**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 June 30, 2007.




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


**EXCHANGE
      ACT OF 1934**




For
      the
      transition period from _____ to_____.




*Commission
      File Number: 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, including zip code)




Registrant’s
      Telephone Number: +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 o




Indicate
      by check mark if the registrant is a large accelerated filer, an accelerated
      filer or a non-accelerated filer. See definition of “accelerated filer and
      larger accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




**Large
      Accelerated Filer o Accelerated
      Filer o
      Non-Accelerated Filer x**




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




There
      were 71,333,586 shares of the Company’s common stock outstanding on August 10,
      2007.









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


**INDEX
      TO FORM 10-Q**




PAGE**PART
                I - FINANCIAL INFORMATION**
            3ITEM
                1. FINANCIAL STATEMENTS
            3Consolidated
                Balance Sheets as of June 30, 2007 (Unaudited) and December 31,
                2006
            3Consolidated
                Statements of Income and Other Comprehensive Income for the three
                months
                and six months ended June 30, 2007and 2006  (Unaudited)
            4Consolidated
                Statements of Shareholders’ Equity
            5Consolidated
                Statements of Cash Flows for the six months ended June 30, 2007 and
                2006
                (Unaudited)
            6Notes
                to Consolidated Financial Statements
            7ITEM
                2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                Of OPERATIONS
            28ITEM
                3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK
            37ITEM
                4. CONTROLS AND PROCEDURES
            38**PART
                II - OTHER INFORMATION**
            38ITEM
                1A. RISK FACTORS
            38ITEM
                6. EXHIBITS
            40


2




**PART
      I - FINANCIAL INFORMATION**




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


TIENS
                  BIOTECH GROUP (USA), INC. AND SUBSIDIARIESCONSOLIDATED
                  BALANCE SHEETSAS
                  OF JUNE 30, 2007 AND DECEMBER 31, 2006June
                  30,2007
              
              December
                  31,(Unaudited)
              
              2006ASSETSCURRENT
                  ASSETS:Cash
              
              $
              53,148,380
              
              $
              54,270,065Accounts
                  receivable, trade - related parties, net ofallowance
                  for doubtful accounts of $87,323 and $86,776as
                  of June 30, 2007 and December 31, 2006, respectively
              
              
              17,377,311
              
              
              12,926,670Accounts
                  receivable, trade - third parties
              
              
              18,602
              
              
              18,135Inventories
              
              
              5,369,936
              
              
              6,845,108Other
                  receivables
              
              
              430,696
              
              
              349,905Other
                  receivables - related parties
              
              
              11,798,849
              
              
              8,397,227Employee
                  advances
              
              
              194,121
              
              
              111,121Prepaid
                  expense
              
              
              1,778,211
              
              
              2,135,917Total
                  current assets
              
              
              90,116,106
              
              
              85,054,148PLANT
                  AND EQUIPMENT, net
              
              
              32,999,702
              
              
              30,511,319OTHER
                  ASSETS:Intangible
                  assets, net
              
              
              3,042,240
              
              
              510,183Long-term
                  prepaid expenses
              
              
              4,871,145
              
              
              7,031,348Loans
                  receivable - related party
              
              
              27,027,739
              
              
              25,640,000Total
                  other assets
              
              
              34,941,124
              
              
              33,181,531Total
                  assets
              
              $
              158,056,932
              
              $
              148,746,998LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              3,571,704
              
              $
              4,123,105Advances
                  from customers - related parties
              
              
              1,542,577
              
              
              1,570,120Wages
                  and benefits payable
              
              
              724,388
              
              
              992,068Other
                  taxes payable
              
              
              953,820
              
              
              969,760Other
                  payables
              
              
              428,548
              
              
              500,213Other
                  payables - related parties
              
              
              195,224
              
              
              522,105Dividend
                  payable to minority interest
              
              
              244,446
              
              
              238,311Current
                  portion of long-term debt, related party
              
              
              2,130,000
              
              
              2,130,000Total
                  current liabilities
              
              
              9,790,707
              
              
              11,045,682LONG-TERM
                  DEBT, net of current portion, related party
              
              
              5,332,742
              
              
              6,397,742Total
                  liabilities
              
              
              15,123,449
              
              
              17,443,424MINORITY
                  INTEREST
              
              
              8,554,671
              
              
              11,883,323SHAREHOLDERS'
                  EQUITY:Common
                  stock, $0.001 par value, 260,000,000 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
              
              
              106,992,355
              
              
              95,371,137Accumulated
                  other comprehensive income
              
              
              9,052,331
              
              
              5,714,988Total
                  shareholders' equity
              
              
              134,378,812
              
              
              119,420,251Total
                  liabilities and shareholders' equity
              
              $
              158,056,932
              
              $
              148,746,998


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




3




**TIENS
                BIOTECH GROUP (USA), INC. AND SUBSIDIARIES********CONSOLIDATED
                STATEMENTS OF INCOME AND OTHER COMPREHENSIVE
                INCOME****FOR
                THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2007 AND
                2006****(UNAUDITED)******
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ********
            ****
            **Three
                months ended June 30**
            ****
            **Six
                months ended June 30**
            ********
            ****
            **2007**
            ****
            **2006**
            ****
            **2007**
            ****
            **2006**
            ******REVENUE
                - RELATED PARTIES**
            ****
            **$**
            **14,320,482**
            ****
            **$**
            **14,292,998**
            ****
            **$**
            **30,557,271**
            ****
            **$**
            **31,015,558**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******COST
                OF SALES**
            ****
            ****
            **4,454,594**
            ****
            ****
            **3,842,392**
            ****
            ****
            **8,890,193**
            ****
            ****
            **8,648,688**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******GROSS
                PROFIT**
            ****
            ****
            **9,865,888**
            ****
            ****
            **10,450,606**
            ****
            ****
            **21,667,078**
            ****
            ****
            **22,366,870**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******SELLING,
                GENERAL AND ADMINISTRATIVE EXPENSES**
            ****
            ****
            **3,328,727**
            ****
            ****
            **3,271,232**
            ****
            ****
            **6,551,483**
            ****
            ****
            **5,837,653**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******INCOME
                FROM OPERATIONS**
            ****
            ****
            **6,537,161**
            ****
            ****
            **7,179,374**
            ****
            ****
            **15,115,595**
            ****
            ****
            **16,529,217**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******OTHER
                INCOME (EXPENSE), net**
            ****
            ****
            **446,994**
            ****
            ****
            **1,075**
            ****
            ****
            **894,607**
            ****
            ****
            **(36,646**
            **)******
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******INCOME
                BEFORE PROVISION FOR INCOME TAXES**
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******AND
                MINORITY INTEREST**
            ****
            ****
            **6,984,155**
            ****
            ****
            **7,180,449**
            ****
            ****
            **16,010,202**
            ****
            ****
            **16,492,571**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******PROVISION
                FOR INCOME TAXES**
            ****
            ****
            **555,395**
            ****
            ****
            **576,029**
            ****
            ****
            **1,266,405**
            ****
            ****
            **1,309,560**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******INCOME
                BEFORE MINORITY INTEREST**
            ****
            ****
            **6,428,760**
            ****
            ****
            **6,604,420**
            ****
            ****
            **14,743,797**
            ****
            ****
            **15,183,011**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******MINORITY
                INTEREST**
            ****
            ****
            **1,369,361**
            ****
            ****
            **1,419,943**
            ****
            ****
            **3,122,579**
            ****
            ****
            **3,228,824**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******NET
                INCOME**
            ****
            ****
            **5,059,399**
            ****
            ****
            **5,184,477**
            ****
            ****
            **11,621,218**
            ****
            ****
            **11,954,187**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******OTHER
                COMPREHENSIVE INCOME:**
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******Foreign
                currency translation adjustment**
            ****
            ****
            **2,062,282**
            ****
            ****
            **267,960**
            ****
            ****
            **3,337,343**
            ****
            ****
            **985,787**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******COMPREHENSIVE
                INCOME**
            ****
            **$**
            **7,121,681**
            ****
            **$**
            **5,452,437**
            ****
            **$**
            **14,958,561**
            ****
            **$**
            **12,939,974**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******EARNINGS
                PER SHARE, BASIC AND DILUTED**
            ****
            **$**
            **0.07**
            ****
            **$**
            **0.07**
            ****
            **$**
            **0.16**
            ****
            **$**
            **0.17**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ******WEIGHTED
                AVERAGE NUMBER OF SHARES**
            ****
            ****
            **71,333,586**
            ****
            ****
            **71,333,586**
            ****
            ****
            **71,333,586**
            ****
            ****
            **71,333,586**
            ****


The accompanying
        notes are an integral part of this consolidated statement.
  4
 TIENS
                    BIOTECH GROUP (USA), INC. AND SUBSIDIARIESCONSOLIDATED
                    STATEMENTS OF SHAREHOLDERS' EQUITYAccumulatedotherNumber
                
                Common
                
                Paid-in
                
                Statutory
                
                Retained
                
                comprehensiveof
                    shares
                
                stock
                
                capital
                
                reserves
                
                earnings
                
                income
                    (loss)
                
                TotalBALANCE,
                    December 31, 2005,
                
                
                71,333,586
                
                $
                71,334
                
                $
                8,842,009
                
                $
                9,420,783
                
                $
                69,079,060
                
                $
                2,234,213
                
                $
                89,647,399Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                11,954,187
                
                
                
                
                
                11,954,187Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                985,787
                
                
                985,787BALANCE,
                    June 30, 2006, unaudited
                
                
                71,333,586
                
                
                71,334
                
                
                8,842,009
                
                
                9,420,783
                
                
                81,033,247
                
                
                3,220,000
                
                
                102,587,373Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                14,337,890
                
                
                
                
                
                14,337,890Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,494,988
                
                
                2,494,988BALANCE,
                    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
                
                $
                134,378,812
 The accompanying
          notes are an integral part of this consolidated statement.
  5
 TIENS
                    BIOTECH GROUP (USA), INC. AND SUBSIDIARIESCONSOLIDATED
                    STATEMENTS OF CASH FLOWSFOR
                    SIX MONTHS ENDED JUNE 30, 2007 AND 2006(UNAUDITED)
 2007
                  
                  2006CASH
                      FLOWS FROM OPERATING ACTIVITIES:Net
                      income
                  
                  $
                  11,621,218
                  
                  $
                  11,954,187Adjustments
                      to reconcile net income to cashprovided
                      by operating activities:Minority
                      interest
                  
                  
                  3,122,579
                  
                  
                  3,228,824Depreciation
                  
                  
                  1,423,506
                  
                  
                  1,128,662Amortization
                  
                  
                  52,633
                  
                  
                  40,593Loss
                      on sale of assets
                  
                  
                  -
                  
                  
                  2,869(Increase)
                      decrease in assets:Accounts
                      receivable, trade - related parties
                  
                  
                  (4,061,841
                  )
                  
                  (4,584,214
                  )Inventories
                  
                  
                  1,628,894
                  
                  
                  1,263,874Other
                      receivables
                  
                  
                  (72,471
                  )
                  
                  (208,836
                  )Other
                      receivables - related parties
                  
                  
                  (4,120,698
                  )
                  
                  (2,017,722
                  )Employee
                      advances
                  
                  
                  (79,049
                  )
                  
                  (283,754
                  )Prepaid
                      expense
                  
                  
                  406,509
                  
                  
                  427,445Accrued
                      interest on long-term prepaid expenses
                  
                  
                  (98,413
                  )
                  
                  -Accrued
                      interest on other receivable - related parties
                  
                  
                  (119,686
                  )
                  
                  -Accrued
                      interest on loans receivable - related parties
                  
                  
                  (717,833
                  )
                  
                  -Increase
                      (decrease) in liabilities:Accounts
                      payable
                  
                  
                  (648,583
                  )
                  
                  920,495Advances
                      from customers - related parties
                  
                  
                  (67,035
                  )
                  
                  (542,135
                  )Wages
                      and benefits payable
                  
                  
                  (289,033
                  )
                  
                  (491,145
                  )Other
                      taxes payable
                  
                  
                  (40,345
                  )
                  
                  (503,834
                  )Other
                      payables
                  
                  
                  (83,390
                  )
                  
                  35,163Other
                      payables - related parties
                  
                  
                  (299,389
                  )
                  
                  (351,803
                  )Net
                      cash provided by operating activities
                  
                  
                  7,557,573
                  
                  
                  10,018,669CASH
                      FLOWS FROM INVESTING ACTIVITIES:Increase
                      in short-term investment
                  
                  
                  -
                  
                  
                  (13,638,900
                  )Increase
                      in loans receivable - related parties
                  
                  
                  -
                  
                  
                  (29,166,000
                  )Increase
                      in intangible assets
                  
                  
                  (129,527
                  )
                  
                  (40,956
                  )Proceeds
                      from sales equipment and automobiles
                  
                  
                  -
                  
                  
                  34,891Purchase
                      of equipment and automobiles
                  
                  
                  (3,103,320
                  )
                  
                  (3,881,033
                  )Net
                      cash used in investing activities
                  
                  
                  (3,232,847
                  )
                  
                  (46,691,998
                  )CASH
                      FLOWS FROM FINANCING ACTIVITIES:Payments,
                      net of borrowings on short term notes payable
                  
                  
                  -
                  
                  
                  (1,065,000
                  )Payments
                      to minority interest shareholder
                  
                  
                  (6,676,102
                  )
                  
                  (7,307,666
                  )Net
                      cash used in financing activities
                  
                  
                  (6,676,102
                  )
                  
                  (8,372,666
                  )EFFECT
                      OF EXCHANGE RATE CHANGES ON CASH
                  
                  
                  1,229,691
                  
                  
                  193,713(DECREASE)
                      IN CASH
                  
                  
                  (1,121,685
                  )
                  
                  (44,852,282
                  )CASH,
                      beginning of year
                  
                  
                  54,270,065
                  
                  
                  77,545,991CASH,
                      end of period
                  
                  $
                  53,148,380
                  
                  $
                  32,693,709SUPPLEMENTAL
                      DISCLOSURE OF CASH FLOW INFORMATION:Cash
                      paid for income taxes
                  
                  $
                  1,370,002
                  
                  $
                  1,339,095Cash
                      paid for interest expense
                  
                  $
                  -
                  
                  $
                  264,254
  The accompanying
          notes are an integral part of this consolidated statement.
  6
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
          30,
          2007
 (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. in February 2002, to Strategika, Inc., and in August 2003 to the
          current
          name.
 
 As
          of
          June 30, 2007, Tiens is owned 4.91% by public stockholders, 2.8% by officers
          and
          92.29% by Mr. Jinyuan Li. Tiens owns 100% of Tianshi International Group
          Limited
          (“Tianshi International”). Tianshi International owns 80% of Tianjin Tianshi
          Biological Development Co., Ltd. (“Biological”).
 
 Tianjin
          Tianshi Group Co., Ltd. (“Tianshi Group”) is owned 90% by Mr. Jinyuan Li and 10%
          by his daughter, Ms. Baolan Li. Tianshi Group owns 87.66% of Tianjin Tianshi
          Pharmaceuticals Co., Ltd. (“ Tianshi
          Pharmaceuticals”) and 51%
          of Tianjin Tianshi Biological Engineering Co., Ltd. (“Tianshi Engineering”).
          Tianshi Pharmaceuticals owns 20% of Biological. Ms. Baolan Li owns 49%
          of
          Tianshi Engineering and 7.29% of Tianshi Pharmaceuticals. Tianjin Feishi
          Transportation Co., Ltd. owns 5.05% of Tianshi Pharmaceuticals.
 
 On
          April
          20, 2004, Tianshi International entered a joint venture contract (the "Joint
          Venture Project") with Tianshi Pharmaceuticals to establish Tiens Yihai
          Co. Ltd.
          ("Tiens Yihai"). Tiens Yihai is located in Shanghai, 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. Tiens Yihai is a foreign
          investment joint venture which is incorporated under the laws of PRC. Tiens
          Yihai is classified as a Foreign Investment Enterprise (“FIE”) in the PRC and is
          subject to the FIE laws of the PRC. Tiens Yihai is a Chinese registered
          limited
          liability company with a legal structure similar to a regular corporation
          and a
          limited liability company organized under state laws in the United States
          of
          America. The Articles of Association provide for a 50-year term beginning
          on May
          27, 2004 with registered capital of $200,000,000. Tianshi International
          contributes 99.4% of the registered capital and Tianshi Pharmaceuticals
          contributes the remained 0.6%.
 
 The
          Company through its subsidiaries is primarily engaged in the manufacturing
          of
          nutritional supplement products, including wellness products and dietary
          supplement products, and personal care products. In the People’s Republic of
          China (“PRC”), the Company sells its products to Tianshi Engineering. Tianshi
          Engineering, in turn, sells the products to end-users through its chain
          stores
          and Chinese affiliated companies. Outside the PRC, the Company sells its
          products to an extensive direct sales force of overseas affiliates and
          independent distributors who use the products themselves and/or resell
          them to
          other distributors or consumers. The Company sells to affiliated companies
          located in 63 countries.
 
 7
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
 **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”).
 
 ***The
          reporting entity***
 
 The
          Company’s consolidated financial statements reflect the activities of the
          Company and the following Company subsidiaries:
 Subsidiary
                  
                  Jurisdiction
                      of formaion
                  
                  %
                      OwnershipTianshi
                      International Holdings Group, Ltd.
                  
                  British
                      Virgin Islands
                  
                  100.0%Tianjin
                      Tianshi Biological Development Co., Ltd.
                  
                  P.R.C.
                  
                  80.0%Tiens
                      Yihai Co., Ltd.
                  
                  P.R.C.
                  
                  99.4%
  ***Principles
          of consolidation***
 
 The
          consolidated financial statements include the financial statements of the
          Company and its subsidiaries. All significant inter-company transactions
          and
          balances are eliminated in consolidation.
 
 ***Use
          of estimates***
 
 The
          preparation of financial statements in conformity with U.S. GAAP requires
          management to make estimates and assumptions that affect the amounts reported
          in
          the combined 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's and Tiens
          Yihai's financial records are maintained and the statutory financial statements
          are stated in its local currency, Renminbi (RMB), as their functional currency.
          Results of operations and cash flow are translated at average exchange
          rates
          during the period, 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 accumulated other comprehensive income in the statement of
          shareholders' equity.
 
 Translation
          adjustments amounted to $9,052,331 and $5,714,988 as of June 30, 2007 and
          December 31, 2006, respectively. Asset and liability accounts at June 30,
          2007
          were translated at 7.60 RMB to $1.00 USD as compared to 7.80 RMB at December
          31,
          2006. Equity accounts were stated at their historical rate. The average
          translation rates applied to income statement accounts for the six months
          ended
          June 30, 2007 and 2006 were 7.71 RMB and 8.02 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.
  8
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  Transaction
          gains and losses that arise from exchange rate fluctuations on transactions
          denominated in a currency other than the functional currency are included
          in the
          results of operations as incurred. These amounts are not material to the
          consolidated financial statements.
 
 ***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 June 30, 2007 and December 31, 2006, 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:
 June
                      30, 2007
                  
                  December
                      31, 2006Balance
                      sheet amount
                  
                  Fair
                      value
                  
                  Balance
                      sheet amount
                  
                  Fair
                      valueLong-term
                      debt - related party
                  
                  $
                  (7,462,742
                  )
                  $
                  (7,402,139
                  )
                  $
                  (8,527,742
                  )
                  $
                  (8,527,742
                  )
  ***Cash
          and cash equivalents***
 
 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.
 
 ***Allowances
          for doubtful accounts***
 
 The
          Company's trade accounts receivable are mainly due from related companies.
          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 June 30, 2007 and December 31, 2006 receivables
          outstanding more than 180 days totaled $601,292 and $31,586, respectively.
          The
          Company did not incur any losses on receivables for the periods reported.
          The
          following table represents the changes of allowance of doubtful
          accounts:
  Balance
                      at Beginning of Period
                  
                  Charged
                      to Costs and Expenses
                  
                  Recovery
                  
                  Balance
                      at End of PeriodPeriod
                      ended June 30, 2007Reserves
                      and allowancesdeducted
                      from assets accounts:Allowance
                      for doubtful accounts:
                  
                  $
                  86,776
                  
                  $
                  547
                  
                  $
                  -
                  
                  $
                  87,323Year
                      ended December 31, 2006Reserves
                      and allowancesdeducted
                      from assets accounts:Allowance
                      for doubtful accounts:
                  
                  $
                  206,916
                  
                  $
                  86,776
                  
                  $
                  206,916
                  
                  $
                  86,776
  9
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
 ***Inventories***
 
 Inventories
          are stated at the lower of cost or market, using the first-in, first-out
          basis.
          The Company reviews its inventory annually for possible obsolete goods
          or to
          determine if any reserves are necessary for potential obsolescence.
 
 ***Prepaid
          expense***
 
 Prepaid
          expense consists of advances to suppliers and short-term prepaid expenses.
          The
          Company reviews its advances to suppliers annually for determining whether
          provisions should be recorded.
 
 ***Loans
          receivable - related party***
 
 The
          loans
          receivable - related party represents a $26,300,000 loan that has been
          made to
          Tianshi Engineering and $727,739 in interest has been accrued on the loan
          as of
          June 30, 2007 (see Note 4).
 
 ***Plant
          and equipment, net***
 
 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
                  
                  
                  20
                      yearsMachinery
                      and equipment
                  
                  
                  10
                      yearsComputer,
                      office equipment and furniture
                  
                  
                  5
                      yearsAutomobiles
                  
                  
                  5
                      years
 
 10
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  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 construction is
          completed and the assets are ready for their intended use.
 
 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. Maintenance, repairs and minor renewals
          are
          charged directly to expenses as incurred. Major additions and betterment
          to
          buildings and equipment are capitalized.
 
 Long-term
          assets of the Company are reviewed periodically 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 to determine
          whether
          subsequent events and circumstances warrant revised estimates of useful
          lives.
          As of June 30, 2007, the Company expects these assets to be fully recoverable.
 
 ***Other
          assets***
 
 All
          the
          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."
          The
          Company acquired two land use rights for fifty years from the PRC on December
          1,
          1999 and October 4, 2004 for $673,627 in total. The costs are being amortized
          over ten years, using the straight-line method. Other intangible assets
          include
          patents and trademarks and are amortized over the estimated useful life
          ranging
          from five to ten years.
 
 A
          portion
          of long-term prepaid expense represents a deposit made in October 2004
          with a
          local government agency in the amount of $3.59 million to acquire the land
          use
          right for 1600 mu or 263 acres land located in Shanghai, China. The deposit
          is
          in connection with Tiens Yihai Industrial Park Project (“Tiens Yihai Project”)
          described in Note 10. The land use right is for a term of 50 years and
          as of
          June 30, 2007, the Company had obtained the land use rights for 300 mu
          (50
          acres).
 
 On
          November 10, 2006, the Company signed a Supplemental Agreement for the
          Construction and Development of Tiens Yihai Project (the “Supplemental
          Agreement”) with the same local government agency, agreeing to provide a loan of
          $6,475,000 to the local government agency for the Tiens Yihai Project (see
          Note
          10). Half of the loan, $3,237,500 was funded on November 27, 2006. Since
          this
          loan was related to the acquisition of land use rights, it was also included
          in
          Long-term prepaid expense.
 
 ***Minority
          interest***
 
 Minority
          interest represents the outside shareholder’s 20% ownership of Biological and
          0.6% ownership of Tiens Yihai. Net income is net of minority
          interest.
 
 11
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
 ***Revenue
          recognition***
 
 The
          Company recognizes revenue from sales in China (“domestic sales”), net of
          commissions and taxes, only after the distributor recognizes sales to
          unaffiliated third parties. The Company recognizes revenue from international
          sales (non-Chinese) to both affiliated and unaffiliated third parties,
          net of
          commissions and taxes as goods are shipped and cleared by the international
          customs department.
 
 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 Statement of Financial Accounting Standards
          (“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.
 
 Shipping
          and handling costs related to costs of goods sold are included in selling,
          general and administrative costs and totaled $168,355 and $546,908 for
          the six
          months ended June 30, 2007 and 2006 and $104,682 and $182,019 for the three
          months ended June 30, 2007 and 2006
 
 ***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 cost of $346,294 and $639,542
          for the
          six months ended June 30, 2007 and 2006, respectively, and $200,799 and
          $322,074
          for the three months ended June 30, 2007 and 2006, respectively. These
          costs are
          included in selling, general and administrative expenses in the accompanying
          statements.
 
 ***Income
          taxes***
 
 The
          Company adopted SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
          requires the recognition of deferred income tax liabilities and assets
          for the
          expected future tax consequences of temporary differences between income
          tax
          basis and financial reporting basis of assets and liabilities. Provision
          for
          income taxes consists of taxes currently due plus deferred taxes. There
          are no
          deferred tax amounts at June 30, 2007 and December 31, 2006.
 
 The
          charge for taxation is based on the results for the year as adjusted for
          items
          that are non-assessable or disallowed, using tax rates that have been enacted
          or
          substantively enacted by the balance sheet date.
  12
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  Deferred
          tax is accounted for using the balance sheet liability method in respect
          of
          temporary differences arising from differences between the carrying amount
          of
          assets and liabilities in the financial statements and the corresponding
          tax
          basis used in the computation of assessable tax profit. In principle, deferred
          tax liabilities are recognized for all taxable temporary differences, and
          deferred tax assets are recognized to the extent that management believes
          it
          probable that taxable profit will be available against which deductible
          temporary differences can be used.
 
 Deferred
          tax is calculated at the tax rates that are expected to apply to the period
          when
          the asset is realized or the liability is settled. Deferred tax is charged
          or
          credited in the income statement, except when related items are credited
          or
          charged directly to equity, in which case the deferred tax is also recorded
          in
          equity. Deferred tax assets and liabilities are offset when they relate
          to
          income taxes levied by the same taxation authority and the Company intends
          to
          settle its current tax assets and liabilities on a net basis.
 
 The
          Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
          Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”), as of January
          1, 2007. A tax position is recognized as a benefit only if management considers
          it is “more likely than not” that the tax position would be sustained in a tax
          examination, with a tax examination being presumed to occur. The amount
          recognized is the largest amount of tax benefit that is believed greater
          than
          50% likely of being realized on examination. For tax positions not meeting
          the
“more likely than not” test, no tax benefit is recorded. The adoption had no
          effect on the Company’s financial statements.
 
 ***Earnings
          per share***
 
 The
          Company adopted SFAS No. 128, "Earnings per Share" (“SFAS 128”). SFAS 128
          requires the presentation of earnings per share (“EPS”) as Basic EPS and Diluted
          EPS. Basic EPS excludes dilution and is computed by dividing net income
          (loss)
          attributable to common stockholders by the weighted average number of common
          shares outstanding for the period. There are no differences between Basic
          and
          Diluted EPS for the six months and three months ended June 30, 2007 and
          2006.
 
 ***Other
          comprehensive income***
 
 Other
          comprehensive income represents foreign currency translation adjustment
          for the
          year. The amounts shown in the Consolidated Statements of Income and Other
          Comprehensive Income and Consolidated Statements of Shareholders’ Equity do not
          include other comprehensive income attributed to minority interest.
 
 ***Recently
          issued accounting pronouncements***
 
 In
          June
          2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF
          No.
          06-3, "How Taxes Collected from Customers and Remitted to Governmental
          Authorities Should Be Presented in the Income Statement" ("EITF No. 06-3").
          EITF
          No. 06-3 permits that such taxes to be presented on either a gross basis
          or a
          net basis, as long as that presentation is used consistently. The adoption
          of
          EITF No. 06-3 on January 1, 2007 did not impact the Company’s consolidated
          financial statements. The Company presents the taxes within the scope of
          EITF
          No. 06-3 on a net basis .
  13
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  In
          July
          2006, the FASB issued FIN 48, which the Company adopted on January 1, 2007.
          (See
          Income Taxes in this Note 2.)
 
 In
          September 2006, the FASB issued Statement of Financial Accounting Standards
          No.
          157, "Fair Value Measurement" ("SFAS 157"), which provides enhanced guidance
          for
          using fair value to measure assets and liabilities. This standard also
          responds
          to investors' requests for expanded information about the extent to which
          companies measure assets and liabilities at fair value, the information
          used to
          measure fair value, and the effect of fair value measurements on earnings.
          The
          standard applies whenever other standards require (or permit) assets or
          liabilities to be measured at fair value.
 
 The
          standard does not expand the use of fair value in any new circumstances.
          SFAS
          157 is effective for financial statements issued for fiscal years beginning
          after November 12, 2007, and interim periods within those fiscal years.
          Early
          adoption is permitted. The Company is currently evaluating whether the
          adoption
          of SFAS 157 will have a material effect on its consolidated results of
          operations and financial condition.
 
 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.
 
 ***Reclassifications***
 
 Certain
          prior year amounts have been reclassified to conform to the current year
          presentation. These reclassifications have no effect on net income or cash
          flows.
 
 **Note
          3 - Supplemental disclosure of cash flow information**
 
 In
          February 2007, the Company received part of the land use right that the
          Company
          prepaid in 2004; accordingly, a total of $2,440,969 was reclassified from
          long-term prepaid expenses to intangible asset.
 
 On
          June
          29, 2007, Engineering paid $1,276,441 to Tianyuan Capital Development
          Corporation Ltd. ("Tianyuan Capital") on behalf of the Company, representing
          one
          installment of the loan and the interest on the remaining loan for the
          six
          months ended June 30, 2007 (see note 11). In return, a part of loan made
          to
          Tianshi Engineering by the Company on April 24, 2007 relating to other
          receivables-related parties was offset.
  14
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  The
          right
          of offset existed because:
  1.
              Tianshi
                  Engineering had a determinable outstanding debt payable to the
                  Company;  2.
              The
                  Company had a determinable outstanding debt payable to Tianyuan
                  Capital;  3.
              The
                  Company had the right to offset the two
                  amounts;  4.
              Both
                  the Company and Tianshi Engineering agreed to offset the two amounts;
                  and  5.
              The
                  agreement to offset is enforceable under Chinese contract
                  law. 
 **Note
          4 - Loan receivable - related parties**
 
 During
          the last quarter of 2005, Tianshi Engineering borrowed RMB 200,000,000
          ($26,300,000) from Biological. The purpose of the loan is to help Tianshi
          Engineering strengthen its sales network in China. This amount was repaid
          to
          Biological by December 31, 2005. Then this amount was loaned to Tianshi
          Engineering again on January 1, 2006 with a due date of December 31, 2006.
          The
          loan was originally interest free. On December 22, 2006, the loan was extended
          to June 30, 2007 and was converted to an interest-bearing loan at a rate
          of
          5.58%. The stated interest rate is the current interest rate for the same
          level
          of loan stipulated by the People’s Bank of China. On June 28, 2007, the loan was
          further extended to September 30, 2007. The Company accrued $717,833 of
          interest
          for this loan as of June 30, 2007.
 
 **Note
          5 - Employee advances**
 
 Employee
          advances represent cash advances to various employees of the Company. These
          cash
          advances represent monies advanced to certain employees to pay for various
          expenses and purchases related to the Company's daily operations. Employee
          advances amounted to $194,121 and $111,121 as of June 30, 2007 and December
          31,
          2006, respectively.
 
 **Note
          6 - Inventories**
 
 Inventories
          consist of the following:
 June
                      30,
                  
                  December
                      31,2007
                  
                  2006(Unaudited)Raw
                      materials
                  
                  $
                  1,602,538
                  
                  $
                  2,106,929Packing
                      materials
                  
                  
                  1,091,766
                  
                  
                  1,113,360Miscellaneous
                      supplies
                  
                  
                  96,462
                  
                  
                  377,819Work
                      in process
                  
                  
                  648,830
                  
                  
                  688,007Processing
                      materials
                  
                  
                  425,267
                  
                  
                  369,618Finished
                      goods
                  
                  
                  1,505,073
                  
                  
                  2,189,375Total
                  
                  $
                  5,369,936
                  
                  $
                  6,845,108
  15
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  The
          Company wrote off obsolete goods that amounted to $0 and $59,832 for the
          six
          months ended June 30, 2007 and the year ended December 31, 2006, respectively.
  **Note
          7 - Property, plant and equipment, net**
 
 Plant
          and
          equipment consists of the following:
 June
                      30,
                  
                  December
                      31,2007
                  
                  2006(Unaudited)Buildings
                      and improvements
                  
                  $
                  15,211,481
                  
                  $
                  14,829,748Office
                      facilities
                  
                  
                  339,081
                  
                  
                  323,753Computer
                      equipment and software
                  
                  
                  1,730,742
                  
                  
                  1,622,731Equipment
                  
                  
                  10,662,670
                  
                  
                  9,329,628Vehicles
                  
                  
                  5,321,104
                  
                  
                  5,187,572Construction
                      in progress
                  
                  
                  9,797,667
                  
                  
                  7,629,623Total
                  
                  
                  43,062,745
                  
                  
                  38,923,055Less:
                      accumulated depreciation
                  
                  
                  (10,063,043
                  )
                  
                  (8,411,736
                  )Plant
                      and equipment, net
                  
                  $
                  32,999,702
                  
                  $
                  30,511,319
  Depreciation
          expense for the six months ended June 30, 2007 and 2006 amounted to $1,423,506
          and $1,128,662, respectively.
 
 **Note
          8 - Other receivable - related parties**
 
 Other
          receivable - 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:
 June
                      30,
                  
                  December
                      31,2007
                  
                  2006(Unaudited)Tianjin
                      Tianshi Biological Engineering Co., Ltd
                  
                  $
                  9,089,300
                  
                  $
                  5,592,772Shengshi
                      Real Estate Development
                  
                  
                  1,290
                  
                  
                  1,039Tianjin
                      Tianshi Technical School
                  
                  
                  -
                  
                  
                  46,589JinMao
                      (Group) Holding
                  
                  
                  107,155
                  
                  
                  104,466Shanghai
                      Tianshi Jinquan Investment Co.
                  
                  
                  4,248
                  
                  
                  2,129Tianjin
                      Tianshi Group Co., Ltd
                  
                  
                  2,596,856
                  
                  
                  2,650,232Total
                  
                  $
                  11,798,849
                  
                  $
                  8,397,227
  16
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  See
          Note
          17 for discussion of how these entities are related to Tiens.
 
 **Note
          9 - Intangible assets**
 
 Intangible
          assets consists of the following:
 June
                      30,
                  
                  December
                      31,2007
                  
                  2006(Unaudited)Land
                      use rights
                  
                  $
                  3,131,936
                  
                  $
                  673,627Other
                      intangible assets
                  
                  
                  351,213
                  
                  
                  267,815Less
                      accumulated amortization
                  
                  
                  (440,909
                  )
                  
                  (431,259
                  )Intangible
                      assets, net
                  
                  $
                  3,042,240
                  
                  $
                  510,183
  Amortization
          expense for the six months ended June 30, 2007 and 2006 amounted to $52,633
          and
          $40,593, respectively. Since Tiens Yihai did not conduct any operations,
          no
          amortization expense was incurred for the land use rights that were received
          in
          June, 2007.
 
 **Note
          10 - Investment in Tiens Yihai Co. Ltd.**
 
 On
          April
          20, 2004, Tianshi International entered a Joint Venture Project with Tianshi
          Pharmaceuticals to establish Tiens Yihai. On September 15, 2004, the board
          of
          directors of Tianshi International ratified the Joint Venture Project.
          The total
          amount to be invested in Tiens Yihai was to be $400 million, of which $200
          million was to be registered capital. Tianshi International was to contribute
          $198.8 million, representing approximately 99.4% of the registered capital
          of
          Tiens Yihai, and Tianshi Pharmaceuticals was to contribute $1.2 million
          representing 0.6% of the registered capital.
  17
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  In
          October 2004, the Company paid a 10% deposit totaling of $3.59 million
          to Zhu
          Jia Jiao Industrial Park Economic Development Ltd (representative of the
          local
          government, “Local Government”) to acquire the land use right of 1,600 mu (263
          acres) located in Shanghai. However, in 2005, the Chinese central government
          issued its "Adjustment of Macro-Economic Policy". This policy implemented
          a new
          system of investment and use of state-owned assets, including land. Pursuant
          to
          this policy, local government organizations readjusted and re-allocated
          projects, including investment, construction and reconstruction of state-owned
          resources. As a result, projects and enterprises that had been affected,
          including Tiens Yihai, were required to wait for decisions by state and
          local
          government before proceeding with development.
 
 On
          November 10, 2006, Tianshi International and the Local Government entered
          into
          the Supplemental Agreement pursuant
          to which the parties agreed to the acquisition of land use rights by Tiens
          Yihai, reduced to an 80 acre parcel of land .
          In
          order to proceed with the purchase of the property by Tiens Yihai, Tianshi
          International was required to provide a loan of RMB50,000,000 (approximately
          $6,475,000) to the Local Government for relocation costs for people living
          on
          the property. The loan was to be funded in two installments:
  ·
              The
                  first installment of RMB25,000,000 (approximately $3,237,500) was
                  paid on
                  November 27, 2006.  ·
              The
                  second installment of RMB25,000,000 (approximately $3,237,500)
                  was to be
                  paid after Tiens Yihai obtains a construction engineering license
                  to
                  develop the property. 
 In
          return
          for the loan, Tiens Yihai will receive a tax credit equal to the amount
          of the
          loan, plus interest. The loan accrues interest at a fixed rate of 6.12%,
          which
          was the interest rate stipulated by the People’s Bank of China for a loan of the
          same level on November 27, 2006.
 
 For
          the
          six months ended June 30, 2007, the Company accrued $98,413 of interest
          receivable which was added to the loan and included in long-term prepaid
          expenses. In addition, Tianshi Group, a related party, has agreed to provide
          a
          guarantee on behalf of the Local Government for an additional loan from
          a
          commercial bank of RMB50,000,000 (approximately $6,475,000).
 
 As
          of
          June 30, 2007, Tiens Yihai had obtained the land use right for 300 mu (50
          acres). Therefore, the Company reclassified $2,403,744 to intangible assets
          from
          long-term prepaid expenses. Due to the decrease in the size of the property
          for
          which the Company has received land use rights and continued uncertainty
          relating to the Tiens Yihai project, the Company has decided to suspend
          the
          development of the property as an industrial park and is currently considering
          alternative commercial uses.
 
 A
          total
          of 15%, or approximately $30,000,000, of the registered capital was required
          to
          be contributed by the joint venture partners, within three months of when
          the
          business license was issued. Tianshi International made its required capital
          contribution in the amount of $29,861,853. The remaining registered capital
          was
          required to be contributed by each joint venture partner by May 27, 2007.
          Because of the significant reduction by the Local Government in the number
          of
          acres approved for the Tiens Yihai project, the Company did not make the
          additional capital contribution of $170 million to Tiens Yihai by May 27,
          2007.
          After negotiating with the local government in Shanghai, the deadline of
          the
          payment was extended for one year.
  18
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  Long-term
          prepaid expenses consists of:
 June
                      30,
                  
                  December
                      31,2007
                  
                  2006(Unaudited)Prepaid
                      land use right
                  
                  $
                  1,464,581
                  
                  $
                  3,807,540Loan
                      to Chinese government
                  
                  
                  3,406,564
                  
                  
                  3,223,808Total
                      long term prepayment
                  
                  $
                  4,871,145
                  
                  $
                  7,031,348
  **Note
          11 - Long term debt**
 
 On
          September 10, 2004, Tianshi International signed a loan agreement with
          Tianyuan
          Capital to borrow $10.65 million to fund Tianshi International's contribution
          due to Tiens Yihai. Mr. Jinyuan Li, the president and major shareholder
          of the
          Company owns 100% of Tianyuan Capital, and is a director of Tiens Yihai.
          The
          loan bears 5% interest and matures on June 30, 2011.
  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.
          Interest of $211,441 was paid for the six months ended June 30, 2007. Total
          principal payments for the next five years on all long-term debt are as
          follows:
 June
                      30,
                  
                  December
                      31,2007
                  
                  2006(Unaudited)Note
                      payable to Tianyuan CapitalDevelopment
                      Corp. Ltd., related party
                  
                  $
                  7,462,742
                  
                  $
                  8,527,742Less
                      current portion of long term debt
                  
                  
                  (2,130,000
                  )
                  
                  (2,130,000
                  )Total
                  
                  $
                  5,332,742
                  
                  $
                  6,397,742
 Year
                      EndingJune
                      30,
                  
                  Amount2008
                  
                  $
                  2,130,0002009
                  
                  
                  2,130,0002010
                  
                  
                  2,130,0002011
                  
                  
                  1,072,742Total
                  
                  $
                  7,462,742
  19
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  **Note
          12 - Minority interest and distribution**
 
 The
          rollforward of Minority Interest in the Balance Sheet is shown
          below:
 Biological
                  
                  
                  
                  YihaiMinority
                  
                  
                  
                  Minority
                  
                  TotalBiological
                  
                  Owners
                  
                  Yihai
                  
                  Owners
                  
                  MinorityUSD
                  
                  (20%)
                  
                  (USD)
                  
                  (0.60%)
                  
                  InterestDecember
                      31, 2005
                  
                  $
                  58,769,254
                  
                  $
                  11,753,851
                  
                  $
                  29,198,163
                  
                  $
                  175,189
                  
                  $
                  11,929,040Comprehensive
                      income
                  
                  
                  37,464,431
                  
                  
                  7,492,886
                  
                  
                  1,356,883
                  
                  
                  8,141
                  
                  
                  7,501,027Dividend
                      distribution
                  
                  
                  (37,733,723
                  )
                  
                  (7,546,745
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (7,546,745
                  )December
                      31, 2006
                  
                  $
                  58,499,962
                  
                  $
                  11,699,992
                  
                  $
                  30,555,046
                  
                  $
                  183,330
                  
                  $
                  11,883,322Comprehensive
                      income
                  
                  
                  16,719,841
                  
                  
                  3,343,968
                  
                  
                  580,262
                  
                  
                  3,483
                  
                  
                  3,347,451Dividend
                      distribution
                  
                  
                  (33,380,512
                  )
                  
                  (6,676,102
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (6,676,102
                  )June
                      30, 2007
                  
                  $
                  41,839,291
                  
                  $
                  8,367,858
                  
                  $
                  31,135,308
                  
                  $
                  186,813
                  
                  $
                  8,554,671
  Dividends
          declared 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. As of June 30, 2007,
          minority
          shareholders owned approximately 20% of the Company’s subsidiaries. The table
          below shows dividends outstanding, as well as the allocation of dividends
          between Tianshi International and the minority shareholder.
 
 TIANSHI
                
                MINORITYDate
                
                INTERNATIONAL
                
                SHAREHOLDER
                
                TotalsDividends
                    outstanding, December 31, 2005 Balance
                
                $
                15,885,843
                
                $
                -
                
                $
                15,885,843Dividends
                    declared
                
                
                30,186,978
                
                
                7,546,745
                
                
                37,733,723Dividends
                    paid
                
                
                (1,557,742
                )
                
                (7,308,434
                )
                
                (8,866,176
                )Accumulated
                    Other Comprehensive Income (loss)
                
                
                1,463,775
                
                
                -
                
                
                1,463,775Dividends
                    outstanding, December 31, 2006 Balance
                
                $
                45,978,854
                
                $
                238,311
                
                $
                46,217,165Dividends
                    declared
                
                
                26,704,410
                
                
                6,676,102
                
                
                33,380,512Dividends
                    paid
                
                
                (1,276,441
                )
                
                (6,676,102
                )
                
                (7,952,543
                )Accumulated
                    Other Comprehensive Income (loss)
                
                
                1,677,661
                
                
                6,135
                
                
                1,683,796Dividends
                    outstanding, June 30, 2007 Balance
                
                $
                73,084,484
                
                $
                244,446
                
                $
                73,328,930
 **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 International, was incorporated in the British
          Virgin Islands and is not liable for income taxes.
  20
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  The
          Company's subsidiaries, Biological and Tiens Yihai, are Sino-Foreign Joint
          Ventures incorporated in the PRC. 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 are 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 a Special Economic Zone and is subject to the special reduced
          income tax rate of 15%. Pursuant to the approval of the relevant PRC tax
          authorities, Biological is fully exempt from PRC income taxes for two years
          starting from the year profits are first made, followed by a 7.5% reduced
          tax
          rate for the next three years.
 
 Prior
          to
          the year ended December 31, 2002, Biological suffered operating losses.
          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%.
  Tiens
          Yihai is located in a Special Industry Zone and is subject to the special
          reduced income tax rate of 15%. Pursuant to the approval of the relevant
          local
          Chinese tax authorities, Tiens Yihai is fully exempt from PRC income taxes
          for
          two years starting from the first year profits are made, followed by a
          7.5%
          reduced tax rate for the next three years. In addition, in order to encourage
          Tiens Yihai doing 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 June 30, 2007, Tiens Yihai operations have not yet
          begun.
 
 Beginning
          January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace 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. The two years tax exemption, three years
          50%
          tax reduction tax holiday for production-oriented FIEs will be eliminated.
          The
          Company is currently evaluating the effect of the new EIT law will have
          on its
          financial position.
  Provision
          for income taxes for the six months ended June 30, 2007 and 2006 were
          $1,266,405, and $1,309,560, respectively, and $555,395 and $576,029 for
          the
          three months ended June 30, 2007 and 2006, respectively.
 
 The
          following table reconciles the U.S. statutory rates to the Company's effective
          tax rate at June 30, 2007 and 2006, respectively:
 2007
                  
                  2006U.S.
                      Statutory rate
                  
                  
                  34.0
                  %
                  
                  34.0
                  %Foreign
                      income not recognized in USA
                  
                  
                  (34.0
                  )
                  
                  (34.0
                  )China
                      income taxes
                  
                  
                  33.0
                  
                  
                  33.0China
                      income taxes savings
                  
                  
                  (25.5
                  )
                  
                  (25.5
                  )Total
                      provision for income taxes
                  
                  
                  7.5
                  %
                  
                  7.5
                  %
  21
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  The
          estimated tax savings due to the reduced tax rate for the six months ended
          June
          30, 2007 and 2006 amounted to $4,305,778 and $4,452,503, respectively,
          $1,888,343 and $1,958,498 tax savings for the three months ended June 30,
          2007
          and 2006, respectively. Earnings per share for the six months and three
          months
          ended June 30, 2007 and 2006 would decrease by $0.05 and $0.05, respectively,
          if
          the income tax had been applied.
 
 VAT
          Added Tax
 
 Enterprises
          or individuals who sell products, engage in repair and maintenance or import
          and
          export goods in the PRC are subject to a value added tax in accordance
          with
          Chinese laws. The value added tax standard rate is 17% of the gross sales
          price.
          A credit is available whereby VAT paid on the purchases of semi-finished
          products or raw materials used in the contract and production of the Company's
          finished products can be used to offset the VAT due on sales of the finished
          goods.
 
 VAT
          on
          sales and VAT on purchases amounted to $2,919,236 and $1,031,181, respectively,
          for the six months ended June 30, 2007 and $2,612,622 and $987,866,
          respectively, for the six months ended June 30, 2006. Sales and purchases
          are
          recorded net of VAT collected and paid as the Company acts as an agent
          for the
          government. VAT taxes are not impacted by the income tax holiday.
 
 **Note
          14 - Accumulated Other Comprehensive Income**
 
 
 TianshiBiological
                
                Yihai
                
                International
                
                TotalBalance
                    as of December 31, 2005
                
                $
                1,088,433
                
                $
                732,331
                
                $
                413,449
                
                $
                2,234,213Increase
                    during the year
                
                
                1,020,641
                
                
                995,361
                
                
                1,464,773
                
                
                3,480,775Balance
                    as of December 31, 2006
                
                $
                2,109,074
                
                $
                1,727,692
                
                $
                1,878,222
                
                $
                5,714,988Increase
                    during the year
                
                
                880,672
                
                
                779,009
                
                
                1,677,662
                
                
                3,337,343Balance
                    as of June 30, 2007
                
                $
                2,989,746
                
                $
                2,506,701
                
                $
                3,555,884
                
                $
                9,052,331
 Accumulated
          Other Comprehensive Income incurred in Biological and Tiens Yihai is due
          to
          exchange rate difference. Results of operations 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. Accumulated Other Comprehensive Income incurred
          in
          Tianshi International is due to the effect of foreign exchange rate on
          dividend
          receivable from Biological. Since this income is not realized, it is included
          in
          Accumulated Other Comprehensive Income.
  22
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  **Note
          15 - 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 salary and length of service
          at
          their date of retirement 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
          salaries to the plan. Total pension expense incurred by the Company amounted
          to
          $298,244 and $240,248 for the six months ended June 30, 2007 and 2006,
          respectively.
 
 The
          Company also has an unemployment insurance plan for its employees. The
          plan
          requires each employee to contribute 1% of 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 $29,702 and $23,110 for the six months ended June 30, 2007 and
          2006,
          respectively. All contributions are paid to a PRC insurance company, which
          in
          turn, is responsible for the liability. On January 1, 2002, the Company
          introduced a basic medical insurance plan for its employees. Pursuant to
          the
          medical insurance plan, the Company is required to pay an amount equal
          to 10% of
          its employees' salaries to a PRC insurance company, which amounted to $162,360
          and $131,654 for the six months ended June 30, 2007 and 2006,
          respectively.
 
 **Note
          16 - Statutory reserves**
 
 The
          laws
          and regulations of the People’s Republic of China require that before a
          Sino-foreign cooperative joint venture enterprise distributes profits to
          its
          partners, it must first satisfy all tax liabilities, provide for losses
          in
          previous years, and make allocations, in proportions determined at the
          discretion of the board of directors, after the statutory reserve. The
          statutory
          reserves represent restricted retained earnings and include the surplus
          reserve
          fund, the common welfare fund, and the enterprise fund.
 
 Statutory
          reserve fund
 
 The
          Company is required to transfer 10% of its net income, as determined in
          accordance with the PRC accounting rules and regulations, to a statutory
          surplus
          reserve fund until such reserve balance reaches 50% of the Company’s registered
          capital. During 2005, the Company's statutory reserve fund had reached
          50% of
          the Company's registered capital, therefore, no statutory reserve is required
          thereafter.
 
 The
          surplus reserve fund is non-distributable other than during liquidation
          and can
          be used to fund previous years’ losses, if any, and may be utilized for business
          expansion or converted into share capital by issuing new shares to existing
          shareholders in proportion to their shareholdings, or by increasing the
          par
          value of the shares currently held by them, provided that the remaining
          reserve
          balance after such issue is not less than 25% of the registered
          capital.
  23
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  Common
          welfare fund
 
 The
          Company is required to transfer 5% to 10% of its net income, as determined
          in
          accordance with the PRC accounting rules and regulations, to the statutory
          common welfare fund. This fund can only be utilized on capital items for
          the
          collective benefit of the Company’s employees, such as construction of
          dormitories, cafeteria facilities, and other staff welfare facilities.
          This fund
          is non-distributable other than upon liquidation. The transfer to this
          fund must
          be made before distribution of any dividend to shareholders. For the six
          months
          ended June 30, 2007 and 2006, no transfer was made to this fund.
 
 Enterprise
          fund
 
 The
          enterprise fund may be used to acquire fixed assets or to increase the
          working
          capital for production and operation of the business. No minimum contribution
          is
          required. For the six months ended June 30, 2007 and 2006, no transfer
          was made
          to this fund.
 
 The
          Chinese government restricts distributions of registered capital and the
          additional investment amounts required by the Chinese joint ventures. Approval
          by the Chinese government must be obtained before these amounts can be
          returned
          to the shareholders.
 
 **Note
          17 - Related party transactions**
 
 Transactions
          with Tianshi Engineering
 
 The
          Company sells products to Tianshi Engineering, a related party through
          common
          ownership. The related party distributors in turn market and sell the Company's
          products to independent distributors or end users of the products. The
          related
          party distributors are solely responsible for all marketing and payments
          of
          sales commissions to independent distributors.
 
 Total sales to
          the related party amounted to $12,347,614 and $13,041,025 for the six months
          ended June 30, 2007 and 2006, respectively. This represents 100% of total
          sales
          in China for the years then ended. Historically, Tianshi Engineering remitted
          payment to the Company 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, the Company has agreed to allow Tianshi
          Engineering to retain those collections. Balances not remitted to the Company
          within 90 days are converted to other receivables - related parties. Beginning
          on January 1, 2007, this part of the other receivables - related parties
          become
          interest bearing. The stated interest rate is the interest rate for the
          same
          level of loan stipulated by the People's Bank of China. As of June 30,
          2007, the
          fixed interest rate for the first half of 2007 was 6.3%, and $119,686 of
          interest was accrued.
  24
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  On
          October 1, 2005, Biological loaned Tianshi Engineering RMB 200,000,000
          ($26,300,000). The loan was non-interest bearing, matured on December 31,
          2005
          and was repaid upon maturity. The purpose of the loan was to enable Tianshi
          Engineering to strengthen its sales network in China. On January 1, 2006,
          this
          amount was loaned to Tianshi Engineering again, with a maturity date of
          December
          31, 2006. In order to continue support of Tianshi Engineering's efforts
          in
          China, on
          December 22, 2006, the loan was extended to June 30, 2007 and was converted
          to
          an interest-bearing loan. The interest rate for the loan is the current
          interest
          rate stipulated by the People’s Bank of China for a loan of the same amount or
          5.58% at June 30, 2007. On June 28, 2007, the loan was further extended
          to
          September 30, 2007. All receivables from Tianshi Engineering will be settled
          by
          cash payment. As of June 30, 2007, $717,833 of interest receivable had
          been
          accrued and is included in loans receivable - related party.
 
 Amounts
          due from Tianshi Engineering were as follows:
 June
                      30,
                  
                  December
                      31,2007
                  
                  2006(Unaudited)Accounts
                      receivable - related parties
                  
                  $
                  6,669,768
                  
                  $
                  7,827,372Other
                      receivable - related parties
                  
                  
                  9,089,300
                  
                  
                  5,592,772Loan
                      receivable - related parties
                  
                  
                  27,027,739
                  
                  
                  25,640,000Total
                      receivables from Tianshi Engineering
                  
                  $
                  42,786,807
                  
                  $
                  39,060,144
  Transactions
          with Tianshi Group
 
 On
          June
          30, 2003, the Company entered into an office and facilities lease agreement
          with
          Tianshi Group, a company owned 90% by Jinyuan Li and 10% by Baolan Li.
          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. Rent expense totaled
          $319,832 and $307,606 for the six months ended June 30, 2007 and 2006,
          respectively.
 
 On
          November 10, 2006, Tianshi International signed an agreement with Shanghai
          Zhu Jia Jiao Industrial Park Economic Development Ltd (see Note 10). Tianshi
          Group has also agreed to provide a guarantee on behalf of the local government
          for a loan from a commercial bank of RMB50,000,000.
 
 At
          June
          30, 2007 and December 31, 2006, amounts due from Tianshi Group were $2,596,856
          and $2,650,232, respectively and were included in Other receivable - related
          parties.
 
 Transaction
          with international related party distributors
 
 The
          Company sells products to international distributors. The Company’s CEO Jinyuan
          Li, is one of the owners of these distributors. The distributors market
          and sell
          the Company's products to independent distributors or end users of the
          products.
          Total sales to these related parties international distributors were $18,209,657
          and $17,974,533 for the six months ended June 30, 2007 and 2006. Total
          accounts
          receivable as of June 30, 2007 and December 31, 2006 were $10,707,543 and
          $5,099,298, respectively.
  25
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
  Transaction
          with other related parties
 
 Shengshi
          Real Estate Development is owned by the Company’s CEO Jinyuan Li. Total other
          receivables from Shengshi Real Estate Development as of June 30, 2007 and
          December 31, 2006 amounted to $1,290 and $1,039.
 
 Tianjin
          Tianshi Technical School is owned by Jinyuan Li. Total other receivables
          from
          Tianjin Tianshi Technical School as of June 30, 2007 and December 31, 2006
          amounted to $0 and $46,589, respectively.
  JinMao
          (Group) Holding is owned by Jinyuan Li. Total other receivables from JinMao
          (Group) Holding as of June 30, 2007 and December 31, 2006 were $107,155
          and
          $104,466
 
 Shanghai
          Tianshi Jinquan Investment Co., is owned by Jinyuan Li. Total balances
          due from
          the related party amounted to $4,248 and $2,129 as of June 30, 2007 and
          December
          31, 2006, respectively.
  **Note
          18 - Additional product sales information**
 
 The
          Company has a single operating segment. 100% of the Company's revenues
          were
          generated from related parties for the six months ended June 30, 2007 and
          2006.
          Summarized enterprise-wide financial information concerning the Company’s
          revenues based on geographic area and product groups is shown in the following
          tables:
 
 Revenue
          by Geographic Area:
 Six
                      months ended June 30,
                  
                  Three
                      months ended June 30,2007
                  
                  2006
                  
                  2007
                  
                  2006(Unaudited)
                  
                  (Unaudited)
                  
                  (Unaudited)
                  
                  (Unaudited)China
                  
                  $
                  12,347,614
                  
                  $
                  13,041,025
                  
                  $
                  5,137,313
                  
                  $
                  4,474,408International
                  
                  
                  18,209,657
                  
                  
                  17,974,533
                  
                  
                  9,183,169
                  
                  
                  9,818,590Total
                  
                  $
                  30,557,271
                  
                  $
                  31,015,558
                  
                  $
                  14,320,482
                  
                  $
                  14,292,998
 26
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
            30,
            2007
 (UNAUDITED)
 Revenue
          by Product Group:
 Six
                      months ended June 30,
                  
                  Three
                      months ended June 30,2007
                  
                  2006
                  
                  2007
                  
                  2006(Unaudited)
                  
                  (Unaudited)
                  
                  (Unaudited)
                  
                  (Unaudited)Wellness
                      products
                  
                  $
                  27,807,117
                  
                  $
                  27,487,265
                  
                  $
                  13,080,070
                  
                  $
                  12,051,613Dietry
                      supplement products
                  
                  
                  2,444,582
                  
                  
                  2,264,146
                  
                  
                  1,093,700
                  
                  
                  1,578,456Personal
                      care products
                  
                  
                  305,572
                  
                  
                  1,264,147
                  
                  
                  146,712
                  
                  
                  662,929Total
                  
                  $
                  30,557,271
                  
                  $
                  31,015,558
                  
                  $
                  14,320,482
                  
                  $
                  14,292,998
 27
  **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” and “RMB” are to the Chinese
      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”; (e) whether Tianshi
      Engineering, our affiliate that sells our products in China, obtains a direct
      selling license in China; and (f) whether we are able to find an alternative
      site to develop a new research and development and manufacturing facility.
      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”). We sell our products to
      affiliated companies in China and internationally.




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




Tianjin
      Tianshi Pharmaceuticals Co., Ltd. (“Tianshi Pharmaceuticals”), a Chinese
      company, owns the remaining 20% of Biological. Tianshi Pharmaceuticals is 87.66%
      owned by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”), a Chinese company,
      and 7.29% owned by Baolan Li, the daughter of our Chairman, President and CEO,
      Jinyuan Li. Tianshi Group is 90% owned by Jinyuan Li and 10% owned by Baolan
      Li.
      Tianshi Group also owns 51% of Tianjin Tianshi Biological Engineering Co. Ltd.
      (“Tianshi Engineering”), the entity to which we sell all of our products for
      consumption in China. Baolan Li owns the remaining 49% of Tianshi
      Engineering.




28




Tiens
      Yihai




In
      April
      2004, Tianshi International entered a joint venture contract with Tianshi
      Pharmaceuticals to establish Tiens Yihai Co., Ltd., a Chinese-Foreign Equity
      Joint Venture (“Tiens Yihai”). Tiens Yihai is 99.4% owned by Tianshi
      International and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai is located
      in Shanghai, China, and was established to build a new research and development
      facility which would also produce our nutrition supplement, home care, and
      personal care products. The total amount to be invested in Tiens Yihai was
      to be
      $400 million, of which $200 million was to be registered capital. Tianshi
      International was to contribute $198.8 million, representing approximately
      99.4%
      of the registered capital of Tiens Yihai, and Tianshi Pharmaceuticals was to
      contribute $1.2 million, representing 0.6% of the registered capital of Tiens
      Yihai. Tianshi International was to secure additional financing for the
      remaining $200 million.




A
      total
      of 15%, or approximately $30 million, of the registered capital was required
      to
      be contributed by the joint venture partners, within three months after the
      business license has been issued. Tianshi International has made its required
      capital contribution in the amount of $29,861,853. The remaining registered
      capital amounts were required to be contributed by each joint venture partner
      by
      May 27, 2007. For reasons discussed below, we did not make the additional
      capital contribution of $170 million to Tiens Yihai by May 27, 2007. After
      negotiating with the local government in Shanghai, the deadline for the
      additional capital contribution was extended for one year. We are currently
      negotiating with the local government for a reduction in the registered capital
      requirement.




In
      October 2004, the Company paid a deposit of $3.6 million to Zhu Jia Jiao
      Industrial Park Economic Development Ltd (representative of the local
      government, “Local Government”) to acquire the land use right of 263 acres
      located in Shanghai. However, in 2005, the Chinese central government issued
      its
“Adjustment of Macro-Economic Policy”. This policy implemented a new system of
      investment and use of state-owned assets, including land. Pursuant to this
      policy, local government organizations adjusted and re-allotted projects,
      including investment, construction and reconstruction of state-owned resources.
      As a result, projects and enterprises that had been affected, including Tiens
      Yihai, were required to wait for further decisions by state and local government
      before proceeding with development.




On
      November 10, 2006, Tianshi International and the Local Government
      entered into a supplemental agreement pursuant to which the parties agreed
      to
      the acquisition of land use rights by Tiens Yihai, reduced to an 80 acre parcel
      of land. At that time, it was not clear whether the remaining 183 acres would
      be
      available for purchase in the future. Therefore, the Local Government has agreed
      to refund to Tiens $1.6 million of the original $3.6 million deposit when it
      receives a construction license for the development.




In
      order
      to proceed with the approval process for development of the property by Tiens
      Yihai, Tiens was required to provide a loan of $6.6 million to the Local
      Government for relocation costs for people living on the property. The $6.6
      million loan was to be funded in two installments:




·
            The
                first installment of $3.3 million was paid on November 27,
                2006.




·
            The
                second installment of $3.3 million is to be paid after Tiens Yihai
                obtains
                a construction license to develop the property. The parties have
                agreed to
                allow Tiens to reduce this second installment by the amount of the
                $1.6
                million refund due to it.




In
      return
      for the loan, Tiens Yihai will receive a tax credit in the amount of the
      loan.




In
      March
      2007, we received notice that the Local Government had approved the land use
      rights for 50 acres of the Tiens Yihai property. As a result of the reduction
      in
      the number of acres for which we have received land use rights and continued
      uncertainty relating to the Tiens Yihai project, management has made a decision
      to suspend the development of the project. We are currently reviewing
      alternative commercial uses for the Tiens Yihai site, as well as the possibility
      of selling the land use rights to a third party. If Tiens Yihai does not proceed
      with construction on the Tiens Yihai site or is not able to sell the land use
      rights to a third party, it is not clear whether the Local Government will
      return the $1.6 million it previously agreed to refund or the initial loan
      of
      $3.3 million made in November 2006.




29




We
      are
      currently considering the possible acquisition of an alternative 80 acres site
      located in the Wuqing economic development area of Tianjin, China. The property,
      which is owned by Tianshi Group, is located approximately seven kilometers
      from
      our current corporate headquarters and manufacturing facility.




30




**RESULTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED** **JUNE
      30, 2007 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2006 AND THE SIX MONTHS
      ENDED JUNE 30, 2007 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
      2006**





Three
                months ended June 30
            
            
            
            Six
                months ended June 302007
            
            2006
            
            change
            
            2007
            
            2,006
            
            changeRevenue
                - related parties
            
            $
            14,320,482
            
            $
            14,292,998
            
            
            0.2%
            
            $
            30,557,271
            
            $
            31,015,558
            
            
            -1.5%Cost
                of sales
            
            
            4,454,594
            
            
            3,842,392
            
            
            15.9%
            
            
            8,890,193
            
            
            8,648,688
            
            
            2.8%Gross
                profit
            
            
            9,865,888
            
            
            10,450,606
            
            
            -5.6%
            
            
            21,667,078
            
            
            22,366,870
            
            
            -3.1%Selling,
                general and administrative expenses
            
            
            3,328,727
            
            
            3,271,232
            
            
            1.8%
            
            
            6,551,483
            
            
            5,837,653
            
            
            12.2%Income
                from operations
            
            
            6,537,161
            
            
            7,179,374
            
            
            -8.9%
            
            
            15,115,595
            
            
            16,529,217
            
            
            -8.6%Other
                income (expense), net
            
            
            446,994
            
            
            1,075
            
            
            
            
            
            894,607
            
            
            (36,646
            )Income
                before provision for income taxesand
                minority interest
            
            
            6,984,155
            
            
            7,180,449
            
            
            -2.7%
            
            
            16,010,202
            
            
            16,492,571
            
            
            -2.9%Provision
                for income taxes
            
            
            555,395
            
            
            576,029
            
            
            -3.6%
            
            
            1,266,405
            
            
            1,309,560
            
            
            -3.3%Income
                before minority interest
            
            
            6,428,760
            
            
            6,604,420
            
            
            -2.7%
            
            
            14,743,797
            
            
            15,183,011
            
            
            -2.9%Minority
                interest
            
            
            1,369,361
            
            
            1,419,943
            
            
            -3.6%
            
            
            3,122,579
            
            
            3,228,824
            
            
            -3.3%Net
                income
            
            
            5,059,399
            
            
            5,184,477
            
            
            -2.4%
            
            
            11,621,218
            
            
            11,954,187
            
            
            -2.8%Other
                comprehensive income:foreign
                currency translation adjustment
            
            
            2,062,282
            
            
            267,960
            
            
            
            
            
            3,337,343
            
            
            985,787Comprehensive
                income
            
            $
            7,121,681
            
            $
            5,452,437
            
            
            30.6%
            
            $
            14,958,561
            
            $
            12,939,974
            
            
            15.6%Weighted
                average number of shares
            
            
            71,333,586
            
            
            71,333,586
            
            
            
            
            
            71,333,586
            
            
            71,333,586Earnings
                per share, basic and diluted
            
            $
            0.07
            
            $
            0.07
            
            
            
            
            $
            0.16
            
            $
            0.17Gross
                profit margin
            
            
            68.9%
            
            
            73.1%
            
            
            
            
            
            70.9%
            
            
            72.1%Selling,
                general and administrative expenses as a percentage of
                sales
            
            
            23.2%
            
            
            22.9%
            
            
            
            
            
            21.4%
            
            
            18.8%Net
                profit margin
            
            
            35.3%
            
            
            36.3%
            
            
            
            
            
            38.0%
            
            
            38.5%


31




Revenue .
      For the
      second quarter of 2007 revenue remained flat at $14.3 compared to the same
      period in 2006. Revenue for the six months ended June 30, 2007 was $30.6 million
      compared to $31.0 million for the same period in 2006, a decrease of 1.5%.
      The
      breakdown of revenue between Chinese and international sales is as
      follows.




Three
                months ended June 30,
            
            
            
            Six
                months ended June 30,2007
            
            2006
            
            Change
            
            2007
            
            2006
            
            ChangeChina
            
            $
            5,137,313
            
            $
            4,474,408
            
            
            14.8%
            
            $
            12,347,614
            
            $
            13,041,025
            
            
            -5.3%International
            
            $
            9,183,169
            
            $
            9,818,590
            
            
            -6.5%
            
            $
            18,209,657
            
            $
            17,974,533
            
            
            1.3%Total
            
            $
            14,320,482
            
            $
            14,292,998
            
            
            0.2%
            
            $
            30,557,271
            
            $
            31,015,558
            
            
            -1.5%




For
      the
      second quarter of 2007, revenue in China was $5.1 million, an increase of 14.8%
      compared to the same period in 2006.




In
      order
      to qualify for a direct selling license in China, Tianshi Engineering, our
      related party customer in China, is required to manufacture part of the products
      that it sells in China. As a result, in 2006, we began to sell semi-finished
      products to Tianshi Engineering, which jointly shares with us licenses to
      produce, manufacture and sell the products. During the first quarter of 2006,
      we
      still had significant amounts of finished products in inventory. The
      semi-finished products have lower sales prices than the finished products we
      had
      previously sold to Tianshi Engineering. By the second quarter of 2006, most
      of
      the finished products in inventory had been sold. Therefore, the increase
      between the second quarters of 2007 and 2006 reflects a growth in sales of
      our
      products in China on the basis of comparing sales of semi-finished products
      in
      the second quarters of both 2006 and 2007. The increase in the strength of
      the
      renminbi against the dollar accounted for 43% of the $662,905 increase in
      revenue in the second quarter of 2007 compared to the same period in
      2006.




For
      the
      six months ended June 30, 2007, revenue in China was $12.3 million, a decrease
      of 5.3% compared to the first half of 2006. We believe that sales to China
      have
      been negatively impacted by the following factors:




·
            continued
                consumer 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;
                and




·
            increased
                government and media scrutiny on the direct selling industry, particularly
                following last year’s publication of the new direct selling
                regulations.




The
      application of Tianshi Engineering for a direct selling license in China is
      still pending.




For
      the
      second quarter of 2007, international revenue was $9.2 million, a decrease
      of
      6.5% compared to the same period in 2006. The decrease was primarily due to
      a
      decrease in sales in Africa. For the six months ended June 30, 2007,
      international revenue was $18.2 million, an increase of 1.3% compared to the
      same period in 2007.




Cost
      of Sales .
      Cost of
      sales for the second quarter of 2007 increased to $4.5 million, or by 15.9%,
      compared to $3.8 million for the same period in 2006. This increase was
      primarily due to an increase in the strength of the renminbi against the dollar.
      Cost of sales for the six months ended June 30, 2007 was $8.9 million, compared
      to $8.6 million for the same period in 2006.




Gross
      Profit .
      Gross
      profit for the second quarter of 2007 was $9.9 million compared to $10.5 million
      for the same period in 2006. The gross profit margin for the second quarter
      of
      2007 was 68.9%, compared to 73.1% for the same period in 2006. Gross profit
      for
      the six months ended June 30, 2007 was $21.7 million, compared to $22.4 million
      for the same period in 2006. The gross profit margin for the six months ended
      June 30, 2007 was 70.9%, compared to 72.1% for the same period in 2006. Our
      gross profit margin is lower for semi-finished products than for the finished
      products that we were still selling during the first quarter of
      2006.




Selling,
      general and administrative expenses .
      Selling, general and administrative expenses remained flat at $3.3 million
      for
      the second quarter of 2007. Increases in salary and depreciation expenses were
      offset by decreases in research in development expenses. The selling and
      administrative expense as a percentage of sales was 23.2% for the second quarter
      of 2007 compared to 22.9% for the same period in 2006. Selling, general and
      administrative expenses was $6.6 million for the six months ended June 30,
      2007,
      compared to $5.8 million for the same period in 2006, an increase of 12.2%
      The
      increase was primarily due to an increase in salary and depreciation expenses.
      The selling and administrative expense as a percentage of sales was 21.4% for
      the second quarter of 2007 compared to 18.8% for the same period in
      2006.




32




Other
      income (expense), net .
      Other
      income (expense), net was $0.4 million of income for the second quarter of
      2007,
      compared to $1,075 of expense for the same period in 2006. The income was
      primarily due to interest on our $26.3 million loan to Tianshi Engineering
      and
      interest from other receivables-related party. Beginning on January 1, 2007
      we
      implemented a new accounting policy where accounts receivable-related parties
      older than 90 days would be transferred to other receivables-related party
      and
      accrue interest. Other income (expense), net was $0.9 million of income for
      the
      six months ended June 30, 2007 compared to $36,646 of expense for the same
      period in 2006.




Net
      income .
      As a
      result of the foregoing factors, net income for the second quarter of 2007
      was
      $5.1 million, a decrease of 2.4% compared to $5.2 million for the same period
      in
      2006. Net income for the six months ended June 30, 2007 was $11.6 million a
      decrease of 2.8% compared to $12.0 million for the same period in
      2006.




**LIQUIDITY
      AND CAPITAL RESOURCES**




Our
      principal source of funds historically has been cash flows from operations.
      Inventories as of June 30, 2007 and December 31, 2006 were $5.4 million and
      $6.8
      million, respectively. The decrease was mainly due to a decrease in raw
      materials and finished goods. Because of the week-long Chinese New Year holiday
      in February of this year, during which our operations were closed, we kept
      more
      inventories at the end of 2006 to make sure that there would be enough materials
      and finished goods in the first quarter of 2007.




**Cash
      Flows**




Net
      cash
      provided by operating activities decreased by $2.4 million to $7.6 million
      for
      the six months ended June 30, 2007, compared to the same period in 2006. This
      difference was primarily due to an increase in other receivables-related party.




Net
      cash
      used in investing activities in the six months ended June 30, 2007 decreased
      by
      $43.5 million compared to the same period in 2006. In the first six months
      of
      2006, we made a $26.3 million loan to Tianshi Engineering, a $4.4 million loan
      to Tianyuan Capital Development Corp. Ltd. (“Tianyuan Capital”) and invested in
      a short-term financial product during the first two quarters of
      2006.




Net
      cash
      used in financing activities in the six months ended June 30, 2007 decreased
      by
      $1.7 million for the six months ended June 30, 2007, which reflects a smaller
      dividend, $6.7 million compared to $7.3 million, paid to the minority
      shareholder of Biological in the second quarter of 2007 and 2006,
      respectively.




**Capital
      Resources**




As
      of
      June 30, 2007 and December 31, 2006, we had cash of $53.1 million and $54.3,
      respectively.  Approximately 64% of the cash was held in the bank account of Biological, 28%
      in
      the bank account of Tiens Yihai, and 8% in the bank account of Tianshi
      International.




Going
      forward, our primary requirements for cash consist of:




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




·
            continued
                promotion of networking sales
                activities;




·
            the
                development costs of new products;
                and




33




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




We
      anticipate that our current operating activities will enable us to meet our
      anticipated cash requirements for the next 12 months. While we have suspended
      the construction of our Tiens Yihai research, development and manufacturing
      facility, we are considering the possibility of using an alternate development
      site. If we proceed with the acquisition and construction of an alternative
      site, we still may require additional financing to fund that
      project.




**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 recognizes revenue from domestic sales by distributors in China, net
      of
      sales commissions and taxes, only after the related Chinese distributor
      recognizes sales of the Company’s products to unaffiliated third parties. The
      Company recognizes revenue from international sales (non-Chinese) to both
      affiliated and unaffiliated third parties, net of commissions and taxes, as
      goods are shipped and clear review by the international customs
      department.




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 Statement of Financial Accounting Standards
      (“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.




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 in accordance with generally accepted accounting
      principles in China.




Inventories .




We
      record
      reserves against our inventory to provide for estimated obsolete or unsalable
      inventory based on assumptions about future demand for our products and market
      conditions. If future demand and market conditions are less favorable than
      management’s assumptions, additional reserves could be required. Likewise,
      favorable future demand and market conditions could positively impact future
      operating results.




**New
      Accounting Pronouncements**




The
      Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
      Taxes - an Interpretation of FASB Statement No. 109” (“FIN 48”), as of January
      1, 2007. Under FIN 48, a tax position is recognized as a benefit only if
      management believes it is “more likely than not” that the tax position would be
      sustained in a tax examination, with a tax examination being presumed to occur.
      The amount recognized is the largest amount of tax benefit that is believed
      greater than 50% likely of being realized on examination. For tax positions
      not
      meeting the “more likely than not” test, no tax benefit is recorded. The
      adoption had no affect on the Company’s financial statements.




34




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.




**CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




We
      market
      all of our products through various domestic and international business entities
      that are related to our company through common ownership. Related party sales
      amounted to 100% of our total consolidated revenue, which was $14.3 million
      for
      the three months ended June 30, 2007.




In
      China,
      we sell our products to Tianshi Engineering, an affiliated Chinese company.
      Tianshi Engineering, in turn, sells the products to end-users through its chain
      stores and Chinese affiliated companies. Our strategy in China is to expand
      our
      market share as Engineering and its Chinese affiliated companies open additional
      branches and chain stores. Tianshi Engineering had a total of 105 branches
      as of
      June 30, 2007. Prior to 2006, Biological sold all of its products to Tianshi
      Engineering as finished products 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 Biological became part of a U.S. public company, and we believe
      that it is a reasonable sales price for us to receive. Tianshi Engineering
      then
      sells the products to purchasers through individual distributors in its
      representative offices or through its affiliates. Through this process, the
      commission to those individual distributors is 52% of the Chinese market price;
      while the representative offices or affiliates incur 3-6% of the Chinese market
      price as their operation expenses and Tianshi Engineering retains 17-20% as
      expenses and profits. This is summarized as follows:




Biological
                (Costs, expenses and profit)
            
            
            25%Tianshi
                Engineering (expenses and profit)
            
            
            17-20%Tianshi
                Engineering’s Representative Offices or Affiliates
            
            
            3-6%Individual
                Distributors’ Commissions
            
            
            52%Chinese
                Market Price
            
            
            100%




During
      2006, we applied the same pricing formula to our finished products which were
      sold to Tianshi Engineering from our inventory. At the beginning of 2006, we
      also began selling semi-finished products to Tianshi Engineering. In order
      to
      qualify for a direct selling license in China, Tianshi Engineering is required
      to manufacture part of the products that it sells in China. As a result, we
      began to sell semi-finished products to Tianshi Engineering, which jointly
      shares with us licenses to produce, manufacture and sell the products. 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, this
      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 is to try to maintain the Company’s gross margins on semi-finished goods
      at a similar level to historical gross margins for finished goods.




Internationally,
      our strategy is to develop a strong direct sales force through our international
      affiliated companies. Currently the United States is not a significant part
      of
      our business. We sell our products to an extensive direct sales force of
      overseas affiliates and independent distributors who use the products themselves
      and/or resell them to other distributors or consumers. We sell to affiliated
      companies located in 63 countries, including Indonesia, Russia, Ukraine,
      Nigeria, South Africa, Kazakhstan, Peru, Greece, Kenya and Vietnam.




35




As
      operation costs vary from country to country, international market prices vary
      accordingly. We sell our products to overseas affiliates at the FOB (destination
      port) price, which consists of 25% of the Chinese retail price, plus customs
      duty, value-added tax and other miscellaneous transportation cost. The
      individual distributors of overseas affiliates sell the products to end-users
      for commissions equal to 52.5% of the respective Chinese retail prices. The
      overseas affiliates mark up the products to cover their expenses and realize
      profits of approximately 10%.




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 table
      is
      provided to facilitate your understanding of the relationships between related
      parties and us and their transactions with us in 2006 and the three months
      ended
      June 30, 2007.




As
                ofJune
                30, 2007
            
            December
                31, 2006Accounts
                receivable, trade - related parties,net
                of allowance for doubtful accounts of$87,323
                and $86,776 as of June 30, 2007and
                December 31, 2006, respectively
            
            $
            17,377,311
            
            $
            12,926,670Other
                receivables - related parties
            
            $
            11,798,849
            
            $
            8,397,227Loans
                receivable - related parties
            
            $
            27,027,739
            
            $
            25,640,000Advances
                from customers - related parties
            
            $
            1,542,577
            
            $
            1,570,120Other
                payables - related parties
            
            $
            195,224
            
            $
            522,105Current
                portion of long-term debt-related party
            
            $
            2,130,000
            
            $
            2,130,000Long-term
                debt - related party
            
            $
            5,332,742
            
            $
            6,397,742




**Accounts
      receivable, trade - related parties** .
      Accounts receivable, trade - related parties increased by $4.5 million from
      December 31, 2006 to June 30, 2007. 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 retain
      those collections. Balances not remitted to us within 90 days are converted
      to
      other receivables - related parties.




**Other
      receivables - related parties** .
      Other
      receivables - related parties was $11.8 million as of June 30, 2007 and $8.4
      million as of December 31, 2006. On April 24, 2007, we entered into a Term
      Loan
      Agreement with Tianshi Engineering. Pursuant to that agreement, beginning on
      April 1, 2007, $4.8 million of other receivables - related parties, which
      originated from Tianshi Engineering as accounts receivable, became interest
      bearing. The loan was due June 30, 2007 and the stated interest rate was 5.67%,
      the interest rate for the same level of loan stipulated by the People’s Bank of
      China. The loan was paid off on June 30, 2007.




**Loans
      receivable - related parties** .
      Loans
      receivable to related parties were $27.0 million and $25.6 million as of June
      30, 2007 and December 31, 2006, respectively. On October 1, 2005, Biological
      loaned Tianshi Engineering $26.3 million. The loan was non-interest bearing,
      matured on December 31, 2005 and was repaid upon maturity. The purpose of the
      loans was to enable Tianshi Engineering to strengthen its sales network in
      China. On January 1, 2006, this amount was loaned to Tianshi Engineering again,
      with a maturity date of December 31, 2006. On December 22, 2006, the loan was
      extended to June 30, 2007 and was converted to an interest-bearing loan. On
      June
      28, 2007 the loan was extended to September 30, 2007. The interest rate for
      the
      loan is the current interest rate for the same level of loan stipulated by
      the
      People’s Bank of China. The $1.4 million of increase was due to change in
      foreign currency exchange rate and $727,739 of interest accrued on the
      loan.




**Long-term
      debt - related party.** Long-term debt -related party was $5.3 million as of June 30, 2007 and $6.4
      million as of December 31, 2006. In 2004, Tianshi International entered a term
      loan agreement with Tianyuan Capital pursuant to which Tianyuan Capital agreed
      to lend $10.65 million in the aggregate to Tianshi International, at an interest
      rate of 5% per year, with interest payable on June 30 and December 31,
      commencing December 31, 2004. Tianshi International must repay the loan in
      ten
      consecutive semi-annual installments of $1,065,000 commencing June 30, 2006
      and
      ending June 30, 2011. Tianshi International used the loan proceeds in Tiens
      Yihai. Mr. Jinyuan Li owns 100% of Tianyuan Capital. As of June 30, 2007, we
      had
      paid $211,441 towards this loan.




36




**Advances
      from customers - related parties** .
      Advances from related party customers were $1.5 million as of June 30, 2007
      compared to $1.6 million as of December 31, 2006. Advances from customers
      reflect the prepayment by certain of our customers to insure that they can
      continue to obtain enough of our products to meet their demand.




**Other
      payables - related party** .
      Other
      payables due to related parties as of June 30, 2007 and December 31, 2006,
      were
      $0.2 million and $0.5 million, respectively. These amounts arose from various
      operational transactions incurred with related parties.




**Transactions
      with Tianshi Group**




Since
      2003, Biological has leased office space and manufacturing facilities from
      Tianshi Group. The lease expires at the end of 2007 and requires annual rent
      at
      1% of our total gross revenues. The rent was negotiated by the parties prior
      to
      entering into the agreement, before we acquired Tianshi International, and
      we
      believe that it is a reasonable rent for the facilities. The term of this
      agreement is for five years commencing on January 1, 2003. In addition, we
      are
      obligated to pay insurance, maintenance and other expenses related to the
      premises. The total amount paid on this lease amounted to $319,832 for the
      six
      months ended June 30, 2007.




**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 it, or at all.




**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. On July 21, 2005, the Chinese government
      approved an increase in the valuation of renminbi against the dollar by 2%
      to $1
      = RMB8.11. As of June 30, 2007, the exchange rate was $1 = RMB 7.6.




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.




37




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**




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 Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934, 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 as of the Evaluation Date that our disclosure
      controls and procedures were effective such that the material information
      required to be included in our Securities and Exchange Commission (“SEC”)
      reports is recorded, processed, summarized and reported within the time periods
      specified in SEC rules and forms relating to our company, including our
      consolidating subsidiaries, and was made known to them by others within those
      entities, particularly during the period when this report was being
      prepared.




Additionally,
      there were no significant changes in our internal controls or in other factors
      that could significantly affect these controls subsequent to the Evaluation
      Date. We have not identified any significant deficiencies or material weaknesses
      in our internal controls, and therefore no corrective actions were
      taken.




**PART
      II - OTHER INFORMATION**




**ITEM
      1A.** **RISK
      FACTORS**




Our
      2006
      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.




**WE
      MAY NOT BE REFUNDED MONIES WE HAVE PAID FOR THE TIENS YIHAI PROPERTY AND WE
      MAY
      BE REQUIRED TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS TO TIENS
      YIHAI**




In
      April
      2004, Tianshi International entered a joint venture contract with Tianshi
      Pharmaceuticals to establish Tiens Yihai. The total amount to be invested in
      Tiens Yihai was to be $400 million, of which $200 million was to be registered
      capital. Tianshi International was to contribute $198.8 million, representing
      approximately 99.4% of the registered capital of Tiens Yihai, and Tianshi
      Pharmaceuticals was to contribute $1.2 million, representing 0.6% of the
      registered capital of Tiens Yihai. Tianshi International was to secure
      additional financing for the remaining $200 million.




A
      total
      of 15%, or approximately $30 million, of the registered capital was required
      to
      be contributed by the joint venture partners, within three months after the
      business license has been issued. Tianshi International has made its required
      capital contribution in the amount of $29,861,853. The remaining registered
      capital amounts were required to be contributed by each joint venture partner
      by
      May 27, 2007. For reasons discussed below, we did not make the additional
      capital contribution of $170 million to Tiens Yihai by May 27, 2007. After
      negotiating with Zhu Jia Jiao Industrial Park Economic Development Ltd.
      (representative of the local government, “Local Government”), the deadline for
      the additional capital contribution was extended for one year. We are currently
      negotiating with the local government for a reduction in the registered capital
      requirement.




38




In
      October 2004, the Company paid a deposit of $3.6 million to the Local Government
      to acquire the land use right of 263 acres located in Shanghai. However, in
      2005, the Chinese central government issued its “Adjustment of Macro-Economic
      Policy”. This policy implemented a new system of investment and use of
      state-owned assets, including land. Pursuant to this policy, local government
      organizations adjusted and re-allotted projects, including investment,
      construction and reconstruction of state-owned resources. As a result, projects
      and enterprises that had been affected, including Tiens Yihai, were required
      to
      wait for further decisions by state and local government before proceeding
      with
      development.




On
      November 10, 2006, Tianshi International and the Local Government entered into
      a
      supplemental agreement pursuant to which the parties agreed to the acquisition
      of land use rights by Tiens Yihai, reduced to an 80 acres parcel of land. At
      that time, it was not clear whether the remaining 183 acres would be available
      for purchase in the future. Therefore, the Local Government has agreed to refund
      to Tiens $1.6 million of the original $3.6 million deposit when it receives
      a
      construction license for the development.




In
      order
      to proceed with the approval process for development of the property by Tiens
      Yihai, Tiens was required to provide a loan of $6.6 million to the Local
      Government for relocation costs for people living on the property. The $6.6
      million loan was to be funded in two installments:




·
            The
                first installment of $3.3 million was paid on November 27,
                2006.




·
            The
                second installment of $3.3 million is to be paid after Tiens Yihai
                obtains
                a construction license to develop the property. The parties have
                agreed to
                allow Tiens to reduce this second installment by the amount of the
                $1.6
                million refund due to it.




In
      return
      for the loan, Tiens Yihai will receive a tax credit in the amount of $6.6
      million.




In
      March
      2007, we received notice that the Local Government had approved the land use
      rights for 50 acres of the Tiens Yihai property. As a result of the reduction
      in
      the number of acres for which we have received land use right and continued
      uncertainty relating to the Tiens Yihai project, management has made a decision
      to suspend the development of the project. We are currently reviewing
      alternative commercial uses for the Tiens Yihai site, as well as the possibility
      of selling the land use rights to a third party. If Tiens Yihai does not proceed
      with construction on the Tiens Yihai site or is not able to sell the land use
      rights to a third party, it is not clear whether the Local Government will
      return the $1.6 million it previously agreed to refund or the initial loan
      of
      $3.3 million made in November 2006.




39




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





Exhibit
                No.
            
            Description10.1
            
            Term
                Loan Agreement, dated April 24, 2007 between Tianjin Tianshi Biological
                Development Co., Ltd and Tianjin Tianshi Biological Engineering Co.,
                Ltd.10.2
            
            Term
                Loan Agreement, dated June 28, 2007 between Tianjin Tianshi Biological
                Development Co., Ltd. and Tianjin Tianshi Biological Engineering
                Co.,
                Ltd.31.1
            
            Certification
                of the Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of the Chief Executive Officer and 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


40




**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.


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


Date:
                August 14, 2007/s/
              Jinyuan LiJinyuan
                LiChief
                Executive Officer and President(Principal
                Executive Officer)


Date:
                August 14, 2007/s/
              Wenjun JiaoWenjun
                JiaoChief
                Financial Officer(Principal
                Accounting Officer)




41