or the land use rights on the underlying property
expire.




Transactions
with Tianshi Pharmaceuticals




In April
2004, Tianshi Holdings entered a joint venture contract with Tianshi
Pharmaceuticals to establish Tiens Yihai Co. Ltd., a Chinese-Foreign Equity
Joint Venture (“Tiens Yihai”). Tiens Yihai was initially 99.4% owned by Tianshi
Holdings and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai is located in
Shanghai, China, and was established to build a new research and development
facility in Shanghai, China. In March 2007, we decided to suspend the proposed
development by Tiens Yihai.




On
October 14, 2008, Tiens Yihai received an approval from the local government to
decrease its registered capital from $200 million to $29,989,361, an amount
corresponding to its paid-in capital. Pursuant to the change in registered
capital, the percentage of capital ownership of both investors changed. The
share held by Tianshi Holdings decreased from 99.4% to 96% and the share owned
by Tianshi Pharmaceuticals increased from 0.06% to 4% of Tiens Yihai’s share
capital.




Due to
the continued uncertainty relating to the Tiens Yihai project, we plan to sell
Tiens Yihai in 2009. Tianshi Holdings, Tianshi Pharmaceuticals and Tianshi Group
entered into a letter of intent on December 31, 2008, pursuant to which Tianshi
Pharmaceuticals agreed to buy Tianshi Holdings’ 96% share of Tiens Yihai, with
Tianshi Group guaranteeing payment.




Transactions
with Tianshi Investments




On
December 20, 2007, Tianshi Holding entered into a Sale and Purchase Agreement
with Tianshi Investment, Biological and Tianshi Engineering. Pursuant to the
Sale and Purchase Agreement, Tianshi Holdings agreed to buy all of the
registered share capital of Life Resources from Tianshi Investment for RMB
474,674,415, or $64,247,182. The closing of the transaction was subject to
government approval of the transfer of Life Resources to Tianshi
Holdings.  On March 13, 2008, the government approved the
transfer.




Pursuant
to the Sale and Purchase Agreement, we advanced a deposit of $64,247,182 to
Tianshi Investment on December 20, 2007. This acquisition deposit was settled as
follows:




·
            $28,592,743
      was paid by canceling a loan in the principal amount of RMB 200,000,000 to
      Tianshi Engineering owned by Biological together with interest
      accrued;


·
            $16,557,914
      was paid by canceling of other receivable owned by Tianshi Engineering to
      Biological; and


·
            $19,096,525
      was paid in cash.




On
December 21, 2007, Tianshi Holdings and Tianshi Investment entered into a
Capital Contribution Agreement, pursuant to which Tianshi Investment agreed to
fund a capital increase of Life Resources in the amount of $7.5 million. Tianshi
Holdings agreed to pay back the $7.5 million to Tianshi Investment within five
days of the date of the government approval of the transfer of the shares of
Life Resources to Tianshi Holdings.   The approval was received
on March 13, 2008 and the $7.5 million was paid back on March 18, 2008, by
canceling $7.5 million of accounts receivable owed to us by Tianshi
Engineering.




On
January 14, 2008, Tianshi Holdings and Tianshi Investment entered into a Loan
Agreement pursuant to which Tianshi Holdings loaned Tianshi Investment $4.1
million without interest.  The loan was required to be used by Tianshi
Investment to increase the registered share capital of Life
Resources.  The loan was due on March 31, 2008, provided however, that
if the government approved the transfer of the shares of Life Resources to
Tianshi Holdings prior to that date, the loan would be cancelled, as Life
Resources would then be a wholly-owned subsidiary of Tianshi
Holdings.  The approval was received on March 13, 2008, and therefore,
the loan was cancelled on the same date.




34




Transactions
with Life Science




On August
25, 2008, Life Resources and Tianjin Tiens Life Science Co., Ltd (“Life
Science”) entered a definitive agreement with the Wuqing Branch Bureau of
Tianjin Municipal Land and Resources and Administrative Bureau (the “Tianjin
Government”) pursuant to which Life Resources and Life Science will pay the
Tianjin Government in connection with changes to the zoning on several parcels
of land on which they respectively have land use rights from “industrial” to
“educational.” Life Resources had paid a total of RMB 41,022,061 (or
approximately US$6.0 million) in connection with the zoning changes to its
parcels.  Life Science is wholly-owned by Tianshi Group.





MANAGEMENT
ASSUMPTIONS





Management
anticipates, based on internal forecasts and assumptions relating to our current
operations, that existing cash and funds generated from operations will be
sufficient to meet working capital needs for at least the next 12 months. In the
event that plans change, our assumptions change or prove inaccurate or if other
capital resources and projected cash flow otherwise prove to be insufficient to
fund operations (due to unanticipated expense, technical difficulties, or
otherwise), we could be required to seek additional financing. There can be
no assurance that we will be able to obtain additional financing on terms
acceptable to us, or at all.





OFF-BALANCE
SHEET ARRANGEMENTS





We have
no off-balance sheet arrangements.





ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK




This
information has been omitted based on the Company’s status as a smaller
reporting company.





ITEM 4T. CONTROLS
AND PROCEDURES





Disclosure
Controls and Procedures





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness, as of the end of the period covered by this
report, of the design and operation of our disclosure controls and procedures,
as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (“Exchange Act”).  Based
on this evaluation, our principal executive officer and principal financial
officer have concluded that, as of such date, our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to
our management, including our principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure.





Changes
in Internal Control Over Financial Reporting





There has
been no change in our internal control over financial reporting during the first
quarter of 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.





PART
II - OTHER INFORMATION





ITEM 6. EXHIBITS





Exhibit No.
                  
                  Description10.1
                  
                  Term
      Loan Agreement, dated April 21, 2009 by and between Tianjin Tiens Life
      Resources Co., Ltd. and Tianjin Tianshi Biological Engineering Co,
      Ltd.31.1
                  
                  Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      of the Chief Executive Officer and Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002





35





SIGNATURES





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





Date:
      May 15, 2009/s/ Jinyuan
  LiJinyuan
      LiChief
      Executive Officer and President(Principal
      Executive Officer)Date:
      May 15, 2009/s/ Zheng WanZheng
      WanChief
      Financial Officer(Principal
      Accounting Officer)




36




EXHIBIT
INDEX


Exhibit
      No.
                
                Description10.1
                
                Term
      Loan Agreement, dated April 21, 2009 by and between Tianjin Tiens Life
      Resources Co., Ltd. and Tianjin Tianshi Biological Engineering Co,.
      Ltd.31.1
                
                Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                
                Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                
                Certification
      of the Chief Executive Officer and Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002




37