**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 September 30, 2008.




**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: 1-32477*




**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: +86-22-8213-7915




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


Yes x  
      No  ̈




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. (Check one):




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





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


Yes  ̈ No x




There
      were 71,333,586 shares of the Company’s common stock outstanding on November 10,
      2008.





**TIENS
      BIOTECH GROUP (USA), INC.**


**INDEX
      TO FORM 10-Q**





PAGE**PART
                I - FINANCIAL INFORMATION**
            
            3ITEM
                1. FINANCIAL STATEMENTS
            
            3Consolidated
                Balance Sheets as of September 30, 2008 (Unaudited) and December
                31,
                2007
            
            3Consolidated
                Statements of Income and Other Comprehensive Income for the three
                and nine
                months ended September 30, 2008 and 2007 (Unaudited)
            
            4Consolidated
                Statements of Shareholders’ Equity (Unaudited)
            
            5Consolidated
                Statements of Cash Flows for the nine months ended September 30,
                2008 and
                2007 (Unaudited)
            
            6Notes
                to Consolidated Financial Statements (Unaudited)
            
            7ITEM
                2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                OF OPERATIONS
            
            38ITEM
                3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK
            
            49ITEM
                4. CONTROLS AND PROCEDURES
            
            49**PART
                II - OTHER INFORMATION**
            
            50ITEM
                1A. RISK FACTORS
            
            50ITEM
                6. EXHIBITS
            
            51


2




PART
      I -
      FINANCIAL INFORMATION





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


TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
          BALANCE SHEETS
 AS
          OF
          SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
 
 September
                    30,
                
                December
                    31,2008
                
                2007(Unaudited)
                
                As Adjusted (Note
                    3)ASSETSCURRENT
                    ASSETS:Cash
                
                
                
                
                $
                41,667,163
                
                $
                54,081,848Accounts
                    receivable, trade - related parties, net ofallowance
                    for doubtful accounts of $168,305 and $71,700as
                    of September 30, 2008 and December 31, 2007, respectively
                
                
                
                
                
                33,492,698
                
                
                14,268,229Accounts
                    receivable, trade - third parties
                
                
                
                
                
                -
                
                
                104,398Inventories
                
                
                
                
                
                7,565,126
                
                
                5,949,963Other
                    receivables
                
                
                
                
                
                465,221
                
                
                1,068,343Other
                    receivables - related parties
                
                
                
                
                
                10,852,795
                
                
                13,887,138Employee
                    advances
                
                
                
                
                
                423,239
                
                
                65,901Prepaid
                    expenses
                
                
                
                
                
                308,614
                
                
                623,638Prepaid
                    income taxes
                
                
                
                
                
                728,993
                
                
                -Total
                    current assets
                
                
                
                
                
                95,503,849
                
                
                90,049,458PROPERTY,
                    PLANT AND EQUIPMENT, net
                
                
                
                
                
                15,617,886
                
                
                16,071,900OTHER
                    ASSETS:Construction
                    in progress
                
                
                
                
                
                61,421,955
                
                
                39,792,774Construction
                    deposits
                
                
                
                
                
                3,950,031
                
                
                1,089,216Intangible
                    assets, net
                
                
                
                
                
                15,820,797
                
                
                9,246,879Other
                    assets
                
                
                
                
                
                5,332,266
                
                
                5,301,847Total
                    other assets
                
                
                
                
                
                86,525,049
                
                
                55,430,716Total
                    assets
                
                
                
                
                $
                197,646,784
                
                $
                161,552,074LIABILITIES
                    AND SHAREHOLDERS' EQUITYCURRENT
                    LIABILITIES:Accounts
                    payable
                
                
                
                
                $
                7,507,216
                
                $
                4,070,906Advances
                    from customers - related parties
                
                
                
                
                
                3,074,501
                
                
                1,700,838Wages
                    and benefits payable
                
                
                
                
                
                938,879
                
                
                1,250,685Other
                    taxes payable
                
                
                
                
                
                -
                
                
                536,819Income
                    taxes payable
                
                
                
                
                
                138,841
                
                
                665,726Contractor
                    deposits
                
                
                
                
                
                236,165
                
                
                595,128Contractor
                    payables
                
                
                
                
                
                7,606,111
                
                
                7,820,285Other
                    payables
                
                
                
                
                
                1,223,681
                
                
                1,133,539Other
                    payables - related parties
                
                
                
                
                
                7,582,403
                
                
                7,938,205Dividend
                    payable to minority interest
                
                
                
                
                
                -
                
                
                4,902,629Current
                    portion of long term debt, related party
                
                
                
                
                
                2,130,000
                
                
                2,130,000Total
                    current liabilities
                
                
                
                
                
                30,437,797
                
                
                32,744,760NON-CURRENT
                    LIABILITIESLong
                    term debt, net of current portion, related party
                
                
                
                
                
                3,202,742
                
                
                4,267,742Other
                    payables-non current
                
                
                
                
                
                574,184
                
                
                538,130Deferred
                    income
                
                
                
                
                
                11,207,307
                
                
                4,895,049Total
                    non current liabilities
                
                
                
                
                
                14,984,233
                
                
                9,700,921Total
                    liabilities
                
                
                
                
                
                45,422,030
                
                
                42,445,681MINORITY
                    INTEREST
                
                
                
                
                
                8,576,670
                
                
                6,144,063SHAREHOLDERS'
                    EQUITY:Common
                    stock, $0.001 par value, 250,000,000 shares authorized,71,333,586
                    issued and outstanding, respectively
                
                
                
                
                
                71,334
                
                
                71,334Paid-in-capital
                
                
                
                
                
                8,842,009
                
                
                8,842,009Statutory
                    reserves
                
                
                
                
                
                9,420,783
                
                
                9,420,783Retained
                    earnings
                
                
                
                
                
                101,447,251
                
                
                78,668,160Accumulated
                    other comprehensive income
                
                
                
                
                
                23,866,707
                
                
                15,960,044Total
                    shareholders' equity
                
                
                
                
                
                143,648,084
                
                
                112,962,330Total
                    liabilities and shareholders' equity
                
                
                
                
                $
                197,646,784
                
                $
                161,552,074
  The
          accompanying notes are an intergral part of these consolidated financial
          statements.
  3
  
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
          STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
          THE
          THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
          (UNAUDITED)
 Three months ended September 30,
                
                Nine months ended September 30,2007
                
                
                
                20072008
                
                As Adjusted (Note 3)
                
                2008
                
                As Adjusted (Note 3)REVENUE
                    - RELATED PARTIES
                
                
                
                
                $
                26,195,853
                
                $
                11,027,478
                
                $
                58,671,121
                
                $
                41,584,749COST
                    OF SALES - RELATED PARTIES
                
                
                
                
                
                6,606,502
                
                
                3,089,791
                
                
                16,850,267
                
                
                11,979,984GROSS
                    PROFIT
                
                
                
                
                
                19,589,351
                
                
                7,937,687
                
                
                41,820,854
                
                
                29,604,765SELLING,
                    GENERAL AND ADMINISTRATIVE EXPENSES
                
                
                
                
                
                4,562,946
                
                
                3,851,249
                
                
                12,898,742
                
                
                10,504,831INCOME
                    FROM OPERATIONS
                
                
                
                
                
                15,026,405
                
                
                4,086,438
                
                
                28,922,112
                
                
                19,099,934(Interest
                    expense)
                
                
                
                
                
                (67,207
                )
                
                (94,125
                )
                
                (199,869
                )
                
                (305,698
                )Interest
                    income
                
                
                
                
                
                227,326
                
                
                608,921
                
                
                733,175
                
                
                1,826,104Other
                    (expense) income, net
                
                
                
                
                
                (412,620
                )
                
                (362,782
                )
                
                (1,399,484
                )
                
                (480,245
                )OTHER
                    (EXPENSE) INCOME, NET
                
                
                
                
                
                (252,501
                )
                
                152,014
                
                
                (866,178
                )
                
                1,040,161INCOME
                    BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST
                
                
                
                
                
                14,773,904
                
                
                4,238,451
                
                
                28,055,934
                
                
                20,140,095PROVISION
                    FOR INCOME TAXES
                
                
                
                
                
                152,990
                
                
                344,248
                
                
                3,297,438
                
                
                1,610,653INCOME
                    BEFORE MINORITY INTEREST
                
                
                
                
                
                14,620,914
                
                
                3,894,203
                
                
                24,758,496
                
                
                18,529,442MINORITY
                    INTEREST
                
                
                
                
                
                92,326
                
                
                848,212
                
                
                1,979,405
                
                
                3,970,791NET
                    INCOME
                
                
                
                
                
                14,528,588
                
                
                3,045,991
                
                
                22,779,091
                
                
                14,558,651OTHER
                    COMPREHENSIVE INCOME:Foreign
                    currency translation adjustment
                
                
                
                
                
                807,035
                
                
                1,927,502
                
                
                7,906,663
                
                
                5,700,759COMPREHENSIVE
                    INCOME
                
                
                
                
                $
                15,335,623
                
                $
                4,973,493
                
                $
                30,685,754
                
                $
                20,259,410EARNINGS
                    PER SHARE, BASIC AND DILUTED
                
                
                
                
                $
                0.20
                
                $
                0.04
                
                $
                0.32
                
                $
                0.20WEIGHTED
                    AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                
                
                
                
                
                71,333,586
                
                
                71,333,586
                
                
                71,333,586
                
                
                71,333,586




The
      accompanying notes are an intergral part of these
      consolidated financial statements.  4
 
 TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY
 AccumulatedotherNumber
                
                Common
                
                Paid-in
                
                Additional
                
                Statutory
                
                Retained
                
                comprehensiveof shares
                
                stock
                
                capital
                
                paid-in-capital
                
                reserves
                
                earnings
                
                income (loss)
                
                TotalsBALANCE,
                    December 31, 2006
                
                
                
                
                
                71,333,586
                
                $
                71,334
                
                $
                8,842,009
                
                $
                -
                
                $
                9,420,783
                
                $
                95,371,137
                
                $
                5,714,988
                
                
                119,420,251Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                11,621,218
                
                
                
                
                
                11,621,218Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,337,343
                
                
                3,337,343BALANCE,
                    June 30, 2007, unaudited
                
                
                
                
                
                71,333,586
                
                $
                71,334
                
                $
                8,842,009
                
                $
                -
                
                $
                9,420,783
                
                $
                106,992,355
                
                $
                9,052,331
                
                $
                134,378,812Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,972,423
                
                
                
                
                
                6,972,423Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,928,015
                
                
                4,928,015Additional
                    paid-in-capital
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                69,105
                
                
                
                
                
                
                
                
                
                
                
                69,105BALANCE,
                    December 31, 2007, as previously reported
                
                
                
                
                
                71,333,586
                
                $
                71,334
                
                $
                8,842,009
                
                $
                69,105
                
                $
                9,420,783
                
                $
                113,964,778
                
                $
                13,980,346
                
                $
                146,348,355Add
                    adjustment for the acquisition of Life Resource
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (69,105
                )
                
                
                
                
                (35,296,618
                )
                
                1,979,698
                
                
                (33,386,025
                )BALANCE,
                    December 31, 2007, as adjusted (Note 3)
                
                
                
                
                
                71,333,586
                
                $
                71,334
                
                $
                8,842,009
                
                $
                -
                
                $
                9,420,783
                
                $
                78,668,160
                
                $
                15,960,044
                
                $
                112,962,330Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                22,779,091
                
                
                
                
                
                22,779,091Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,906,663
                
                
                7,906,663BALANCE,
                    September 30, 2008, unaudited
                
                
                
                
                
                71,333,586
                
                $
                71,334
                
                $
                8,842,009
                
                $
                -
                
                $
                9,420,783
                
                $
                101,447,251
                
                $
                23,866,707
                
                $
                143,648,084
  The
          accompanying notes are an intergral part of these consolidated financail
          statements.
  5
 
 TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 FOR
        THE
        NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (UNAUDITED)
 Nine months ended September 3020072008
                
                As Adjusted (Note 3)CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                
                
                
                $
                22,779,091
                
                $
                14,558,651Adjustments
                    to reconcile net income to cashprovided
                    by (used in) operating activities:Provision
                    for doubtful accounts
                
                
                
                
                
                89,913
                
                
                (11,320
                )Minority
                    interest
                
                
                
                
                
                1,979,405
                
                
                3,970,791Depreciation
                
                
                
                
                
                2,063,597
                
                
                2,218,230Amortization
                
                
                
                
                
                226,559
                
                
                218,677Interest
                    expense (income)
                
                
                
                
                
                (138,328
                )
                
                62,182(Gain)
                    loss on sale of assets
                
                
                
                
                
                (8,644
                )
                
                (3,341
                )(Increase)
                    decrease in assets:Accounts
                    receivable, trade - related parties
                
                
                
                
                
                (25,058,774
                )
                
                (1,558,640
                )Accounts
                    receivable, trade - third parties
                
                
                
                
                
                109,101
                
                
                -Other
                    receivables
                
                
                
                
                
                639,999
                
                
                2,050,878Other
                    receivables - related parties
                
                
                
                
                
                452,044
                
                
                (10,924,763
                )Inventories
                
                
                
                
                
                (1,090,429
                )
                
                1,436,897Employee
                    advances
                
                
                
                
                
                (345,666
                )
                
                51,326Prepaid
                    expense
                
                
                
                
                
                347,689
                
                
                909,621Increase
                    (decrease) in liabilities:Accounts
                    payable
                
                
                
                
                
                3,098,509
                
                
                (1,278,408
                )Advances
                    from customers - related parties
                
                
                
                
                
                1,233,804
                
                
                (62,960
                )Wages
                    and benefits payable
                
                
                
                
                
                (381,633
                )
                
                (233,645
                )Other
                    taxes payable
                
                
                
                
                
                (1,834,741
                )
                
                (346,126
                )Other
                    payables
                
                
                
                
                
                (86,004
                )
                
                109,016Other
                    payables - related parties
                
                
                
                
                
                282,945
                
                
                (278,926
                )Net
                    cash provided by (used in) operating activities
                
                
                
                
                
                4,358,437
                
                
                10,888,140CASH
                    FLOWS FROM INVESTING ACTIVITIES:Repayment
                    from (loans to) related parties
                
                
                
                
                
                2,155,702
                
                
                (2,865,778
                )Collections
                    from (loans to) local government
                
                
                
                
                
                454,941
                
                
                (9,778
                )Acquisition
                    of intangible assets
                
                
                
                
                
                (6,037,069
                )
                
                (317,238
                )Construction
                    deposits
                
                
                
                
                
                (3,363,647
                )
                
                -Contractor
                    deposits
                
                
                
                
                
                (390,634
                )
                
                64,189Addition
                    to construction in progress
                
                
                
                
                
                (18,573,180
                )
                
                (17,431,705
                )Proceeds
                    from sale of equipment
                
                
                
                
                
                61,797
                
                
                196Purchase
                    of equipment and automobiles
                
                
                
                
                
                (574,822
                )
                
                (4,742,096
                )Net
                    cash used in investing activies
                
                
                
                
                
                (26,266,912
                )
                
                (25,302,210
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Loan
                    from (repayment to) related parties
                
                
                
                
                
                6,578,584
                
                
                (846,820
                )Payments
                    on long term debt, related party
                
                
                
                
                
                (1,065,000
                )
                
                -Increase
                    inlegal
                    capital
                
                
                
                
                
                -
                
                
                20,999,900Increase
                    in deferred income
                
                
                
                
                
                5,861,232
                
                
                -Payments
                    to minority interest shareholder
                
                
                
                
                
                (5,123,520
                )
                
                (6,676,102
                )Net
                    cash provided by (used in) financing activities
                
                
                
                
                
                6,251,296
                
                
                13,476,978EFFECT
                    OF EXCHANGE RATE CHANGES ON CASH
                
                
                
                
                
                3,242,494
                
                
                1,822,813INCREASE
                    (DECREASE) IN CASH
                
                
                
                
                
                (12,414,685
                )
                
                885,721CASH,
                    beginning of period
                
                
                
                
                
                54,081,848
                
                
                55,214,540CASH,
                    end of period
                
                
                
                
                $
                41,667,163
                
                $
                56,100,261**Supplemental
                    disclosures of cash flow information**Cash
                    paid during the year for:Interest
                    (net of amount capitalized)
                
                
                
                
                $
                132,662
                
                $
                211,441Income
                    taxes
                
                
                
                
                $
                3,857,173
                
                $
                1,885,052
  The
          accompanying notes are an intergral part of these consolidated financail
          statements.
  6
 TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 **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.
 
 As
        of
        September 30, 2008, the Company is 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"), 99.4% of
        Tiens Yihai Co.,
        Ltd.
        ("Tiens Yihai") and 100%
        of Tianjin
        Tiens Life Resources Co., Ltd. (“Life Resources”).
 
 On
        September 9, 2003, the Company received all of the issued and outstanding
        common
        stock of Tianshi Holdings in exchange for the issuance by the Company of
        68,495,000 shares of its common stock to the original stockholders of Tianshi
        Holdings, representing 95% of the issued and outstanding common stock of
        the
        Company at such time, after giving effect to the issuance.
 
 On
        June
        18, 2003, Tianshi Holdings acquired 80% of Biological from Tianshi Hong Kong
        International Development Co., Ltd. ("Tianshi Hong Kong") ,
        which
        was 100% owned by the Company's current Chairman, Chief Executive Officer
        and
        President, Jinyuan Li. Tianjin Tianshi Biological Engineering Co., Ltd.
        (“Tianshi Engineering”) owned
        the remaining 20% of Biological.
 
 Tianshi
        Engineering is 49% owned by Baolan Li, the daughter of Jinyuan Li and 51%
        by Tianjin
        Tianshi Group Co., Ltd. ("Tianshi Group") .
        In June
        2003, Tianshi Engineering transferred its 20% interest in Biological for
        no
        consideration to Tianjin Tianshi Pharmaceuticals Co., Ltd. (”Tianshi Pharmaceutical s”)
        and
        Tianshi Holdings acquired 80% of Biological from Tianshi Hong Kong for no
        consideration. On February 25, 2008, Tianshi Pharmaceuticals transferred
        its 20%
        interest in Biological to Tianshi Engineering.
 
 On
        April
        20, 2004, Tianshi Holdings entered a joint venture contract (the "Joint Venture
        Project") with Tianshi Pharmaceuticals to establish Tiens Yihai. Tiens Yihai
        is
        located in Shanghai, the People’s Republic of China (“PRC”), and was established
        to build a new research facility which would also produce the Company’s
        nutrition supplement, home care, and personal care products. Tianshi Holdings
        contributed 99.4% of the registered capital and Tianshi Pharmaceuticals
        contributed the remaining 0.6%.
 
 On
        December 20, 2007, Tianshi Holdings entered a Sale and Purchase Agreement
        with
        Tianshi International Investment Group Co., Ltd. (“Tianshi Investment”). Jinyuan
        Li owns 100% of Tianshi Investment. Pursuant to the Sale and Purchase Agreement,
        Tianshi Holdings agreed to buy all of the registered share capital of Life
        Resources for $64.2 million. The closing of the transaction was subject to
        government approval of transfer of all of the share capital of Life Resources
        to
        Tianshi Holdings. On March 13, 2008, the Chinese government approved the
        transfer and the Company became the 100% shareholder of Life
        Resources.
  7
 
 TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 Life
        Resources was incorporated on April 29, 2005 as a Foreign Investment Enterprise
        (“FIE”) in Wuqing, Tianjin, PRC, with a registered share capital of $30,000,000.
        The Company is currently constructing research and development and manufacturing
        and logistic facilities, as well as administrative offices. Construction
        on the
        project began in July 2006. On March 13, 2008, the Chinese government approved
        the increase of registered capital of Life Resources from $30,000,000 to
        $50,000,000.
  On
          May
          22, 2008, Biological and Mr. Fulin Zhu established a Chinese company, Dongfeng
          Tianshi Biological Development Co., Ltd. (“Dongfeng Biological”) with the
          intention of using the subsidiary to export the Company’s roducts overseas. Due
          to an easing of export restrictions by the Chinese government in the third
          quarter of 2008, the Company no longer required Dongfeng Biological and
          dissolved it on August 15, 2008. Dongfeng Biological did not conduct any
          operations.
 ***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. The Company discontinued its personal care products
        during
        2007. In the PRC, the Company sells its products to 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 52 countries who in turn sell them 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 generally accepted accounting
        principles in the United States. These Consolidated Financial Statements
        should
        be read in conjunction with the Company’s Annual Report on Form 10-K for the
        fiscal year ended December 31, 2007, filed with the Securities and Exchange
        Commission on March 31, 2008.
 
 ***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.
              
              
              99.4%Life
                  Resources
              
              
              P.R.C.
              
              
              100.0%
  8
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 ***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.
 
 As
        Tianshi Holdings and Life Resources were under common control before the
        combination was consummated, the combination of Life Resources was treated
        for
        accounting purposes in a manner similar to a pooling of interests. The balance
        sheet of the Company at December 31, 2007 and comparative interim financial
        statements for the corresponding periods of the preceding fiscal year were
        adjusted as if Life Resources had been combined with the Company before January
        1, 2007.
 
 ***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 its 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 $7,906,663 and $5,700,759 for the nine months ended
        September 30 ,
        2008 and
        2007, respectively, and $807,035 and $1,927,502 for the three months ended
        September 30 ,
        2008 and
        2007, respectively. Asset and liability accounts at September
        30, 2008 were
        translated at 6.85 RMB to $1.00 USD as compared to 7.31 RMB at December 31,
        2007. Equity accounts are stated at their historical rate. The average
        translation rates applied to income statement accounts for the nine months
        ended
        September 30 ,
        2008 and 2007
        were 7.00 RMB and 7.68 RMB, respectively. Cash flows are also translated
        at
        average translation rates for the period. Therefore, amounts reported on
        the
        statement of cash flows will not necessarily agree with changes in the
        corresponding balances on the balance sheet.
 
 ***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 September
        30 ,
        2008 and
        December 31, 2007, 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:
  9
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 September 30, 2008
              
              December 31, 2007Balance sheet
                amount
              
              Fair value
              
              Balance sheet
                amount
              
              Fair valueLong-term
                  debt - related party
              
              $
              (5,332,742
              )
              $
              (5,427,010
              )
              $
              (6,397,742
              )
              $
              (6,443,795
              )
 
 
 ***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 a general allowance for doubtful debt of 0.5% of the year end
        balance of 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 September
        30, 2008 and
        December 31, 2007, receivables outstanding more than 180 days totaled $1,617,538
        and $2,937,718, respectively. The Company believes that the 0.5% general
        allowance for doubtful accounts is adequate. The following table represents
        the
        changes in the allowance for doubtful accounts:
 
 Balance at
                Beginning
                of Period
              
              Provision for
                Doubtful
                Accounts
              
              Recovery
              
              Balance at
                End of PeriodPeriod
                  ended September 30, 2008Reserves
                  and allowancesdeducted
                  from assets accounts:Allowance
                  for doubtful accounts:
              
              $
              71,700
              
              $
              168,305
              
              $
              71,700
              
              $
              168,305Period
                  ended December 31, 2007Reserves
                  and allowancesdeducted
                  from assets accounts:Allowance
                  for doubtful accounts:
              
              $
              86,776
              
              $
              71,700
              
              $
              86,776
              
              $
              71,700
  ***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.
  10
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 ***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 for determining whether
        provisions should be provided. The amount included in prepaid expense is
        net of
        any provisions. Provisions for prepaid expenses amounted to $930,479 and
        $872,053 at September 30, 2008 and December 31, 2007, respectively.
 
 ***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 betterment to buildings and equipment are capitalized.
 
 ***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 the
        constructions in progress.
  11
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 ***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. On August 25,
        2008,
        Life Resources entered a definitive agreement with the Wuqing Branch Bureau
        of
        Tianjin Municipal Land and Resources and Administrative Bureau (the “Tianjin
        Government”) and Tianjin Tiens Life Science Co., Ltd (“Life Science”) 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.” On August
        28, 2008 and August 29, 2008, Life Resources paid a total of RMB 42,252,723
        (or
        US$ 6,163,827) in connection with the zoning changes to its
        parcels.
 
 ***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, Tiens International 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 September 30, 2008, land use rights for only
        50 of
        the 80 acres had been received.
 
 ***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 purchase of land use
        rights at an amount of RMB 35,803,461 (or US $4,895,049). On August 28, 2008,
        Life Resources paid RMB 41,022,061 (or US $5,984,298) for the zoning changes
        to
        one parcel of land on which the land use rights was changed from “industrial” to
“educational”. On September 12, 2008, the Company received the same amount of
        government grant. The grants are treated as deferred income and will be
        amortized over the life of the buildings on the land.
 
 ***Minority
        interest***
 
 Minority
        interest represents the outside shareholder’s 20% ownership of Biological and
        0.6% ownership of Tiens Yihai. The net income shown in Consolidated Statements
        of Income and Other Comprehensive Income and Consolidated Statements of Cash
        Flows is net of minority interest.
  12
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 ***Revenue
        recognition***
 
 The
        Company sells both semi-finished products and finished products to Tianshi
        Engineering domestically. Life Resources sells semi-finished products, and
        Biological sells finished products. 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 distributors
        recognize sales of the Company's products to unaffiliated third parties.
        Revenues in both cases are net of taxes.
 
 For
        overseas sales, the Company only sells finished products. The Company recognizes
        revenue from international sales (non-Chinese) to both affiliated and
        unaffiliated third 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, no allowance for estimated returns
        has
        been recorded as of September 30, 2008 and December 31, 2007.
 
 ***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 nine months ended September 30, 2008 and 2007 amounted to $215,717 and
        $567,
        respectively, and for the three months ended September 30, 2008 and 2007
        amounted to $2,249 and $19, respectively, and were expensed as
        incurred.
 
 ***Shipping
        and Handling***
 
 Shipping
        and handling costs totaled $527,401 and $852,334 for the nine months ended
        September 30, 2008 and 2007, respectively, and $304,764 and $523,789 for
        the
        three months ended September 30, 2008 and 2007, 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.
  13
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 ***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 $1,199,344 and $524,621
        for
        the nine months ended September 30 ,
        2008 and
        2007, respectively, and $585,682 and $173,008 for the three months ended
        September 30, 2008 and 2007, respectively. These costs are included in selling,
        general and administrative expenses in the accompanying statements.
 
 ***Income
        taxes***
 
 The
        Company has adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes” (“FIN No.48”). FIN No.48 clarifies the accounting for uncertainty
        in income taxes recognized in an enterprise’s financial statements in accordance
        with FASB Statement No. 109, “Accounting for Income Taxes.” FIN No.48 prescribes
        a recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return.
 
 According
        to FIN No.48, the evaluation of a tax position is a two-step process. The
        first
        step is recognition: the enterprise determines whether it is more likely
        than
        not that a tax position will be sustained upon examination, including resolution
        of any related appeals or litigation process, based on the technical merits
        of
        the position. The second step is measurement: a tax position that meets the
        more-likely than not recognition threshold is measured to determine the amount
        of benefit to recognize in the financial statement. The tax position is measured
        at the largest amount of benefit that is greater than 50 percent likely of
        being
        realized upon ultimate settlement.
 
 The
        Company has not been subjected to income tax examinations by taxing authorities
        for the nine months ended September 30, 2008 and the year ended December
        31,
        2007. During the nine months ended September 30, 2008 and the year ended
        December 31, 2007, 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 September 30, 2008 and December 31, 2007,
        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 each of the three months and nine months ended September
        30,
        2008 and 2007.
 
 ***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 are net
        of minority interests.
  14
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 ***Recently
        issued accounting pronouncements***
 
 In
        February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
        Financial Assets and Financial Liabilities - Including an amendment of FASB
        Statement No. 115" (“SFAS 159”). SFAS 159 permits companies to choose to measure
        many financial instruments and certain other items at fair value
        that  are
        not
        currently required to be measured at fair value. The objective of SFAS 159
        is to
        provide opportunities to mitigate volatility in reported earnings caused
        by  measuring
        related assets and liabilities differently, without having to apply hedge
        accounting provisions. SFAS 159 also establishes presentation and
        disclosure  requirements
        designed to facilitate comparisons between companies that choose different
        measurement attributes for similar types of assets and liabilities.
        SFAS  159
        will
        be effective in the first quarter of fiscal 2009. The Company is evaluating
        the
        impact that this statement will have on its consolidated financial  statements.
 
 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
        will
        be effective in the first quarter of fiscal 2009. The Company is evaluating
        the
        impact that this statement will have on its consolidated financial  statements.
 
 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 a guide 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
        will
        be effective in the first quarter of fiscal 2009. The Company is evaluating
        the
        impact that this statement will have on its consolidated financial  statements.
 
 In
        March
        2008, the FASB issued SFAS 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
        will be effective in the first quarter of fiscal 2009. The Company is evaluating
        the impact that this statement will have on its 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 Company is
        evaluating the impact that this statement will have on its consolidated
        financial statements.
  15
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 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 will not have a material impact on the Company’s consolidated financial
        statements.
 
 **Note
        3 – Acquisition of Life Resources**
 
 On
        December 20, 2007, Tianshi Holdings entered a Sale and Purchase Agreement
        with
        Tianshi Investment. Pursuant to the Sale and Purchase Agreement, Tianshi
        Holdings agreed to buy all of the registered share capital of Life Resources
        for
        $64.2 million. The closing of the transaction was subject to government approval
        of transfer of all of the share capital of Life Resources to Tianshi Holdings.
        On March 13, 2008, the Chinese government approved the transfer. As Tianshi
        Holdings and Life Resources were under common control by Jinyuan Li before
        the
        combination, the combination was treated for accounting purposes as a pooling
        of
        interests. The balance sheet of the Company at December 31, 2007 and comparative
        interim financial statements for the corresponding periods of the preceding
        fiscal year were adjusted as if Life Resources had been combined before January
        1, 2007. The following are unaudited statements of income and other
        comprehensive income of Life Resources for each of the three months and nine
        months ended September 30, 2008 and 2007. Since part of the sales by Life
        Resources were to the Biological, the amounts in the statements of income
        of
        Life Resource are not the same as amounts shown as the “Effect of Change”
presented in the following comparative interim financial
        statements.
  16
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Three months ended September 30,
                
                Nine months ended September 30,2008
                
                2007
                
                2008
                
                2007(Unaudited)
                
                (Unaudited)
                
                (Unaudited)
                
                (Unaudited)REVENUE
                    - RELATED PARTIES
                
                $
                21,291,034
                
                $
                -
                
                $
                26,921,719
                
                $
                -COST
                    OF SALES - RELATED PARTIES
                
                
                4,489,217
                
                
                -
                
                
                5,794,085
                
                
                -GROSS
                    PROFIT
                
                
                16,801,817
                
                
                -
                
                
                21,127,634
                
                
                -SELLING,
                    GENERAL ANDADMINISTRATIVE
                    EXPENSES
                
                
                441,273
                
                
                49,335
                
                
                1,180,034
                
                
                151,434INCOME
                    (LOSS) FROM OPERATIONS
                
                
                16,360,544
                
                
                (49,335
                )
                
                19,947,600
                
                
                (151,434
                )Interest
                    income
                
                
                10,320
                
                
                5,835
                
                
                60,878
                
                
                15,065Other
                    (expense) income
                
                
                (1,539
                )
                
                (3,504
                )
                
                (73,312
                )
                
                (19,194
                )OTHER
                    (EXPENSE) INCOME, NET
                
                
                8,781
                
                
                2,331
                
                
                (12,434
                )
                
                (4,129
                )INCOME
                    (LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY
                    INTEREST
                
                
                16,369,325
                
                
                (47,004
                )
                
                19,935,166
                
                
                (155,563
                )PROVISION
                    FOR INCOME TAXES
                
                
                -
                
                
                -
                
                
                -
                
                
                -NET
                    INCOME (LOSS)
                
                
                16,369,325
                
                
                (47,004
                )
                
                19,935,166
                
                
                (155,563
                )OTHER
                    COMPREHENSIVE INCOME:Foreign
                    currency translation adjustment
                
                
                (1,306,343
                )
                
                334,358
                
                
                3,446,124
                
                
                770,272COMPREHENSIVE
                    INCOME
                
                $
                15,062,982
                
                $
                287,354
                
                $
                23,381,290
                
                $
                614,709
  The
        following financial statement line items for each of the three months and
        nine
        months ended September 30, 2008 and 2007 were affected by the combination
        of
        Life Resources:
  17
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 ***Income
        statement (*** ***Unaudited)***
  For three months ended
                September 30, 2008
              
              For three months ended
                September 30, 2007As computed,
                without Life
                Resources
              
              As reported,
                combined with
                Life Resources
              
              Effect of
                Change
              
              As reported,
                without Life
                Resources
              
              As adjusted,
                combined with
                Life Resources
              
              Effect of
                ChangeREVENUE
                  - RELATED PARTIES
              
              $
              14,140,874
              
              $
              26,195,853
              
              $
              12,054,979
              
              $
              11,027,478
              
              $
              11,027,478
              
              $
              -COST
                  OF SALES - RELATED PARTIES
              
              
              9,337,280
              
              
              6,606,502
              
              
              (2,730,778
              )
              
              3,089,791
              
              
              3,089,791
              
              
              -GROSS
                  PROFIT
              
              
              4,803,594
              
              
              19,589,351
              
              
              14,785,757
              
              
              7,937,687
              
              
              7,937,687
              
              
              -SELLING,
                  GENERAL AND ADMINISTRATIVE EXPENSES
              
              
              4,156,862
              
              
              4,562,946
              
              
              406,084
              
              
              3,801,914
              
              
              3,851,249
              
              
              49,335INCOME
                  FROM OPERATIONS
              
              
              646,732
              
              
              15,026,405
              
              
              14,379,673
              
              
              4,135,773
              
              
              4,086,438
              
              
              (49,335
              )OTHER
                  (EXPENSE) INCOME, NET
              
              
              (261,282
              )
              
              (252,501
              )
              
              8,781
              
              
              149,683
              
              
              152,014
              
              
              2,331INCOME
                  BEFORE PROVISION FOR INCOME TAXESAND
                  MINORITY INTEREST
              
              
              385,450
              
              
              14,773,904
              
              
              14,388,454
              
              
              4,285,455
              
              
              4,238,451
              
              
              (47,004
              )PROVISION
                  FOR INCOME TAXES
              
              
              152,984
              
              
              152,990
              
              
              6
              
              
              344,248
              
              
              344,248
              
              
              -INCOME
                  BEFORE
                MINORITY
                  INTEREST
              
              
              232,466
              
              
              14,620,914
              
              
              14,388,448
              
              
              3,941,207
              
              
              3,894,203
              
              
              (47,004
              )MINORITY
                  INTEREST
              
              
              92,322
              
              
              92,326
              
              
              4
              
              
              848,212
              
              
              848,212
              
              
              -NET
                  INCOME
              
              
              140,144
              
              
              14,528,588
              
              
              14,388,444
              
              
              3,092,995
              
              
              3,045,991
              
              
              (47,004
              )OTHER
                  COMPREHENSIVE INCOME:Foreign
                  currency translation adjustment
              
              
              134,028
              
              
              807,035
              
              
              673,007
              
              
              1,593,144
              
              
              1,927,502
              
              
              334,358COMPREHENSIVE
                  INCOME
              
              $
              274,172
              
              $
              15,335,623
              
              $
              15,061,451
              
              $
              4,686,139
              
              $
              4,973,493
              
              $
              287,354EARNINGS
                  PER SHARE, BASIC AND DILUTED
              
              $
              0.00
              
              $
              0.20
              
              $
              0.20
              
              $
              0.04
              
              $
              0.04
              
              $
              -WEIGHTED
                  AVERAGE NUMBER OF SHARES
              
              
              71,333,586
              
              
              71,333,586
              
              
              
              
              
              71,333,586
              
              
              71,333,586
  18
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 For nine months ended
                September 30, 2008
              
              For nine months ended
                September 30, 2007As computed,
                without Life
                Resources
              
              As reported,
                combined with
                Life Resources
              
              Effect of
                Change
              
              As reported,
                without Life
                Resources
              
              As adjusted,
                combined with
                Life Resources
              
              Effect of
                ChangeREVENUE
                  - RELATED PARTIES
              
              $
              44,814,450
              
              $
              58,671,121
              
              $
              13,856,671
              
              $
              41,584,749
              
              $
              41,584,749
              
              $
              -COST
                  OF SALES - RELATED PARTIES
              
              
              19,139,628
              
              
              16,850,267
              
              
              (2,289,361
              )
              
              11,979,984
              
              
              11,979,984
              
              
              -GROSS
                  PROFIT
              
              
              25,674,822
              
              
              41,820,854
              
              
              16,146,032
              
              
              29,604,765
              
              
              29,604,765
              
              
              -SELLING,
                  GENERAL AND
                ADMINISTRATIVE
                  EXPENSES
              
              
              11,781,983
              
              
              12,898,742
              
              
              1,116,759
              
              
              10,353,397
              
              
              10,504,831
              
              
              151,434INCOME
                  FROM OPERATIONS
              
              
              13,892,839
              
              
              28,922,112
              
              
              15,029,273
              
              
              19,251,368
              
              
              19,099,934
              
              
              (151,434
              )OTHER
                  (EXPENSE) INCOME, NET
              
              
              (853,744
              )
              
              (866,178
              )
              
              (12,434
              )
              
              1,044,290
              
              
              1,040,161
              
              
              (4,129
              )INCOME
                  BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST
              
              
              13,039,095
              
              
              28,055,934
              
              
              15,016,839
              
              
              20,295,658
              
              
              20,140,095
              
              
              (155,563
              )PROVISION
                  FOR INCOME TAXES
              
              
              3,297,432
              
              
              3,297,438
              
              
              6
              
              
              1,610,653
              
              
              1,610,653
              
              
              -INCOME
                  BEFORE MINORITY INTEREST
              
              
              9,741,663
              
              
              24,758,496
              
              
              15,016,833
              
              
              18,685,005
              
              
              18,529,442
              
              
              (155,563
              )MINORITY
                  INTEREST
              
              
              1,979,401
              
              
              1,979,405
              
              
              4
              
              
              3,970,791
              
              
              3,970,791
              
              
              -NET
                  INCOME
              
              
              7,762,262
              
              
              22,779,091
              
              
              15,016,829
              
              
              14,714,214
              
              
              14,558,651
              
              
              (155,563
              )OTHER
                  COMPREHENSIVE INCOME:Foreign
                  currency translation adjustment
              
              
              4,460,607
              
              
              7,906,663
              
              
              3,446,056
              
              
              4,930,487
              
              
              5,700,759
              
              
              770,272COMPREHENSIVE
                  INCOME
              
              $
              12,222,869
              
              $
              30,685,754
              
              $
              18,462,885
              
              $
              19,644,701
              
              $
              20,259,410
              
              $
              614,709EARNINGS
                  PER SHARE, BASIC AND DILUTED
              
              $
              0.11
              
              $
              0.32
              
              $
              0.21
              
              $
              0.21
              
              $
              0.20
              
              $
              -0.01WEIGHTED
                  AVERAGE NUMBER OF SHARES
              
              
              71,333,586
              
              
              71,333,586
              
              
              
              
              
              71,333,586
              
              
              71,333,586
  19
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 ***Balance
        sheet (Unaudited)***
 September
        30, 2008
 
 September30,2008Ascomputed,
                withoutLife
                Resources
              
              Asreported,
                combinedwith
                LifeResources
              
              EffectofChangeASSETSCURRENT
                  ASSETS:Cash
              
              $
              33,467,254
              
              $
              41,667,163
              
              $
              8,199,909Accounts
                  receivable, trade - related parties, net
              
              
              24,611,293
              
              
              33,492,698
              
              
              8,881,405Inventories
              
              
              8,834,626
              
              
              7,565,126
              
              
              (1,269,500
              )Other
                  receivables
              
              
              235,116
              
              
              465,221
              
              
              230,105Other
                  receivables - related parties
              
              
              15,436,835
              
              
              10,852,795
              
              
              (4,584,040
              )Employee
                  advances
              
              
              173,087
              
              
              423,239
              
              
              250,152Prepaid
                  expenses
              
              
              308,614
              
              
              308,614
              
              
              -Prepaid
                  income taxes
              
              
              935,361
              
              
              728,993
              
              
              (206,368
              )Total
                  current assets
              
              
              84,002,186
              
              
              95,503,849
              
              
              11,501,663PROPERTY,
                  PLANT AND EQUIPMENT, net
              
              
              15,249,229
              
              
              15,617,886
              
              
              368,657OTHER
                  ASSETS:Construction
                  in progress
              
              
              2,688,441
              
              
              61,421,955
              
              
              58,733,514Construction
                  deposits
              
              
              -
              
              
              3,950,031
              
              
              3,950,031Intangible
                  assets, net
              
              
              2,718,127
              
              
              15,820,797
              
              
              13,102,670Other
                  assets
              
              
              5,332,266
              
              
              5,332,266
              
              
              -Acquisition
                  deposit
              
              
              84,247,182
              
              
              -
              
              
              (84,247,182
              )Total
                  other assets
              
              
              94,986,016
              
              
              86,525,049
              
              
              (8,460,967
              )Total
                  assets
              
              $
              194,237,431
              
              $
              197,646,784
              
              $
              3,409,353LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              3,230,310
              
              $
              7,507,216
              
              $
              4,276,906Accounts
                  payable-related parties
              
              
              5,125,241
              
              
              -
              
              
              (5,125,241
              )Advances
                  from customers - related parties
              
              
              3,074,501
              
              
              3,074,501
              
              
              -Wages
                  and benefits payable
              
              
              912,886
              
              
              938,879
              
              
              25,993Income
                  taxes payable
              
              
              138,835
              
              
              138,841
              
              
              6Contractor
                  deposits
              
              
              -
              
              
              236,165
              
              
              236,165Contractor
                  payables
              
              
              -
              
              
              7,606,111
              
              
              7,606,111Other
                  payables
              
              
              1,222,014
              
              
              1,223,681
              
              
              1,667Other
                  payables - related parties
              
              
              7,478,828
              
              
              7,582,403
              
              
              103,575Dividend
                  payable to minority interest
              
              
              -
              
              
              -
              
              
              -Current
                  portion of long term debt, related party
              
              
              2,130,000
              
              
              2,130,000
              
              
              -Total
                  current liabilities
              
              
              23,312,615
              
              
              30,437,797
              
              
              7,125,182NON-CURRENT
                  LIABILITIESLong
                  term debt, net of current portion, related party
              
              
              3,202,742
              
              
              3,202,742
              
              
              -Other
                  payables-non current
              
              
              574,184
              
              
              574,184
              
              
              -Deferred
                  income
              
              
              -
              
              
              11,207,307
              
              
              11,207,307Total
                  non current liabilities
              
              
              3,776,926
              
              
              14,984,233
              
              
              11,207,307Total
                  liabilities
              
              
              27,089,541
              
              
              45,422,030
              
              
              18,332,489MINORITY
                  INTEREST
              
              
              8,576,666
              
              
              8,576,670
              
              
              4SHAREHOLDERS'
                  EQUITY:Common
                  stock
              
              
              71,334
              
              
              71,334
              
              
              -Paid-in-capital
              
              
              8,842,009
              
              
              8,842,009
              
              
              -Additional
                  paid-in-capital
              
              
              69,105
              
              
              -
              
              
              (69,105
              )Statutory
                  reserves
              
              
              9,420,783
              
              
              9,420,783
              
              
              -Retained
                  earnings
              
              
              121,727,040
              
              
              101,447,251
              
              
              (20,279,789
              )Accumulated
                  other comprehensive income
              
              
              18,440,953
              
              
              23,866,707
              
              
              5,425,754Total
                  shareholders' equity
              
              
              158,571,224
              
              
              143,648,084
              
              
              (14,923,140
              )Total
                  liabilities and shareholders' equity
              
              $
              194,237,431
              
              $
              197,646,784
              
              $
              3,409,353
  20
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 December
        31, 2007
 December31,2007As reported,
                without Life
                Resources
              
              As adjusted,
                combined with Life
                Resources
              
              Effect of ChangeASSETSCURRENT
                  ASSETS:Cash
              
              $
              48,678,945
              
              $
              54,081,848
              
              $
              5,402,903Accounts
                  receivable, trade - related parties, net
              
              
              14,268,229
              
              
              14,268,229
              
              
              -Accounts
                  receivable, trade - third parties
              
              
              104,398
              
              
              104,398
              
              
              -Inventories
              
              
              5,949,963
              
              
              5,949,963
              
              
              -Other
                  receivables
              
              
              892,489
              
              
              1,068,343
              
              
              175,854Other
                  receivables - related parties
              
              
              13,070,907
              
              
              13,887,138
              
              
              816,231Employee
                  advances
              
              
              64,336
              
              
              65,901
              
              
              1,565Prepaid
                  expenses
              
              
              623,638
              
              
              623,638
              
              
              -Total
                  current assets
              
              
              83,652,905
              
              
              90,049,458
              
              
              6,396,553PROPERTY,
                  PLANT AND EQUIPMENT, net
              
              
              16,034,812
              
              
              16,071,900
              
              
              37,088OTHER
                  ASSETS:Construction
                  in progress
              
              
              2,287,807
              
              
              39,792,774
              
              
              37,504,967Construction
                  deposits
              
              
              -
              
              
              1,089,216
              
              
              1,089,216Intangible
                  assets, net
              
              
              2,603,084
              
              
              9,246,879
              
              
              6,643,795Long-term
                  prepaid expenses
              
              
              5,301,847
              
              
              5,301,847
              
              
              -Acquisition
                  deposit
              
              
              71,747,182
              
              
              -
              
              
              (71,747,182
              )Total
                  other assets
              
              
              81,939,920
              
              
              55,430,716
              
              
              (26,509,204
              )Total
                  assets
              
              $
              181,627,637
              
              $
              161,552,074
              
              $
              (20,075,563
              )LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              4,070,906
              
              $
              4,070,906
              
              $
              -Advances
                  from customers - related parties
              
              
              1,700,838
              
              
              1,700,838
              
              
              -Wages
                  and benefits payable
              
              
              1,250,685
              
              
              1,250,685
              
              
              -Other
                  taxes payable
              
              
              536,819
              
              
              536,819
              
              
              -Income
                  taxes payable
              
              
              665,726
              
              
              665,726
              
              
              -Contractor
                  deposits
              
              
              -
              
              
              595,128
              
              
              595,128Contractor
                  payable
              
              
              -
              
              
              7,820,285
              
              
              7,820,285Other
                  payables
              
              
              1,133,539
              
              
              1,133,539
              
              
              -Other
                  payables - related parties
              
              
              7,938,205
              
              
              7,938,205
              
              
              -Dividend
                  payable to minority interest
              
              
              4,902,629
              
              
              4,902,629
              
              
              -Current
                  portion of long term debt, related party
              
              
              2,130,000
              
              
              2,130,000
              
              
              -Total
                  current liabilities
              
              
              24,329,347
              
              
              32,744,760
              
              
              8,415,413NON-CURRENT
                  LIABILITIESLong
                  term debt, net of current portion, related party
              
              
              4,267,742
              
              
              4,267,742
              
              
              -Other
                  payables-non current
              
              
              538,130
              
              
              538,130
              
              
              -Deferred
                  income
              
              
              -
              
              
              4,895,049
              
              
              4,895,049Total
                  non current liabilities
              
              
              4,805,872
              
              
              9,700,921
              
              
              4,895,049Total
                  liabilities
              
              
              29,135,219
              
              
              42,445,681
              
              
              13,310,462MINORITY
                  INTEREST
              
              
              6,144,063
              
              
              6,144,063
              
              
              -SHAREHOLDERS'
                  EQUITY:Common
                  stock
              
              
              71,334
              
              
              71,334
              
              
              -Paid-in-capital
              
              
              8,842,009
              
              
              8,842,009
              
              
              -Additional
                  paid-in-capital
              
              
              69,105
              
              
              -
              
              
              (69,105
              )Statutory
                  reserves
              
              
              9,420,783
              
              
              9,420,783
              
              
              -Retained
                  earnings
              
              
              113,964,778
              
              
              78,668,160
              
              
              (35,296,618
              )Accumulated
                  other comprehensive income
              
              
              13,980,346
              
              
              15,960,044
              
              
              1,979,698Total
                  shareholders' equity
              
              
              146,348,355
              
              
              112,962,330
              
              
              (33,386,025
              )Total
                  liabilities and shareholders' equity
              
              $
              181,627,637
              
              $
              161,552,074
              
              $
              (20,075,563
              )
  21
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 ***Statements
        of cash flows (Unaudited)***
 Nine
        months ended September 30, 2008
  Forninemonthsended
                September30,2008As computed,
                without Life
                Resources
              
              As reported,
                combined with
                Life Resources
              
              Effect of ChangeCASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              7,762,262
              
              $
              22,779,091
              
              $
              15,016,829Adjustments
                  to reconcile net income to cashprovided
                  by (used in) operating activities:
              
              
              (13,517,944
              )
              
              (18,420,654
              )
              
              (4,902,710
              )Net
                  cash provided by (used in) operating activities
              
              
              (5,755,682
              )
              
              4,358,437
              
              
              10,114,119CASH
                  FLOWS FROM INVESTING ACTIVITIES:Payment
                  of deposit on acquisition of Life Resource
              
              
              (12,500,000
              )
              
              -
              
              
              12,500,000Repayment
                  from (loans to) related parties
              
              
              -
              
              
              2,155,702
              
              
              2,155,702Collections
                  from (loans to) local government
              
              
              454,941
              
              
              454,941
              
              
              -Acquisition
                  of intangible assets
              
              
              -
              
              
              (6,037,069
              )
              
              (6,037,069
              )Construction
                  deposits
              
              
              -
              
              
              (3,363,647
              )
              
              (3,363,647
              )Contractor
                  deposits
              
              
              -
              
              
              (390,634
              )
              
              (390,634
              )Addition
                  to construction in progress
              
              
              (175,347
              )
              
              (18,573,180
              )
              
              (18,397,833
              )Proceeds
                  from sale of equipment
              
              
              386,971
              
              
              61,797
              
              
              (325,174
              )Purchase
                  of equipment and automobiles
              
              
              (573,531
              )
              
              (574,822
              )
              
              (1,291
              )Net
                  cash used in investing activities
              
              
              (12,406,966
              )
              
              (26,266,912
              )
              
              (13,859,946
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Loan
                  from (repayment to) related parties
              
              
              6,500,000
              
              
              6,578,584
              
              
              78,584Payments
                  on long term debt, related party
              
              
              (1,065,000
              )
              
              (1,065,000
              )
              
              -Increase
                  in deferred income
              
              
              -
              
              
              5,861,232
              
              
              5,861,232Payments
                  to minority interest shareholder
              
              
              (5,123,520
              )
              
              (5,123,520
              )
              
              -Net
                  cash provided by financing activities
              
              
              311,480
              
              
              6,251,296
              
              
              5,939,816EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              2,639,477
              
              
              3,242,494
              
              
              603,017INCREASE
                  (DECREASE) IN CASH
              
              
              (15,211,691
              )
              
              (12,414,685
              )
              
              2,797,006CASH,
                  beginning of period
              
              
              48,678,945
              
              
              54,081,848
              
              
              5,402,903CASH,
                  end of period
              
              $
              33,467,254
              
              $
              41,667,163
              
              $
              8,199,909
  22
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 Nine
        months ended September 30, 2007
 
 Forninemonthsended
                September30,2007As reported,
                without Life
                Resources
              
              As adjusted,
                combined with
                Life Resources
              
              Effect of ChangeCASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              14,714,214
              
              $
              14,558,651
              
              $
              (155,563
              )Adjustments
                  to reconcile net income to cashprovided
                  by (used in) operating activities:
              
              
              (6,051,190
              )
              
              (3,670,511
              )
              
              2,380,679Net
                  cash provided by operating activities
              
              
              8,663,024
              
              
              10,888,140
              
              
              2,225,116CASH
                  FLOWS FROM INVESTING ACTIVITIES:Loan
                  to related parties
              
              
              (1,087,456
              )
              
              (2,865,778
              )
              
              (1,778,322
              )Collections
                  from (loans to) local government
              
              
              (9,778
              )
              
              (9,778
              )
              
              -Acquisition
                  of intangible assets
              
              
              (317,238
              )
              
              (317,238
              )
              
              -Contractor
                  deposits
              
              
              -
              
              
              64,189
              
              
              64,189Addition
                  to construction in progress
              
              
              (3,759,770
              )
              
              (17,431,705
              )
              
              (13,671,935
              )Proceeds
                  from sales equipment and automobiles
              
              
              196
              
              
              196
              
              
              -Purchase
                  of equipment and automobiles
              
              
              (962,999
              )
              
              (4,742,096
              )
              
              (3,779,097
              )Net
                  cash used in investing activities
              
              
              (6,137,045
              )
              
              (25,302,210
              )
              
              (19,165,165
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Repayment
                  to related parties
              
              
              -
              
              
              (846,820
              )
              
              (846,820
              )Increase
                  in registered share capital
              
              
              -
              
              
              20,999,900
              
              
              20,999,900Payments
                  to minority interest shareholder
              
              
              (6,676,102
              )
              
              (6,676,102
              )
              
              -Net
                  cash provided by (used in) financing activities
              
              
              (6,676,102
              )
              
              13,476,978
              
              
              20,153,080EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              1,721,259
              
              
              1,822,813
              
              
              101,554INCREASE
                  (DECREASE) IN CASH
              
              
              (2,428,864
              )
              
              885,721
              
              
              3,314,585CASH,
                  beginning of period
              
              
              54,270,065
              
              
              55,214,540
              
              
              944,475CASH,
                  end of period
              
              $
              51,841,201
              
              $
              56,100,261
              
              $
              4,259,060
  **Note
        4 – Supplemental disclosure of cash flow information**
 
 Income
        taxes paid for the nine months ended September 30, 2008 and 2007 amounted
        to
        $3,857,173 and $1,885,052, respectively.
 
 Interest
        paid for the nine months ended September 30, 2008 and 2007 amounted to $132,662
        and $211,441, respectively.
  23
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 On
        December 21, 2007 the
        Company, Tianshi Investment and Life Resources entered a Loan Agreement,
        pursuant to which Tianshi Investment loaned $7.5 million to Life Resources
        without interest. The Company 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. On March 13,
        2008,
        the Chinese government approved the transfer and the Company repaid $7.5
        million
        to Tianshi Investment on March 18, 2008 by netting off part of the accounts
        receivable due from Tianshi Engineering.
 
 The
        right
        to offset existed because:
 
 1.
              Tianshi
                  Engineering had a determinable outstanding debt payable to the
                  Company;
 2.
              The
                  Company had a determinable outstanding amount of a loan to repay
                  to
                  Tianshi Investment;
 3.
              The
                  Company had the right to offset the two
                  amounts;
 4.
              The
                  Company, Tianshi Investment and Tianshi Engineering agreed to offset
                  the
                  two amounts; and
 5.
              The
                  agreement to offset is enforceable under Chinese contract
                  law.
 
 On
        April
        9, 2008, liabilities in the form of accounts receivable due to Biological
        from
        Tianshi Engineering in the amount of $900,000 were offset against a cash
        payment
        of $900,000 from Tianshi Investment to Tianshi Holdings. Tianshi Holdings
        used
        such monies to increase the capital contribution of Life Resources.
 
 The
        right
        to offset existed because:
 
 1.
              Tianshi
                  Engineering had a determinable outstanding debt payable to the
                  Company;
 2.
              The
                  Company received a determinable amount in cash from Tianshi
                  Investment;
 3.
              The
                  Company had the right to offset the two
                  amounts;
 4.
              The
                  Company, Tianshi Investment and Tianshi Engineering agreed to offset
                  the
                  two amounts; and
 5.
              The
                  agreement to offset is enforceable under Chinese contract
                  law.
 
 
 **Note
        5 – Inventories**
 
 Inventories
        consist of the following at September 30, 2008 and December 31, 2007:
  24
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 September 30,
              
              December 31,2008
              
              2007Raw
                  materials
              
              $
              3,439,798
              
              $
              1,842,760Packing
                  materials
              
              
              1,181,673
              
              
              810,319Miscellaneous
                  supplies
              
              
              421,894
              
              
              217,370Work
                  in process
              
              
              266,896
              
              
              571,173Processing
                  materials
              
              
              -
              
              
              137,188Finished
                  goods
              
              
              2,254,865
              
              
              2,371,153Total
              
              $
              7,565,126
              
              $
              5,949,963
 
 The
        Company has written off obsolete goods in the amount of $107,191 and $158,768
        for the nine months ended September 30, 2008 and 2007, respectively.
 
 **Note
        6 – Prepaid expenses**
 
 Prepaid
        expenses consist of advances to suppliers and short-term prepaid expenses.
        The
        details of prepaid expenses at September 30, 2008 and December 31, 2007 are
        as
        follows:
 
 September 30,
              
              December 31,2008
              
              2007Advance
                  to suppliers
              
              $
              296,060
              
              $
              622,275Short-term
                  prepaid expenses
              
              
              12,554
              
              
              1,363Total
              
              $
              308,614
              
              $
              623,638
 
 **Note
        7 – Property, plant and equipment, net**
 
 Property,
        plant and equipment consist of the following at September 30, 2008 and December
        31, 2007:
  25
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 September 30,
              
              December 31,2008
              
              2007Buildings
                  and improvements
              
              $
              7,423,281
              
              $
              6,923,475Office
                  equipment
              
              
              441,813
              
              
              405,277Computer
                  equipment and software
              
              
              2,940,883
              
              
              2,678,312Machinery
                  and equipment
              
              
              12,551,689
              
              
              11,333,473Automobiles
              
              
              5,556,216
              
              
              5,188,650Total
              
              
              28,913,882
              
              
              26,529,187Less:
                  accumulated depreciation
              
              
              (13,295,996
              )
              
              (10,457,287
              )Property,
                  plant and equipment, net
              
              $
              15,617,886
              
              $
              16,071,900
 
 Depreciation
        expense for the nine months ended September 30, 2008 and 2007 amounted to
        $2,063,597 and $2,218,230, respectively.
 
 **Note
        8 - Intangible assets**
 
 Intangible
        assets consist of the following at September 30, 2008 and December 31,
        2007:
 
 September 30,
              
              December 31,2008
              
              2007Land
                  use rights
              
              $
              16,196,491
              
              $
              9,402,699Other
                  intangible assets
              
              
              350,907
              
              
              328,873Less
                  accumulated amortization
              
              
              (726,601
              )
              
              (484,693
              )Intangible
                  assets, net
              
              $
              15,820,797
              
              $
              9,246,879
 
 Amortization
        expense for the nine months ended September 30, 2008 and 2007 amounted to
        $226,559 and $218,677 respectively. The estimated amortization expense for
        the
        next five years is as follows:
 
 EstimatedamortizationexpensefortheyearendingDecember31,
              
              Amount2008
              
              $
              299,1632009
              
              $
              358,5342010
              
              $
              358,1492011
              
              $
              351,6542012
              
              $
              351,654
  26
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 **Note
        9 – Related party transactions and balances**
 
 The
        Company mainly conducted related party transactions with Tianshi Group, Tianshi
        Engineering, 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 understanding
        of
        the transactions and outstanding balances between those related parties.
 
 Nine months ended September 30,
              
              Three months ended September 30,2008
              
              2007
              
              2008
              
              2007Revenue-related
                  parties
              
              $
              58,671,121
              
              $
              41,584,749
              
              $
              26,195,853
              
              $
              11,027,478
  September 30, 2008
              
              December 31, 2007Accounts
                  receivable, trade – related parties, net of allowance for doubtful
                  accounts of $168,305 and $71,700 as of September 30, 2008 and December
                  31,
                  2007, respectively
              
              $
              33,492,698
              
              $
              14,268,229Other
                  receivables – related parties
              
              $
              10,852,795
              
              $
              13,887,138Advances
                  from customers – related parties
              
              $
              3,074,501
              
              $
              1,700,838Other
                  payables – related parties
              
              $
              7,582,403
              
              $
              7,938,205Current
                  portion of long-term debt - related party
              
              $
              2,130,000
              
              $
              2,130,000Long
                  term debt – related party
              
              $
              3,202,742
              
              $
              4,267,742
  ***Revenue
        -related parties***
  The
        details of revenue-related parties are as follows:
 
 Nine months ended September 30,
              
              Three months ended September 30,2008
              
              2007
              
              2008
              
              2007Tianshi
                  Engineering
              
              $
              29,191,771
              
              $
              15,736,494
              
              $
              14,576,060
              
              $
              3,388,880Overseas
                  RelatedCompanies
              
              
              29,479,350
              
              
              25,848,255
              
              
              11,619,793
              
              
              7,638,598Total
              
              $
              58,671,121
              
              $
              41,584,749
              
              $
              26,195,853
              
              $
              11,027,478
  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.
  27
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 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 which are 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 market and sell the Company’s products 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.
  ***Accounts
        receivable, trade - related parties***
  The
        details of accounts receivable, trade - related parties are as
        follows:
 
 September 30, 2008
              
              December 31, 2007Tianshi Engineering
              
              $
              11,803,348
              
              $
              2,062,333Overseas Related Companies
              
              
              21,857,655
              
              
              12,277,596Allowance for Doubtful Accounts
              
              
              (168,305
              )
              
              (71,700
              )Total
              
              $
              33,492,698
              
              $
              14,268,229
  ***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:
  28
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 December 31,September 30,
                2008
              
              2007
                As
                  AdjustedTianshi
                  Engineering
              
              $
              10,797,979
              
              $
              9,460,811Tianshi
                  Group
              
              
              37,148
              
              
              2,347,489Tianjin
                  Xingda Travel Co., Ltd
              
              
              8,066
              
              
              1,939Shanghai
                  Tianshi Jinquan Investment Co.
              
              
              3,693
              
              
              874Tianshi
                  Pharmaceuticals
              
              
              3,339
              
              
              5,065Shengshi
                  Real Estate Development
              
              
              1,773
              
              
              2,238Beijin
                  Xingda Travel Co., Ltd
              
              
              797
              
              
              5,959Xiongshi
                  Construction
              
              
              -
              
              
              2,062,763Total
              
              $
              10,852,795
              
              $
              13,887,138
 
 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 to the Company.  The
        credit terms provide an interest-free credit term of three months.  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. For the
        nine months ended September 30, 2008 and 2007, the interest income from the
        other receivables - related parties amounted to $0 and $236,714, respectively,
        and $0 and $124,641 for the three months ended September 30, 2008 and 2007,
        respectively.
 
 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.
        In
        addition, during 2006 the Company was owed other receivables-related parties
        in
        the amount of RMB 7,560,000 ($1,033,603) from Tianjin Juchao Commercial and
        Trading Co., Ltd (“Juchao”), a related party owned by Jinyuan Li. On March 31,
        2006, Juchao declared termination of its operations, and all of its rights
        and
        liabilities were transferred to Tianshi Group. This amount was also included
        in
        other receivables – related parties as of December 31, 2007.
  ***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 September 30, 2008 and December 31, 2007, advances
        from
        related party customers amounted to $3.1 million and $1.7 million,
        respectively.
  29
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  ***Other
        payables - related parties***
  The
        details of other payable-related parties are as follows:
 September 30, 2008
              
              December 31, 2007
                As AdjustedTianshi
                  Investment
              
              $
              6,500,000
              
              $
              7,490,136Tianshi
                  Group
              
              
              808,348
              
              
              -Tianshi
                  Germany Co., Ltd
              
              
              109,261
              
              
              109,233Tianyuan
                  Capital Development Co. Ltd. ("Tianyuan Capital")
              
              
              84,359
              
              
              84,359Beijin
                  Xingda Travel Co., Ltd
              
              
              80,234
              
              
              -Tianshi
                  Shanghai Co., Ltd
              
              
              187
              
              
              176Tianshi
                  Administrative Committee of Industrial Park
              
              
              14
              
              
              13Tianshi
                  Engineering
              
              
              -
              
              
              244,980Tianshi
                  Pharmaceuticals
              
              
              -
              
              
              9,308Total
              
              $
              7,582,403
              
              $
              7,938,205
  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
        December 21, 2007, Tianshi Holdings and Tianshi Investment entered 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 the Company by Tianshi Engineering (see
        Note 4).
 
 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.
  ***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.
  30
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 The
        principal of the loan will be paid in ten consecutive semi-annual installments
        of $1,065,000 on the last day of June and December, commencing June 2006
        and
        ending June 31, 2011. The interest on the loan
        is calculated at an annual interest rate of 5% based on the remaining balance
        of
        the principal. The interest accrued amounted to $199,869 and $305,492 for
        the
        nine months ended September 30, 2008 and 2007, respectively, and $67,207
        and
        $94,051 for the three months ended September 30, 2008 and 2007, respectively.
        The interest accrued in each period is paid along with the installment payment
        on the principal. Five installment payments had been made by September 30,
        2008.
 
 The
        loan
        balance at September 30, 2008 and December 31, 2007 consisted of the following:
 
 September 30, 2008
              
              December 31, 2007Note
                  payable to Tianyuan CapitalDevelopment
                  Corp. Ltd., related party
              
              $
              5,332,742
              
              $
              6,397,742Less
                  current portion of long term debt
              
              
              (2,130,000
              )
              
              (2,130,000
              )Total
              
              $
              3,202,742
              
              $
              4,267,742
 
 Total
        principal payments for the next four years on all long-term debt are as follows:
 
 Year EndingDecember 31,
              
              Amount2008
                  (3 months remaining)
              
              $
              1,065,0002009
              
              $
              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 product 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 October 2007 for the 2008 fiscal year.
        Rent
        revenue accrued from these leases amounted to $243,937 and $282,147 for the
        nine
        months ended September 30, 2008 and 2007, respectively, and $83,008 and $94,872
        for the three months ended September 30, 2008 and 2007,
        respectively.
  31
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 ***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 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.  The
        Company entered a new one-year lease agreement with Tianshi Group, effective
        January 1, 2008 covering the same facilities and having identical rent terms.
        For the nine months ended September 30, 2008 and 2007, the Company paid this
        rent at an amount of $460,895 and $432,727, respectively, and $61,263 and
        $112,895 for the three months ended September 30, 2008 and 2007,
        respectively.
 
 ***Other
        Transactions with Tianshi Investments***
 
 On
        December 20, 2007, Tianshi Holdings entered 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 RMB474,674,415
        ($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, Tianshi Holdings 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 due to Biological from Tianshi Engineering in
        the
        principal amount of RMB200,000,000 together with interest accrued;
 
 •  $16,557,914
        was paid by canceling other receivables due to Biological from Tianshi
        Engineering; and
 
 •  $19,096,525
        was paid in cash.
 
 On
        January 14, 2008, Tianshi Holdings and Tianshi Investment entered 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.
  32
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 **Note
        10 – Minority interest and distribution**
 
 The
        roll
        forward of the Minority Interest balance in the balance sheet is shown
        below:
 
 Biological
              
              
              
              Tiens YihaiMinority
              
              
              
              Minority
              
              TotalBiological
              
              Owners
              
              Tiens Yihai
              
              Owners
              
              MinorityUSD
              
              (20%)
              
              USD
              
              (0.60%)
              
              InterestDecember
                  31, 2006
              
              $
              58,499,962
              
              $
              11,699,992
              
              $
              30,555,046
              
              $
              183,331
              
              $
              11,883,323Net
                  income (loss)
              
              
              24,840,180
              
              
              4,968,036
              
              
              (273,217
              )
              
              (1,639
              )
              
              4,966,397Other
                  comprehensive income
              
              
              2,947,667
              
              
              589,533
              
              
              2,019,326
              
              
              12,116
              
              
              601,649Additional
                  paid-in-capital
              
              
              86,381
              
              
              17,276
              
              
              -
              
              
              -
              
              
              17,276Dividend
                  distribution
              
              
              (56,622,912
              )
              
              (11,324,582
              )
              
              -
              
              
              -
              
              
              (11,324,582
              )December
                  31, 2007
              
              $
              29,751,278
              
              $
              5,950,255
              
              $
              32,301,156
              
              $
              193,808
              
              $
              6,144,063Net
                  income (loss)
              
              
              9,892,315
              
              
              1,978,463
              
              
              157,022
              
              
              942
              
              
              1,979,405Other
                  comprehensive Income
              
              
              2,200,990
              
              
              440,197
              
              
              2,167,423
              
              
              13,005
              
              
              453,202September
                  30, 2008
              
              $
              41,844,583
              
              $
              8,368,915
              
              $
              34,625,601
              
              $
              207,755
              
              $
              8,576,670
 
 
 Dividends
        declared by Biological are split pro rata between the shareholders according
        to
        their ownership interest. The payment of the dividends to the shareholders
        may
        occur at different times, resulting in distributions which do not appear
        to be
        reflective of the minority ownership percentages. The table below shows the
        outstanding dividends payable of Biological, as well as the allocation of
        dividends between Tianshi Holdings and the minority shareholder.
 
 Tianshi
              
              MinorityDate
              
              Holdings
              
              Shareholder
              
              TotalsDividends
                  outstanding, December 31, 2006 Balance
              
              $
              45,978,854
              
              $
              238,311
              
              $
              46,217,165Dividends
                  declared
              
              
              45,298,330
              
              
              11,324,582
              
              
              56,622,912Dividends
                  paid
              
              
              (86,747,565
              )
              
              (6,676,102
              )
              
              (93,423,667
              )Accumulated
                  other comprehensive income (loss)
              
              
              3,900,013
              
              
              15,838
              
              
              3,915,851Dividends
                  outstanding, December 31, 2007 Balance
              
              $
              8,429,632
              
              $
              4,902,629
              
              $
              13,332,261Dividends
                  declared
              
              
              -
              
              
              -
              
              
              -Dividends
                  paid
              
              
              (900,000
              )
              
              (5,070,091
              )
              
              (5,970,091
              )Accumulated
                  other comprehensive income (loss)
              
              
              545,398
              
              
              167,462
              
              
              712,860Dividends
                  outstanding, September 30, 2008 Balance
              
              $
              8,075,030
              
              $
              -
              
              $
              8,075,030
  33
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 **Note
        1** **1
        – Accumulated other comprehensive income**
 
 Life
              
              TianshiBiological
              
              Tiens Yihai
              
              Resources
              
              Holdings
              
              TotalBalance
                  as of December 31, 2006
              
              $
              2,109,074
              
              $
              1,727,692
              
              $
              -
              
              $
              1,878,222
              
              $
              5,714,988Increase
                  during the year
              
              
              2,358,134
              
              
              2,007,211
              
              
              -
              
              
              3,900,014
              
              
              8,265,359Balance
                  as of December 31, 2007, as previously reported
              
              $
              4,467,207
              
              $
              3,734,903
              
              $
              -
              
              $
              5,778,236
              
              $
              13,980,346Add
                  adjustment for the acquisition of Life Resources
              
              
              -
              
              
              -
              
              
              1,979,698
              
              
              -
              
              
              1,979,698Balance
                  as of December 31, 2007, restated
              
              $
              4,467,207
              
              $
              3,734,903
              
              $
              1,979,698
              
              $
              5,778,236
              
              $
              15,960,044Increase
                  during the year
              
              
              1,760,793
              
              
              2,154,418
              
              
              3,446,124
              
              
              545,328
              
              
              7,906,663Balance
                  as of September 30, 2008
              
              $
              6,228,000
              
              $
              5,889,321
              
              $
              5,425,822
              
              $
              6,323,564
              
              $
              23,866,707
 
 Accumulated
        other comprehensive income recorded in Biological, Tiens Yihai and Life
        Resources are due to foreign currency translation adjustments. Accumulated
        other
        comprehensive income was recorded in Tianshi Holdings due to the effect of
        foreign exchange rate on dividend receivables from Biological.
 
 **Note
        12 – 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:
  34
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 Revenue
        by Geographic Area:
 
 Nine months ended September 30,
              
              Three months ended September 30,Revenue
              
              2008
              
              2007
              
              2008
              
              2007China
              
              $
              29,191,771
              
              $
              15,736,494
              
              $
              14,576,060
              
              $
              3,388,880Indonesia
              
              
              9,312,896
              
              
              5,885,081
              
              
              5,897,623
              
              
              3,656,943Russia
              
              
              8,331,390
              
              
              3,665,144
              
              
              2,048,133
              
              
              441,829Ukraine
              
              
              2,745,744
              
              
              3,705,653
              
              
              1,084,793
              
              
              358,528Other
                  internationalcountries
              
              
              9,089,320
              
              
              12,592,377
              
              
              2,589,244
              
              
              3,181,298Total
              
              $
              58,671,121
              
              $
              41,584,749
              
              $
              26,195,853
              
              $
              11,027,478
 
 Revenue
        by Product Group:
 
 Nine months ended September 30,
              
              Three months ended September 30,2008
              
              2007
              
              2008
              
              2007Wellness
                  products
              
              $
              53,753,513
              
              $
              37,342,692
              
              $
              24,015,547
              
              $
              9,535,575Dietary
                  supplement
                products
              
              
              4,879,724
              
              
              3,878,449
              
              
              2,180,013
              
              
              1,433,867Personal
                  care products
              
              
              37,884
              
              
              363,608
              
              
              293
              
              
              58,036Total
              
              $
              58,671,121
              
              $
              41,584,749
              
              $
              26,195,853
              
              $
              11,027,478
 
 **Note
        13 - 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.
 
 Prior
        to
        2008, pursuant to the income tax laws of the PRC concerning Foreign Investment
        Enterprises and Foreign Enterprises and various local income tax laws (the
        "Income Tax Law"), Sino-foreign joint venture enterprises generally were
        subject
        to income tax at an effective rate of 33% (30% state income taxes plus 3%
        local
        income taxes) on income as reported in their statutory financial statements
        unless the enterprise is located in specially-designated regions or cities
        for
        which more favorable effective rates apply.
 
 Biological
        is located in Tianjin Wuqing Development Area, a national new technology
        development zone and is subject to the special reduced income tax rate of
        15%.
        Pursuant to the approval of the relevant PRC tax authorities, Biological
        was
        fully exempt from PRC income taxes for two years starting from the year profits
        were first made, followed by a 7.5% reduced tax rate for the next three years.
  35
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 Biological
        started generating taxable profits in the year ended December 31, 2003.
        Effective January 1, 2005, the two-year 100% exemption for income taxes expired
        for Biological and it became subject to income tax at a reduced rate of
        7.5% ,
        which
        expired on January 1, 2008.
 
 Tiens
        Yihai is located in a Special Industry Zone and is subject to a special reduced
        income tax rate of 15%. Pursuant to the approval of the relevant local Chinese
        tax authorities, Tiens Yihai was fully exempt from PRC income taxes for two
        years starting from the first year profits were made, followed by a 7.5%
        reduced
        tax rate for the next three years. In addition, in order to encourage Tiens
        Yihai to do business in the Special Industry Zone, the local Chinese tax
        authorities agreed to refund 50% of the total income tax after the five-year
        tax
        break. As of September 30, 2008, Tiens Yihai was in the developmental stage
        of
        its organization and did not have any operating income.
 
 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 was 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.
 
 Beginning
        January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the existing
        laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
        The new standard EIT rate of 25% will replace the 33% rate currently 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. Biological currently qualifies as a
        high-tech company. However, as there is no detailed regulation regarding
        the
        implementation of the new EIT, in the first three quarters of 2008 Biological
        was required by the local tax authority to prepay income tax at a tax rate
        of
        25%.
 
 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, as there is no detailed regulation
        regarding the implementation of the new EIT, Life Resources was required
        by
        local tax authority to prepay income tax at a tax rate of 25% till its tax
        exemption qualification was approved by the tax authority. The approval is
        expected to be issued in October 2008 and the prepaid income tax in Life
        Resources could be refunded after the approval. The prepaid income tax in
        Life
        Resources of $685,381 is treated as deferred income taxes in the consolidated
        financial statements of the Company.
 
 Provisions
        for income taxes were all current income tax expenses and for the nine months
        ended September 30, 2008 and 2007, were $3,297,438 and $1,610,653, respectively,
        and for the three months ended September 30, 2008 and 2007 were $152,990
        and
        $344,248, respectively.
 
 The
        following table reconciles the U.S. statutory rates to the Company's effective
        tax rate:
  36
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 2008
              
              2007U.S.
                  Statutory rate
              
              
              34.0
              %
              
              
              
              34.0
              %Foreign
                  income not recognized in USA
              
              
              (34.0
              )
              
              
              
              (34.0
              )China
                  income taxes
              
              
              25.0
              
              
              
              
              33.0Effect
                  of reduced tax rate
              
              
              -
              
              
              
              
              (25.5
              )Total
                  provision for income taxes
              
              
              25
              %
              
              
              
              7.5
              %
 
 The
        estimated tax savings due to the reduced tax rate for the nine months ended
        September 30, 2008 and 2007 amounted to $4,983,792 and $5,476,219 respectively.
        The net effect on earnings per share if the income tax had been applied would
        decrease earnings per share for the nine months ended September 30, 2008
        and
        2007 by $0.07 and $0.06, respectively
 
 **Note
        14 – Retirement plan**
 
 Regulations
        in the PRC require the Company to contribute to a defined contribution
        retirement plan for all employees. All Biological 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.
 
 Biological
        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
        $587,156 and $450,680 for the nine months ended September 30, 2008 and 2007,
        respectively, and $207,901 and $152,436 for the three months ended September
        30,
        2008 and 2007, respectively.
 
 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 $58,747 and $44,979 for the nine months ended
        September 30, 2008 and 2007, respectively, and $20,879 and $15,227 for the
        three
        months ended September 30, 2008 and 2007, 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 $306,543 and $245,302
        for
        the nine months ended September 30, 2008 and 2007, respectively, and $113,710
        and $82,942 for the three months ended September 30, 2008 and 2007,
        respectively.
  37





**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”, 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, and personal care
      products. Our operations are conducted from our headquarters in Tianjin,
      People’s Republic of China (“China”) through our 80% owned subsidiary, Tianjin
      Tianshi Biological Development Co. Ltd. (“Biological”) and our 100% owned
      subsidiary, Tianjin Tiens Life Resources Co., Ltd. (“Life Resources”). We sell
      our products to affiliated companies in China and internationally.




Tiens
      Biotech Group (USA), Inc. 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. Tianjin Tianshi Group Co., Ltd.
      (“Tianshi Group”), a Chinese company, owns 51% of Tianshi Engineering. Baolan
      Li, the daughter of our Chairman, President and CEO, Jinyuan Li, owns the
      remaining 49% of Tianshi Engineering. Tianshi Group is 90% owned by Jinyuan
      Li
      and 10% owned by Baolan Li. Tianshi Engineering acquired its 20% interest in
      Biological from Tianjin Tianshi Pharmaceuticals Co., Ltd. (“Tianshi
      Pharmaceuticals”) on February 25, 2008. Tianshi Pharmaceuticals is 87.66% owned
      by Tianshi Group, and 7.29% owned by Baolan Li.


38





On
      December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
      with Tianshi International Investment Group Co., Ltd. (“Tianshi Investment”).
      Jinyuan Li owns 100% of Tianshi Investment. Pursuant to the Sale and Purchase
      Agreement, Tianshi Holdings agreed to buy all of the registered share capital
      of
      Life Resources for $64.2 million. The closing of the transaction was subject
      to
      government approval of transfer of all of the share capital of Life Resources
      to
      Tianshi Holdings. On March 13, 2008, the Chinese government approved the
      transfer and Tianshi Holdings became the 100% shareholder of Life
      Resources. Life
      Resources is currently constructing research and development, manufacturing
      and
      logistic facilities, as well as administrative offices totaling approximately
      420,000 square meters. We intend to move our headquarters to these new
      facilities once they are completed. On August 25, 2008, Life Resources entered
      a
      definitive agreement with the Wuqing Branch Bureau of Tianjin Municipal Land
      and
      Resources and Administrative Bureau (the “Tianjin Government”) and Tianjin Tiens
      Life Science Co., Ltd (“Life Science”) 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 will pay a total of RMB 41,022,061
      (or approximately US$6.0 million) in connection with the zoning changes to
      its
      parcels. As of June 2008, Life Resources replaced Biological in the production
      of semi-finished products and began to produce and sell semi-finished products
      to Tianshi Engineering on the same pricing terms as Biological’s previous sales.
      Biological sells finished goods to Tianshi Engineering.




On
        May
        22, 2008, Biological and Mr. Fulin Zhu established a Chinese company, Dongfeng
        Tianshi Biological Development Co., Ltd. (“Dongfeng Biological”) with the
        intention of using the subsidiary to export our products overseas. Due to
        an
        easing of export restrictions by the Chinese government in the third quarter
        of
        2008, we no longer required Dongfeng Biological and dissolved it on August
        15,
        2008. Dongfeng Biological did not conduct any operations.


We
      research, develop, and manufacture nutrition supplement products, including
      wellness products and dietary supplement products. Our operations are conducted
      from our headquarters in Tianjin, China through our subsidiaries, Biological
      and
      Life Resources. We develop our products at our product research and development
      center, which employs highly qualified professionals in the fields of
      pharmacology, biology, chemistry and fine chemistry. We have developed and
      produce 33 nutrition supplement products, which include wellness products and
      dietary nutrition supplements.





In
      China,
      we sell our products to Tianshi Engineering, an affiliated company. 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 of China, we sell our products
      to
      overseas affiliated companies located in 52 countries that in turn sell them
      to
      independent direct sales distributors.




39


**RESULTS
      OF OPERATIONS FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED
      TO
      THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2007**





On
      December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
      with Tianshi Investment. Pursuant to the Sale and Purchase Agreement, Tianshi
      Holdings agreed to buy all of the registered share capital of Life Resources
      for
      $64.2 million. The closing of the transaction was subject to government approval
      of transfer of all of the share capital of Life Resources to Tianshi Holdings.
      On March 13, 2008, the Chinese government approved the transfer. As Tianshi
      Holdings and Life Resources were under common control by Jinyuan Li before
      the
      combination, the combination was treated for accounting purposes as a pooling
      of
      interests. The balance sheet of the Company at December 31, 2007 and comparative
      interim financial statements for the corresponding periods of the preceding
      fiscal year were adjusted as if Life Resources had been combined with the
      Company before January 1, 2007.





**Three months ended September 30,**
            
            
            
            **Nine months ended September 30,****2008**
            
            **2007**
            
            
            
            **2008**
            
            **2007****Unaudited**
            
            **As Adjusted**
            
            **Change**
            
            **Unaudited**
            
            **As Adjusted**
            
            **Change****Income
                Statement Data**REVENUE
                - RELATED PARTIES
            
            $
            26,195,853
            
            $
            11,027,478
            
            
            137.6%
            
            $
            58,671,121
            
            $
            41,584,749
            
            
            41.1%COST
                OF SALES - RELATED PARTIES
            
            
            6,606,502
            
            
            3,089,791
            
            
            113.8%
            
            
            16,850,267
            
            
            11,979,984
            
            
            40.7%GROSS
                PROFIT
            
            
            19,589,351
            
            
            7,937,687
            
            
            146.8%
            
            
            41,820,854
            
            
            29,604,765
            
            
            41.3%SELLING,
                GENERAL ANDADMINISTRATIVE
                EXPENSES
            
            
            4,562,946
            
            
            3,851,249
            
            
            18.5%
            
            
            12,898,742
            
            
            10,504,831
            
            
            22.8%INCOME
                FROM OPERATIONS
            
            
            15,026,405
            
            
            4,086,438
            
            
            267.7%
            
            
            28,922,112
            
            
            19,099,934
            
            
            51.4%OTHER
                (EXPENSE) INCOME, NET
            
            
            (252,501
            )
            
            152,014
            
            
            -
            
            
            (866,178
            )
            
            1,040,161
            
            
            -INCOME
                BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST
            
            
            14,773,904
            
            
            4,238,451
            
            
            248.6%
            
            
            28,055,934
            
            
            20,140,095
            
            
            39.3%PROVISION
                FOR INCOME TAXES
            
            
            152,990
            
            
            344,248
            
            
            -55.6%
            
            
            3,297,438
            
            
            1,610,653
            
            
            104.7%INCOME
                BEFORE MINORITY INTEREST
            
            
            14,620,914
            
            
            3,894,203
            
            
            275.5%
            
            
            24,758,496
            
            
            18,529,442
            
            
            33.6%MINORITY
                INTEREST
            
            
            92,326
            
            
            848,212
            
            
            -89.1%
            
            
            1,979,405
            
            
            3,970,791
            
            
            -50.2%NET
                INCOME
            
            
            14,528,588
            
            
            3,045,991
            
            
            377.0%
            
            
            22,779,091
            
            
            14,558,651
            
            
            56.5%OTHER
                COMPREHENSIVE INCOME:Foreign
                currency translation adjustment
            
            
            807,035
            
            
            1,927,502
            
            
            -58.1%
            
            
            7,906,663
            
            
            5,700,759
            
            
            38.7%COMPREHENSIVE
                INCOME
            
            $
            15,335,623
            
            $
            4,973,493
            
            
            208.3%
            
            $
            30,685,754
            
            $
            20,259,410
            
            
            51.5%WEIGHTED
                AVERAGE NUMBER OF SHARES
            
            
            71,333,586
            
            
            71,333,586
            
            
            
            
            
            71,333,586
            
            
            71,333,586EARNINGS
                PER SHARE, BASIC AND DILUTED
            
            $
            0.20
            
            $
            0.04
            
            
            
            
            $
            0.32
            
            $
            0.20





Revenue .
      For the
      third quarter of 2008, revenue was $26.2 million, an increase of 137.6% compared
      to $11.0 million for the same period in 2007. For the nine months ended
      September 30, 2008, revenue was $58.7 million, an increase of 41.1% compared
      to
      $41.6 million for the same period in 2007. The breakdown of revenue between
      Chinese and international sales is as follows.


**Three months ended September 30,**
              
              
              
              **Nine months ended September 30,****2008**
              
              **2007**
              
              **Change**
              
              **2008**
              
              **2007**
              
              **Change**China
              
              $
              14,576,060
              
              $
              3,388,880
              
              
              330.1%
              
              $
              29,191,771
              
              $
              15,736,494
              
              
              85.5%International
              
              $
              11,619,793
              
              $
              7,638,598
              
              
              52.1%
              
              $
              29,479,350
              
              $
              25,848,255
              
              
              14.0%Total
              
              $
              26,195,853
              
              $
              11,027,478
              
              
              137.6%
              
              $
              58,671,121
              
              $
              41,584,749
              
              
              41.1%




40




For
      the
      third quarter of 2008, revenue in China was $14.6 million, an increase of 330.1%
      compared to $3.4 million for the same period in 2007. During the third quarter,
      Tianshi Engineering announced plans to increase the prices of its **** products
      in October 2008. We believe that some of the increase in revenue in the third
      quarter was due to customers stocking up on certain products as a result of
      the
      price increase announcement by Tianshi Engineering, therefore, the increase
      in
      sales may not continue through the fourth quarter of 2008. For now, the price
      increase of Tianshi Engineering products will not affect the price at which
      Biological sells to Tianshi Engineering. On
      October 23, 2008, Tianshi Engineering began increasing the prices on 19 of
      our
      products that it distributes. The price increases have ranged from 5% to
      21%.




For
      the
      nine months ended September 30, 2008, revenue in China was $29.2 million, an
      85.5% increase compared to $15.7 million for the same period in 2007. The growth
      in revenue during the third quarter was offset by a 15% decrease in revenue
      in
      China during the first quarter of 2008. During the first quarter of 2008, we
      believe that sales in China were negatively impacted by continued uncertainty
      in
      China regarding the impact of recently enacted direct selling regulations and
      uncertainty regarding the timing of the direct selling license application
      process and approval.




For
      the
      third quarter of 2008, international revenue was $11.6 million, an increase
      of
      52.1% compared to $7.6 million for the same period in 2007. In August 2007,
      China’s Administration of Quality Supervision, Inspection and Quarantine
      (“AQSIQ”) announced an ongoing national campaign in China against unsafe food
      and substandard products. The special campaign against poor product quality
      was
      launched in response to a series of safety scares involving Chinese products
      worldwide. The campaign set 20 detailed goals, including twelve “100 percents”.
      For example, 100 percent of food producers should be licensed; 100 percent
      of
      agricultural wholesale markets in cities must be monitored; 100 percent of
      suppliers of raw materials for exported products should be inspected; and 100
      percent of agricultural products must be free of five types of strong
      pesticides. The campaign, which was originally scheduled to finish at the end
      of
      2007, is currently scheduled to continue throughout 2008.





As
      a
      result of this campaign by the AQSIQ, there has been a general slow-down and
      backlog of export clearances for Chinese food products, and, from August 2007
      through the first quarter of 2008, we experienced significant delays in
      obtaining export clearance for all of the products which we sell to our
      international affiliates. Beginning in the second quarter of 2008, these export
      restrictions were reduced for exports to countries in Africa and Asia, but
      remained in place for exports to countries in Europe and the Americas. During
      the third quarter of 2008, these export restrictions were further
      reduced.





For
      the
      nine months ended September 30, 2008, international revenue was $29.5 million,
      an increase of 14.0% compared to $25.8 million for the same period in 2007.
      This
      increase in international revenue was mainly due to an increase in sales in
      Russia and Indonesia.





Cost
      of Sales .
      Cost of
      sales for the third quarter of 2008 increased to $6.6 million, or by 113.8%,
      compared to $3.1 million for the same period in 2007. This increase was mainly
      due to the increase in revenue for the period. Cost of sales for the period
      increased at a lower rate than revenue primarily due to the increase in sales
      of
      products sold to Tianshi Engineering which have a lower cost compared to
      products sold to overseas companies. For the nine months ended September 30,
      2008, cost of sales was $16.9 million, an increase of 40.7% compared to $12.0
      million for the same period in 2007. This increase was in line with the increase
      in revenue for the period and was due to both the increase in sales and the
      increase in the value of the renminbi against the dollar.




Gross
      Profit .
      Gross
      profit for the third quarter of 2008 was $19.6 million, an increase of 146.8%
      compared to $7.9 million for the same period in 2007. For the nine months ended
      September 30, 2008, gross profit was $41.8 million, an increase of 41.3%
      compared to the same period in 2007. The gross profit margin for the third
      quarter of 2008 was 74.8%, compared to 72.0% for the same period in 2007. This
      increase reflects the increase in proportion of sales with higher gross profit
      margin. For the nine months ended September 30, 2008, the gross profit margin
      was 71.3% compared to 71.2% for the same period in 2007. The increase in gross
      profit margin during the third quarter was offset by a 4.2% decrease during
      the
      first quarter of 2008.


41




Selling,
      general and administrative expenses .
      Selling, general and administrative expenses were $4.6 million for the third
      quarter of 2008, an increase of 18.5% compared to $3.9 million for the same
      period in 2007. The increase was primarily due to increases in salary expense
      and research and development. The selling and administrative expenses as a
      percentage of sales was 17.4% for the third quarter of 2008 compared to 34.9%
      for the same period in 2007. For the nine months ended September 30, 2008,
      selling, general and administrative expenses were $12.9 million, an increase
      of
      22.8% compared to $10.5 million in the same period in 2007. For the nine months
      ended September 30, 2008, selling, general and administrative expenses as a
      percentage of sales was 22.0%, compared to 25.3% for the same period in 2007.
      This decrease reflects the increase in sales.





Other
      income (expense), net .
      Other
      expense, net was $0.3 million for the third quarter of 2008, compared to $0.2
      million of income for the same period in 2007. The difference was mainly due
      to
      interest earned on a RMB200 million (or approximately $29.4 million) loan which
      we made to Tianshi Engineering and which was paid off in December 2007. For
      the
      nine months ended September 30, 2008, other expense, net was $0.9 compared
      to
      $1.0 million income for the same period in 2007. The difference was primarily
      due to a $1.2 million donation we made in June 2008 towards the Sichuan
      earthquake relief efforts.





Provision
      for income taxes .
      Provision for income taxes was $0.2 million for the third quarter of 2008
      compared to $0.3 million for the same period in 2007. For the nine months ended
      September 30, 2008, provision for income taxes was $3.3 million compared to
      $1.6
      million for the same period in 2007. From January 1, 2005 through December
      31,
      2007, Biological was subject to income tax at a reduced rate of 7.5%. Beginning
      on January 1, 2008, the new Enterprise Income Tax (“EIT”) law 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. Biological currently qualifies
      as
      a high-tech company. However, as there are not yet any detailed regulations
      regarding the implementation of the new EIT and in the first three quarters
      of
      2008, Biological was required by the local tax authority to prepay income tax
      at
      a tax rate of 25%. Beginning in June 2008, we transferred production of
      semi-finished products and sale 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 was 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 third quarter of 2008 was
      $14.5 million, an increase of 377% compared to $3.0 million for the same period
      in 2007. For the nine months ended September 30, 2008, net income was $22.8
      million, an increase of 56.5% compared to $14.6 million for the same period
      in
      2007. Beginning in June 2008, we transferred production of semi-finished
      products and sale from Biological, which is 20% owned by an affiliated party,
      to
      Life Resources. Life Resources, which is 100% owned by Tiens and has the
      exemption from PRC income taxes described above. During the three months ended
      September 30, 2008, Life Resources’ sales accounted for approximately 83% of our
      revenue in China, and Biological’s sales accounted for the remaining 17% of our
      revenue in China.





Other
      comprehensive income .
      Other
      comprehensive income decreased to $0.8 million for the third quarter of 2008,
      compared to $1.9 million for the same period in 2007. This decrease was mainly
      due to the slowdown in the rate of increase in the value of the renminbi against
      the dollar for the third quarter of 2008 compared to the same period in 2007.
      For the nine months ended September 30, 2008, other comprehensive income was
      $7.9 million, compared to $5.7 million for the same period in 2007. Other
      comprehensive income represents foreign currency translation adjustments for
      the
      year. Accumulated other comprehensive income was recorded in Biological, Tiens
      Yihai Co. Ltd. (“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. The amounts shown in the Income Statement are net of minority
      interests.





**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.


42





Net
      cash
      provided by operating activities was $4.4 million for the nine months ended
      September 30, 2008, compared to net cash provided by operating activities of
      $10.9 million for the same period of 2007. The decrease reflects an increase
      in
      accounts receivable-related parties by $19.2 million to $33.5 million as of
      September 30, 2008 from $14.3 million as of December 31, 2007. This increase
      was
      primarily due to the increase in revenue during the third quarter of 2008.





As
      of
      September 30, 2008, we had positive working capital of $65.1 million. Cash
      was
      $41.7 million as of September 30, 2008, compared to $54.1 million as of December
      31, 2007.





Net
      cash
      used in investing activities increased by $1.0 million for the nine months
      ended
      September 30, 2008 compared to the same period of 2007. Net cash provided by
      financing activities was $6.3 million for the nine months ended September 30,
      compared to $13.5 million for the same period of 2007. During the first nine
      months of 2008, we received a loan from Tianshi Investment in the amount of
      $6.5
      million relating to Life Resources. During the same period in 2007, a capital
      contribution of $21.0 million was provided to Life Resources by Tianshi
      Investment, its parent company at that time.





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.





We
      estimate that the completion of the Life Resources project will require
      approximately $220 million, including the $64 million already spent to acquire
      all of the registered share capital of Life Resources and $18 million spent
      on
      the project in the first nine months of 2008. We intend to construct the
      facilities in phases over several years, based on available cash and capacity
      needs. Depending on the rate of construction and our cash flow, it is likely
      that we will require additional financing in the future to complete the
      long-term funding requirements of that project. However, we anticipate that
      our
      current operating activities will enable us to meet our anticipated cash
      requirements, including the Life Resources project, for the next twelve
      months.





**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 .




The
      Company sells both semi-finished products and finished products to Tianshi
      Engineering domestically.  Life
      Resources mainly sells semi-finished products and Biological mainly sells
      finished products. Under the provisions of the new EIT law beginning in January
      1, 2008 Life Resources is fully exempt from income taxes for two years while
      Biological is required to pay an income tax at a tax rate of 25%. In order
      to
      take advantage of the new EIT law, the production of semi-finished products
      was
      transferred from Biological to Life Resources. Revenue from the sale of
      semi-finished products was recognized at FOB Tianjin shipping point, when the
      semi-finished products were sold to Tianshi Engineering. Revenue from the sale
      of finished products is recognized only when the related party Chinese
      distributors recognize sales of the Company’s products to unaffiliated third
      parties. Revenues in both cases are net of value added taxes.


43


For
      overseas sales, the Company only sells finished products. The Company recognizes
      revenue from international sales (outside of China) to both affiliated and
      unaffiliated third parties, net of value added 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, no allowance for estimated returns has
      been recorded as of September 30, 2008.




Bad
      debts .




Our
      business operations are conducted primarily in China. During the normal course
      of business, we extend unsecured credit to our customers, all of whom are
      affiliated parties. Management reviews our accounts receivable on a regular
      basis to determine if the bad debt allowance is adequate at each fiscal year
      end. We record a provision for accounts receivable at 0.5% of our outstanding
      accounts receivable balance.




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 will
      be effective in the first quarter of fiscal 2009. Management is evaluating
      the
      impact that this statement will have on our consolidated financial
      statements.





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 a guide on how to report 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
      will be effective in the first quarter of fiscal 2009. Management is evaluating
      the impact that this statement will have on our consolidated financial
      statements.





In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures
      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
      will be effective in the first quarter of fiscal 2009. The Company is evaluating
      the impact that this statement will have on its 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 Company is
      evaluating the impact that this statement will have on its consolidated
      financial statements.


44





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 has 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 will not have a material impact on the Company’s 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.





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
      Company’s 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 to overseas related companies located in 52 countries,
      which in turn sell them to independent direct sales distributors. 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.





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 us.




**September 30, 2008**
            
            **December 31, 2007**Accounts
                receivable, trade - related parties, net of allowance for doubtful
                accounts of $168,305 and $71,700 as of September 30, 2008 and December
                31,
                2007, respectively
            
            $
            33,492,698
            
            $
            14,268,229Other
                receivables - related parties
            
            $
            10,852,795
            
            $
            13,887,138Advances
                from customers - related parties
            
            $
            3,074,501
            
            $
            1,700,838Other
                payables - related parties
            
            $
            7,582,403
            
            $
            7,938,205Current
                portion of long-term debt - related party
            
            $
            2,130,000
            
            $
            2,130,000Long
                term debt - related party
            
            $
            3,202,742
            
            $
            4,267,742




**Revenue
      - Related Parties**





The
      details of revenue-related parties are as follows:


45


**Three months ended September 30,**
              
              **Nine months ended September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Tianshi
                  Engineering
              
              $
              14,576,060
              
              $
              3,388,880
              
              $
              29,191,771
              
              $
              15,736,494Overseas
                  Related Companies
              
              
              11,619,793
              
              
              7,638,598
              
              
              29,479,350
              
              
              25,848,255Total
              
              $
              26,195,853
              
              $
              11,027,478
              
              $
              58,671,121
              
              $
              41,584,749




**Accounts
        Receivable, Trade - Related Parties**
 
 The
        details of accounts receivables, trade-related parties are as
        follows:


**September 30, 2008**
              
              **December 31, 2007**Tianshi
                  Engineering
              
              $
              11,803,348
              
              $
              2,062,333Overseas
                  Related Companies
              
              
              21,857,655
              
              
              12,277,596Allowance
                  for Doubtful Accounts
              
              
              (168,305
              )
              
              (71,700
              )Total
              
              $
              33,492,698
              
              $
              14,268,229




Accounts
        receivables-related parties increased from December 31, 2007 as a result
        of the
        increase in revenue, which was greatest in the third quarter of
        2008.
  **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 details of
        other
        receivables-related parties are as follows:
 **September 30, 2008**
                  
                  **December 31, 2007**Tianshi
                      Engineering
                  
                  $
                  10,797,979
                  
                  $
                  9,460,811Tianshi
                      Group
                  
                  
                  37,148
                  
                  
                  2,347,489Tianjin
                      Xingda Travel Co., Ltd
                  
                  
                  8,066
                  
                  
                  1,939Shanghai
                      Tianshi Jinquan Investment Co.
                  
                  
                  3,693
                  
                  
                  874Tianshi
                      Pharmaceuticals
                  
                  
                  3,339
                  
                  
                  5,065Shengshi
                      Real Estate Development
                  
                  
                  1,773
                  
                  
                  2,238Beijing
                      Xingda Travel Co., Ltd
                  
                  
                  797
                  
                  
                  5,959Xiongshi
                      Construction
                  
                  
                  -
                  
                  
                  2,062,763Total
                  
                  $
                  10,852,795
                  
                  $
                  13,887,138
  Historically,
        Tianshi Engineering remitted payment to us upon sales to third party customers.
        However, in order to support Tianshi Engineering’s marketing efforts in
        anticipation of receiving a direct selling license in China, we have agreed
        to
        allow Tianshi Engineering to defer payment to us. The credit terms provide
        an
        interest-free credit term of three months. Balances not remitted to us within
        90
        days are converted to other receivables - related parties. Beginning on 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.
  We
        and
        Tianshi Group used common meters at our headquarters for electricity and
        water,
        and also used 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. In addition, during 2006 we were
        owed
        other receivables-related parties in the amount of RMB 7,560,000 ($1,033,603)
        from Tianjin Juchao Commercial and Trading Co., Ltd (“Juchao”), a related party
        owned by Jinyuan Li. On March 31, 2006, Juchao declared termination of its
        operations, and all of its rights and liabilities were transferred to Tianshi
        Group. This amount was also included in other receivables - related parties
        as
        of December 31, 2007.
 
 46




**Advances
        from Customers - Related Parties**
 
 Advances
        from related party customers were $3.1 million and $1.7 million as of September
        30, 2008 and December 31, 2007, 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:
 **September 30, 2008**
                
                **December 31, 2007**Tianshi
                    Investment
                
                $
                6,500,000
                
                $
                7,490,136Tianshi
                    Group
                
                
                808,348
                
                
                -Tianshi
                    Germany Co., Ltd
                
                
                109,261
                
                
                109,233Tianyuan
                    Capital Development Co. Ltd.
                
                
                84,359
                
                
                84,359Beijin
                    Xingda Travel Co., Ltd
                
                
                80,234
                
                
                -Tianshi
                    Shanghai Co., Ltd
                
                
                187
                
                
                176Tianshi
                    Administrative Committee of Industrial Park
                
                
                14
                
                
                13Tianshi
                    Pharmaceuticals
                
                
                -
                
                
                9,308Tianshi
                    Engineering
                
                
                -
                
                
                244,980Total
                
                $
                7,582,403
                
                $
                7,938,205
  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
        December 21, 2007, the Company, Tianshi Investment and Life Resources entered
        a
        Loan Agreement, pursuant to which Tianshi Investment loaned $7.5 million
        to Life
        Resources without interest. The Company agreed to repay 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. On March
        13,
        2008, the Chinese government approved the transfer and the Company repaid
        $7.5
        million to Tianshi Investment on March 18, 2008 by canceling $7.5 million
        of
        accounts receivable owed to it by Tianshi Engineering.
 
 On
        January 21, 2008, Life Resources and Tianshi Investment entered into a loan
        agreement pursuant to which Tianshi Investment provided 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 agreed to extend the loan until December 31, 2008.
        Life
        Resources used the loan to increase its registered share capital.
 
 **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.
 
 **Other
        Transactions with Tianshi Engineering**
 
 On
        December 31, 2005, Biological entered into four lease agreements with Tianshi
        Engineering which enabled Tianshi Engineering to share the use of certain
        of
        Biological’s product 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 on October 17, 2007 for the 2008 fiscal
        year.
        Rent revenue from these leases amounted to $243,937 and $282,147 for the
        nine
        months ended September 30, 2008 and 2007, respectively.
  47
 
 **Other
        Transactions with Tianshi Group**
 
 Since
        2003, Biological has leased office space and manufacturing facilities from
        Tianshi Group. The lease provides for an annual rent equal to 1% of our total
        gross revenues. The rent was negotiated by the parties before we acquired
        Tianshi Holdings, and we believe that it is a reasonable rent for the
        facilities. The term of the lease was for five years and expired on December
        31,
        2007. In addition, we are obligated to pay insurance, maintenance and other
        expenses related to the premises. We entered into a new one-year lease agreement
        with Tianshi Group, effective January 1, 2008 covering the same facilities
        and
        having identical rent terms. The total amount paid on this lease for nine
        months
        ended September 30, 2008 and 2007 was $460,895 and $432,727,
        respectively.
 
 **Other
        Transactions**
 
 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
        RMB474,674,415 ($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:
 
 o
              $28,592,743
                  was paid by canceling a loan due to Biological from Tianshi Engineering
                  in
                  the principal amount of RMB200,000,000 together with interest
                  accrued;
 
 o
              $16,557,914
                  was paid by canceling other receivables due to Biological from
                  Tianshi
                  Engineering; and
 
 o
              $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.
 
 On
        August
        25, 2008, Life Resources entered a definitive agreement with the Wuqing Branch
        Bureau of Tianjin Municipal Land and Resources and Administrative Bureau
        (the
“Tianjin Government”) and Tianjin Tiens Life Science Co., Ltd (“Life Science”)
        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 will pay a total of RMB 41,022,061 (or
        approximately US$6.0 million) in connection with the zoning changes to its
        parcels.
 
 **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 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.
  48
  **OFF-BALANCE
        SHEET ARRANGEMENTS**
  We
        have
        no off-balance sheet arrangements.
 
 **ITEM
        3.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
  **EFFECTS
        OF INFLATION**
  We
        are
        subject to commodity price risks arising from price fluctuations in the market
        prices of the various raw materials that comprise our products. Price risks
        are
        managed by each business unit through productivity improvements and
        cost-containment measures. For the time being, management does not believe
        that
        inflation risk is material to our business or our consolidated financial
        position, results of operations or cash flows.
  **EFFECT
        OF FLUCTUATION IN FOREIGN EXCHANGE RATES**
  Our
        operating subsidiary, Biological, is located in China, and buys all of its
        raw
        materials in China and sells our products in China using the renminbi as
        the
        functional currency. Based on Chinese government regulations, all foreign
        currencies under the category of current accounts are allowed to be freely
        exchanged with hard currencies. As of September 30, 2008, the exchange rate
        was
        $1 = RMB 6.85 compared to $1 = RMB 7.31 as of December 31, 2007.
 
 Substantially
        all our revenues and expenses are denominated in the renminbi. However, we
        use
        the dollar for financial reporting purposes. The value of renminbi against
        the
        dollar and other currencies may fluctuate and is affected by, among other
        things, changes in China’s political and economic conditions. As our operations
        are primarily in China, any significant revaluation of the renminbi may
        materially and adversely affect our cash flows, revenues and financial
        condition. For example, to the extent that we need to convert dollars into
        renminbi for our operations, appreciation of this currency against the dollar
        could have a material adverse effect on our business, financial condition
        and
        results of operation. Conversely, if we decide to convert our renminbi into
        dollars for other business purposes and the dollar appreciates against this
        currency, the dollar equivalent of the renminbi would be reduced.
 
 Given
        the
        uncertainty of exchange rate fluctuations, we cannot estimate the effect
        of
        these fluctuations on our future business, product pricing, results of
        operations or financial condition. Currently we have not entered agreements
        or
        purchased instruments to hedge our exchange rate risks, although we may do
        so in
        the future.
 
 **ITEM
        4.**  **CONTROLS
        AND PROCEDURES**
  **Disclosure
        Controls and Procedures**
 
 Under
        the
        supervision and with the participation of management, including our chief
        executive officer and the chief financial officer, we conducted an evaluation
        of
        the effectiveness of the design and operation of our disclosure controls
        and
        procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act
        of
        1934 (“Exchange Act”), as of the end of the period covered by this report (the
“Evaluation Date”). Based on this evaluation, our chief executive officer and
        chief financial officer concluded that as of the Evaluation Date our disclosure
        controls and procedures were effective such that the information required
        to be
        disclosed in our Exchange Act reports is recorded, processed, summarized
        and
        reported within the time periods specified in Securities and Exchange
        Commission’s rules and forms relating to our company, including our consolidated
        subsidiaries, and that such information is accumulated and communicated to
        our
        management, including our chief executive officer and chief financial officer,
        as appropriate, to allow timely decisions regarding required
        disclosure.
  49
 
 **Changes
        in Internal Control Over Financial Reporting**
 
 There
        has
        been no change in our internal control over financial reporting during the
        third
        quarter of 2008 that has materially affected, or is reasonably likely to
        materially affect, our internal control over financial reporting.
 
 **PART
        II - OTHER INFORMATION**
  **ITEM
        1A.**  **RISK
        FACTORS**
  Our
        2007
        Annual Report on Form 10-K includes a detailed discussion of our risk factors.
        The information presented below updates those risk factors and should be
        read in
        conjunction with the risk factors and information disclosed in that Form
        10-K.
 
 **A
        RECENT CAMPAIGN IMPOSED BY THE CHINESE GOVERNMENT AGAINST THE EXPORT OF UNSAFE
        FOOD AND SUBSTANDARD PRODUCTS, IS HINDERING OUR ABILITY TO EXPORT OUR PRODUCTS
        INTERNATIONALLY.**
 
 In
        August
        2007, China’s Administration of Quality Supervision, Inspection and Quarantine
        (“AQSIQ”) announced an ongoing national campaign in China against unsafe food
        and substandard products. The special campaign against poor product quality
        was
        launched in response to a series of safety scares involving Chinese products
        worldwide. The campaign set 20 detailed goals, including twelve “100 percents”.
        For example, 100 percent of food producers should be licensed; 100 percent
        of
        agricultural wholesale markets in cities must be monitored; 100 percent of
        suppliers of raw materials for exported products should be inspected; and
        100
        percent of agricultural products must be free of five types of strong
        pesticides. The campaign, which was originally scheduled to finish at the
        end of
        2007, is currently scheduled to continue throughout 2008.
 
 As
        a
        result of this campaign by the AQSIQ, there has been a general slow-down
        and
        backlog of export clearances for Chinese food products, and from August 2007
        through the first quarter of 2008, we experienced significant delays in
        obtaining export clearance for all of the products which we sell to our
        international affiliates. Beginning in the second quarter of 2008, these
        export
        restrictions were reduced for exports to countries in Africa and Asia, but
        remained in place for exports to countries in Europe and the Americas. During
        the third quarter of 2008, these export restrictions were further reduced.
 
 We
        believe that these restrictions have resulted in some of our international
        affiliates not being able to purchase sufficient quantities of our products
        to
        meet their demand during 2007 and 2008, resulting in a loss of sales. In
        addition, a recent safety scare involving powdered milk produced in China
        may
        result in another increase in export restrictions in the future, which could
        have a negative impact on our revenue.
 
 **UNCERTAINTY
        IN THE DEVELOPMENT OF DIRECT SELLING REGULATIONS MAY ADVERSELY AFFECT SALES
        OF
        OUR PRODUCTS IN CHINA.**
 
 Substantially
        all of our assets are located in China, and approximately 56.0%, 40.5% and
        40.9%
        of our revenues in 2005, 2006 and 2007, respectively, were derived from our
        operations in China. Accordingly, our operations are subject, to a significant
        degree, to Chinese law. In China, we are aiming to expand our market share
        through the branches, chain stores, and affiliated companies of Tianshi
        Engineering, our affiliate who sells our products in China. Because direct
        selling was only recently authorized in China, the regulatory environment
        with
        respect to direct selling in this market remains fluid and the process for
        obtaining the necessary governmental approvals have been interpreted differently
        by different governmental authorities. The direct selling regulations require
        Tianshi Engineering to apply for approval to conduct a direct selling enterprise
        in China.
 
 Tianshi
        Engineering has applied for a direct selling license in a number of provinces
        and must obtain a series of approvals from the Departments of Commerce in
        such
        provinces, as well as the Departments of Commerce in each city and district
        in
        which we plan to operate. Tianshi Engineering is also required to obtain
        the
        approval of the State Ministry of Commerce, which is the national government
        authority overseeing direct selling.
 
 Tianshi
        Engineering has found that it is taking more time than anticipated to work
        through the approval process with the Chinese authorities. These authorities
        have broad discretion in interpreting the regulations and granting necessary
        approvals. A delay in obtaining approvals at one level can delay our ability
        to
        obtain approvals at the next level. The complexity of the approval process
        as
        well as the government’s continued cautious approach as direct selling develops
        in China makes it difficult to predict a timeline for obtaining these approvals.
        If Tianshi Engineering does not receive a direct selling license in China,
        then
        its ability to compete against its competitors who have received such a license
        may be hurt. As a result, Tianshi Engineering may lose distributors who find
        a
        competitor’s direct selling business and compensation model more attractive.
        This could materially decrease the revenue that we receive from sales by
        Tianshi
        Engineering in China.
  50
 
 **ITEM
        6.**  **EXHIBITS**
  Exhibit No.
              
              Description10.1
              
              Supplementary
                  Agreement for Grant Contract of State-Owned Land Use Right dated August
                  25, 2008 by and among Tianjin Tiens Life Resources Co., Ltd., Wuqing
                  Branch Bureau of Tianjin Municipal Land and Resources and Administrative
                  Bureau and Tianjin Tiens Life Science 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
  51
  **SIGNATURES**
  In
        accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
        the
        registrant has caused this report to be signed on its behalf by the undersigned,
        thereunto duly authorized.
  Date:
                  November 14, 2008/s/
                  Jinyuan LiJinyuan
                  LiChief
                  Executive Officer and President(Principal
                  Executive Officer)Date:
                  November 14, 2008/s/
                  Zheng WanZheng
                  WanChief
                  Financial Officer(Principal
                  Accounting Officer)
  52
  **EXHIBIT
        INDEX**
 
 Exhibit No.
              
              Description10.1
              
              Supplementary
                  Agreement for Grant Contract of State-Owned Land Use Right dated
                  August
                  25, 2008 by and among Tianjin Tiens Life Resources Co., Ltd., Wuqing
                  Branch Bureau of Tianjin Municipal Land and Resources and Administrative
                  Bureau and Tianjin Tiens Life Science 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
  53