**U.S.
        SECURITIES AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
  **FORM
        10-Q**
  **x
        QUARTERLY REPORT PURSUANT TO SECTION 13
        OR 15(d) OF THE SECURITIES**
 **EXCHANGE
        ACT OF 1934**
  For
        the
        quarterly period ended September 30, 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 November 12,
      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 September 30, 2007 (Unaudited) and December
                  31,
                  2006
              
              3Consolidated
                  Statements of Income and Other Comprehensive Income for the three
                  months
                  and nine months ended September 30, 2007 and 2006
                  (Unaudited)
              
              4Consolidated
                  Statements of Shareholders’ Equity
              
              5Consolidated
                  Statements of Cash Flows for the nine months ended September 30,
                  2007 and
                  2006 (Unaudited)
              
              6Notes
                  to Consolidated Financial Statements
              
              7ITEM
                  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                  Of OPERATIONS
              
              29ITEM
                  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              
              38ITEM
                  4. CONTROLS AND PROCEDURES
              
              39**PART
                  II - OTHER INFORMATION**
              
              39ITEM
                  1A. RISK FACTORS
              
              39ITEM
                  6. EXHIBITS
              
              42


2


PART
        I -
        FINANCIAL INFORMATION
  **ITEM
        1.** **FINANCIAL
        STATEMENTS (UNAUDITED)**


TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEETS
  AS
        OF
        SEPTEMBER 30, 2007 AND DECEMBER 31, 2006




September
                  30,
              
              December
                  31,2007
              
              2006(Unaudited)ASSETSCURRENT
                  ASSETS:Cash
              
              $
              51,841,201
              
              $
              54,270,065Accounts
                  receivable, trade - related parties, net ofallowance
                  for doubtful accounts of $75,456 and $86,776as
                  of September 30, 2007 and December 31, 2006,
                  respectively
              
              
              15,015,659
              
              
              12,926,670Accounts
                  receivable, trade - third parties
              
              
              18,817
              
              
              18,135Inventories
              
              
              5,635,349
              
              
              6,845,108Other
                  receivables
              
              
              568,693
              
              
              349,905Other
                  receivables - related parties
              
              
              18,573,926
              
              
              8,397,227Employee
                  advances
              
              
              85,716
              
              
              111,121Prepaid
                  expense
              
              
              1,286,639
              
              
              2,135,917Loans
                  receivable
              
              
              3,497,238
              
              
              3,223,809Loans
                  receivable - related party
              
              
              27,714,328
              
              
              25,640,000Total
                  current assets
              
              
              124,237,566
              
              
              113,917,957Property,
                  PLANT AND EQUIPMENT, net
              
              
              34,205,418
              
              
              30,511,319OTHER
                  ASSETS:Intangible
                  assets, net
              
              
              3,061,331
              
              
              510,183Long-term
                  prepaid expenses
              
              
              1,629,810
              
              
              3,807,539Total
                  other assets
              
              
              4,691,141
              
              
              4,317,722Total
                  assets
              
              $
              163,134,125
              
              $
              148,746,998LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              2,954,969
              
              $
              4,123,105Advances
                  from customers - related parties
              
              
              1,564,869
              
              
              1,570,120Wages
                  and benefits payable
              
              
              788,545
              
              
              992,068Other
                  taxes payable
              
              
              652,815
              
              
              969,760Other
                  payables
              
              
              630,328
              
              
              500,213Other
                  payables - related parties
              
              
              252,728
              
              
              522,105Dividend
                  payable to minority interest
              
              
              256,583
              
              
              238,311Current
                  portion of long term debt, related party
              
              
              2,130,000
              
              
              2,130,000Total
                  current liabilities
              
              
              9,230,837
              
              
              11,045,682LONG
                  TERM DEBT, net of current portion, related party
              
              
              5,332,742
              
              
              6,397,742Total
                  liabilities
              
              
              14,563,579
              
              
              17,443,424MINORITY
                  INTEREST
              
              
              9,505,594
              
              
              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
              
              
              110,085,351
              
              
              95,371,137Accumulated
                  other comprehensive income
              
              
              10,645,475
              
              
              5,714,988Total
                  shareholders' equity
              
              
              139,064,952
              
              
              119,420,251Total
                  liabilities and shareholders' equity
              
              $
              163,134,125
              
              $
              148,746,998




The accompanying
        notes are an integral part of this statement.


3




TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  CONSOLIDATED
        STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
        THE
        THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 (UNAUDITED)
 Three
                    months ended September 30
                
                Nine
                    months ended September 302007
                
                2006
                
                2007
                
                2006REVENUE
                    - RELATED PARTIES
                
                $
                11,027,478
                
                $
                19,187,748
                
                $
                41,584,749
                
                $
                50,203,306COST
                    OF SALES
                
                
                3,089,791
                
                
                5,066,051
                
                
                11,979,984
                
                
                13,714,739GROSS
                    PROFIT
                
                
                7,937,687
                
                
                14,121,697
                
                
                29,604,765
                
                
                36,488,567SELLING,
                    GENERAL AND ADMINISTRATIVE EXPENSES
                
                
                3,801,914
                
                
                2,803,859
                
                
                10,353,397
                
                
                8,641,512INCOME
                    FROM OPERATIONS
                
                
                4,135,773
                
                
                11,317,838
                
                
                19,251,368
                
                
                27,847,055OTHER
                    INCOME (EXPENSE), net
                
                
                149,683
                
                
                164,104
                
                
                1,044,290
                
                
                127,458INCOME
                        BEFORE PROVISION FOR INCOME TAXES AND MINORITY
                        INTEREST
                
                
                4,285,456
                
                
                11,481,942
                
                
                20,295,658
                
                
                27,974,513PROVISION
                    FOR INCOME TAXES
                
                
                344,248
                
                
                878,931
                
                
                1,610,653
                
                
                2,188,491INCOME
                    BEFORE MINORITY INTEREST
                
                
                3,941,208
                
                
                10,603,011
                
                
                18,685,005
                
                
                25,786,022MINORITY
                    INTEREST
                
                
                848,212
                
                
                2,167,747
                
                
                3,970,791
                
                
                5,396,570NET
                    INCOME
                
                
                3,092,996
                
                
                8,435,264
                
                
                14,714,214
                
                
                20,389,452OTHER
                    COMPREHENSIVE INCOME:Foreign
                    currency translation adjustment
                
                
                1,593,144
                
                
                1,411,012
                
                
                4,930,487
                
                
                2,396,799COMPREHENSIVE
                    INCOME
                
                $
                4,686,140
                
                $
                9,846,276
                
                $
                19,644,701
                
                $
                22,786,251EARNINGS
                    PER SHARE, BASIC AND DILUTED
                
                $
                0.04
                
                $
                0.12
                
                $
                0.21
                
                $
                0.29WEIGHTED
                    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
          statement.




4


TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY
  AccumulatedotherNumber
                
                Common
                
                Paid-in
                
                Statutory
                
                Retained
                
                comprehensiveof
                    shares
                
                stock
                
                capital
                
                reserves
                
                earnings
                
                income
                
                TotalsBALANCE,
                    December 31, 2005,
                
                
                71,333,586
                
                $
                71,334
                
                $
                8,842,009
                
                $
                9,420,783
                
                $
                69,079,060
                
                $
                2,234,213
                
                $
                89,647,399Net
                    Income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                20,389,452
                
                
                -
                
                
                20,389,452Foreign
                    currency translation gain
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,396,799
                
                
                2,396,799BALANCE,
                    September 30, 2006, unaudited
                
                
                71,333,586
                
                
                71,334
                
                
                8,842,009
                
                
                9,420,783
                
                
                89,468,512
                
                
                4,631,012
                
                
                112,433,650Net
                    Income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                5,902,625
                
                
                -
                
                
                5,902,625Foreign
                    currency translation gain
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,083,976
                
                
                1,083,976BALANCE,
                    December 31, 2006,
                
                
                71,333,586
                
                
                71,334
                
                
                8,842,009
                
                
                9,420,783
                
                
                95,371,137
                
                
                5,714,988
                
                
                119,420,251Net
                    Income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                14,714,214
                
                
                -
                
                
                14,714,214Foreign
                    currency translation gain
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                4,930,487
                
                
                4,930,487BALANCE,
                    September 30, 2007, unaudited
                
                
                71,333,586
                
                $
                71,334
                
                $
                8,842,009
                
                $
                9,420,783
                
                $
                110,085,351
                
                $
                10,645,475
                
                $
                139,064,952
  The accompanying
          notes are an integral part of this statement.


5


TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 FOR
        NINE
        MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 (UNAUDITED)
  2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              14,714,214
              
              $
              20,389,452Adjustments
                  to reconcile net income to cashprovided
                  by (used in) operating activities:Minority
                  interest
              
              
              3,970,791
              
              
              5,396,570Depreciation
              
              
              2,213,931
              
              
              1,738,855Amortization
              
              
              120,452
              
              
              61,199(Gain)
                  loss on sale of assets
              
              
              (3,341
              )
              
              3,064Interest
                  expense (non-cash)
              
              
              62,182
              
              
              -(Increase)
                  decrease in assets:Accounts
                  receivable, trade - related parties
              
              
              (1,569,960
              )
              
              (9,653,207
              )Other
                  receivables
              
              
              (204,924
              )
              
              (257,944
              )Other
                  receivables - related parties
              
              
              (10,924,763
              )
              
              447,827Inventories
              
              
              1,436,897
              
              
              791,733Employee
                  advances
              
              
              28,973
              
              
              (201,963
              )Prepaid
                  expense
              
              
              909,621
              
              
              (175,692
              )Increase
                  (decrease) in liabilities:Accounts
                  payable
              
              
              (1,278,408
              )
              
              1,306,096Advances
                  from customers - related parties
              
              
              (62,960
              )
              
              (581,737
              )Wages
                  and benefits payable
              
              
              (233,645
              )
              
              (341,672
              )Other
                  taxes payable
              
              
              (346,126
              )
              
              103,025Other
                  payables
              
              
              109,016
              
              
              81,827Other
                  payables - related parties
              
              
              (278,926
              )
              
              (1,300,687
              )Net
                  cash provided by operating activities
              
              
              8,663,024
              
              
              17,806,746CASH
                  FLOWS FROM INVESTING ACTIVITIES:Increase
                  in long-term prepaid expense
              
              
              (9,778
              )Increase
                  in loans receivable-related parties
              
              
              (1,087,456
              )
              
              (24,992,000
              )Increase
                  in intangible assets
              
              
              (317,238
              )
              
              (41,074
              )Proceeds
                  from sales equipment and automobiles
              
              
              196
              
              
              35,082Purchase
                  of equipment and automobiles
              
              
              (4,722,769
              )
              
              (4,382,904
              )Net
                  cash used in investing activities
              
              
              (6,137,045
              )
              
              (29,380,896
              )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
              
              
              1,721,259
              
              
              1,172,806DECREASE
                  IN CASH
              
              
              (2,428,864
              )
              
              (18,774,010
              )CASH,
                  beginning of year
              
              
              54,270,065
              
              
              77,545,991CASH,
                  end of period
              
              $
              51,841,201
              
              $
              58,771,981SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid for income taxes
              
              $
              1,885,052
              
              $
              1,863,250Cash
                  paid for interest expense
              
              $
              211,441
              
              $
              264,254
  The accompanying
        notes are an integral part of this statement.




6


TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        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, it changed its name to Strategika, Inc., and in August
        2003 to the current name.
 
 As
        of
        September 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”).
 
 On
        April
        20, 2004, Tianshi International entered a joint venture contract (the "Joint
        Venture Project") with Tianjin Tianshi Pharmaceuticals Co. Ltd. ("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 owns the remaining
        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 Tianjin Tianshi Biological
        Engineering Co. Ltd. ("Tianshi Engineering"), a related party through common
        ownership. 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.
  **Note
        2 - Summary of significant accounting policies**
  7
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 ***Basis
        of presentation***
 
 The
        financial statements of the Company and its subsidiaries are prepared in
        accordance with accounting principles generally accepted in the United States
        of
        America (“U.S. GAAP”). These Consolidated Financial Statements for interim
        periods are unaudited. In the opinion of management, all adjustments and
        disclosures necessary for a fair presentation of these interim statements
        have
        been included. The results reported in these Consolidated Financial Statements
        are not necessarily indicative of the results that may be reported for the
        entire year. The accompanying consolidated financial statements have been
        prepared in accordance with the rules and regulations of the Securities and
        Exchange Commission and do not include all information and footnotes necessary
        for a complete presentation of financial statements in conformity with
        accounting principles generally accepted in the United States. These
        Consolidated Financial Statements should be read in conjunction with the
        Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
        2006, filed on March 29, 2007.
 
 ***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.
  8
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 Translation
        adjustments amounted to $10,645,475 and $5,714,988 as of September 30, 2007
        and December 31, 2006, respectively. Asset and liability accounts at September 30, 2007
        were translated at 7.52 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 nine months
        ended September 30, 2007
        and 2006 were 7.68 RMB and 8.00 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.
 
 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 September 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:
 September
                    30, 2007
                
                December
                    31, 2006Balance
                    sheet amount
                
                Fair
                    value
                
                Balance
                    sheetamount
                
                Fair
                    valueLong-term
                    debt - related party
                
                $
                (7,462,742
                )
                $
                (7,410,790
                )
                $
                (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 September 30, 2007
        and December 31, 2006 receivables outstanding more than 180 days totaled
        $6,661,476 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 September 30, 2007Reserves
                    and allowancesdeducted
                    from assets accounts:Allowance
                    for doubtful accounts:
                
                $
                86,776
                
                $
                75,456
                
                $
                86,776
                
                $
                75,456Year
                    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
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 ***Inventories***
 
 Inventories
        are stated at the lower of cost or market, using the moving weighted average
        method. 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 $26,604,000 loan that has been made
        to
        Tianshi Engineering and $1,110,328 in interest has been accrued on the loan
        as
        of September 30, 2007
        (see Note 4).
 
 ***Property,
        plant and equipment, net***
 
 Property,
        plant and equipment are stated at cost less accumulated depreciation.
        Depreciation is computed using the straight-line method over the estimated
        useful lives of the assets. Estimated useful lives of the assets are as follows:
 Estimated
                    Useful LifeBuildings
                    and improvement
                
                20
                    yearsEquipment
                
                10
                    yearsComputer
                    equipment and software
                
                5
                    yearsOffice
                    equipment
                
                5
                    yearsVehicles
                
                5
                    years
  10
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          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 September 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 fifty years since the third quarter of 2007, using the straight-line
        method. The Company is currently evaluating the extent of the adjustment
        with
        the respect of the amortization during the prior period. 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 approximately 263 acres of 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 September 30,
        2007, the Company had obtained the land use rights for approximately 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.
  11
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 ***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.
  ***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***
  Shipping
        and handling costs related to costs of goods sold are included in Revenue
        and
        totaled $852,334 and $650,112 for the nine months ended September 30, 2007
        and
        2006 and $523,789 and $101,624 for the three months ended September 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 costs of $515,421 and $812,963
        for the
        nine months ended September 30, 2007
        and 2006, respectively, and $169,127 and $173,421 for the three months ended September 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 September 30, 2007
        and December 31, 2006.
  12
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 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.
 
 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 nine months and three months ended September 30, 2007
        and 2006.
 
 ***Other
        comprehensive income***
 
 Other
        comprehensive income represents the 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.
  13
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 ***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 .
 
 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.
  14
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 **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 $2,331,043 was reclassified from
        long-term prepaid expenses to intangible asset.
 
 On
        June
        29, 2007, Tianshi 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.
 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.
  On
        September 27, 2007, Tianshi Engineering paid $1,000,000 to Tianshi International
        on behalf of Biological, representing a payment of dividend by Biological.
        In
        return, a part of Biological’s accounts receivable to Tianshi Engineering was
        offset. The right to offset existed because:
 
 1.
              Tianshi
                  Engineering had a determinable outstanding debt payable to the
                  Company;
  2.
              Biological
                  had a determinable outstanding dividend payable to Tianshi
                  International;
  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
        ($26,604,000) 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. On September 27, 2007, this loan
        was
        extended again to December 31, 2007. The Company accrued $1,110,328 of interest
        for this loan as of September 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 $85,716 and $111,121 as of September 30, 2007
        and December 31, 2006, respectively.
  15
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
  **Note
        6 - Inventories**
 
 Inventories
        consist of the following:
 September
                    30,
                
                December
                    31,2007
                
                2006(Unaudited)Raw
                    materials
                
                $
                1,820,199
                
                $
                2,106,929Packing
                    materials
                
                
                829,485
                
                
                1,113,360Miscellaneous
                    supplies
                
                
                101,560
                
                
                377,819Work
                    in process
                
                
                306,945
                
                
                688,007Processing
                    materials
                
                
                422,938
                
                
                369,618Finished
                    goods
                
                
                2,154,221
                
                
                2,189,375Total
                
                $
                5,635,349
                
                $
                6,845,108
 
 The
        Company wrote off obsolete goods that amounted to $158,768 and $59,832 for
        the
        nine months ended September 30, 2007
        and the year ended December 31, 2006, respectively.
  **Note
        7 - Property, plant and equipment, net**
 
 Property,
        plant and equipment consists of the following:
 September
                    30,
                
                December
                    31,2007
                
                2006(Unaudited)Buildings
                    and improvements
                
                $
                16,353,348
                
                $
                14,829,748Office
                    equipment
                
                
                343,337
                
                
                323,753Computer
                    equipment and software
                
                
                1,781,624
                
                
                1,622,731Equipment
                
                
                10,803,019
                
                
                9,329,628Vehicles
                
                
                5,382,610
                
                
                5,187,572Construction
                    in progress
                
                
                10,515,991
                
                
                7,629,623Total
                
                
                45,179,929
                
                
                38,923,055Less:
                    accumulated depreciation
                
                
                (10,974,511
                )
                
                (8,411,736
                )Property,
                    plant and equipment, net
                
                $
                34,205,418
                
                $
                30,511,319
  16
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 Depreciation
        expense for the nine months ended September 30, 2007
        and 2006 amounted to $2,213,931 and $1,738,855, respectively. Depreciation
        expense for the three months ended September 30, 2007 and 2006 amounted to
        $790,425 and $610,193, respectively.
 
 **Note
        8 - Other receivables - related parties**
 
 Other
        receivables - related parties are generated by the Company making various
        cash
        advances and short term loans, the allocation of various expenses to related
        parties, and amounts transferred from accounts receivable. The
        following table summarizes the other receivables- related parties
        balances:
 September
                    30,
                
                December
                    31,2007
                
                2006(Unaudited)Tianjin
                    Tianshi Biological Engineering Co., Ltd
                
                $
                15,420,459
                
                $
                5,592,772Shengshi
                    Real Estate Development
                
                
                1,325
                
                
                1,039Tianjin
                    Tianshi Technical School
                
                
                -
                
                
                46,589JinMao
                    (Group) Holding
                
                
                108,394
                
                
                104,466Shanghai
                    Tianshi Jinquan Investment Co.
                
                
                2,473
                
                
                2,129Tianjin
                    Tianshi Group Co., Ltd
                
                
                3,041,275
                
                
                2,650,232Total
                
                $
                18,573,926
                
                $
                8,397,227
  See
        Note
        17 for discussion of how these entities are related to Tiens.
  **Note
        9 - Intangible assets**
 
 Intangible
        assets consists of the following:
 September
                    30,
                
                December
                    31,2007
                
                2006(Unaudited)Land
                    use rights
                
                $
                3,029,996
                
                $
                673,627Other
                    intangible assets
                
                
                591,220
                
                
                267,815Less
                    accumulated amortization
                
                
                (559,885
                )
                
                (431,259
                )Intangible
                    assets, net
                
                $
                3,061,331
                
                $
                510,183
  Amortization
        expense for the nine months ended September 30, 2007 and 2006 amounted to
        $120,452 and $61,199, respectively. As of September 30, 2007, $38,851 was
        amortized for the land use right of Tiens Yihai. Amortization expense for
        the
        three months ended September 30, 2007 and 2006 amounted to $67,819 and $20,606,
        respectively.
 17
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
            30, 2007
 (UNAUDITED)
  Estimated
                      amortization expense forthe
                      year ending December 31,
                  
                  AmountRemainder
                      of 2007
                  
                  $
                  42,5402008
                  
                  $
                  170,1612009
                  
                  $
                  165,4342010
                  
                  $
                  116,9502011
                  
                  $
                  111,028
 
 **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.
 
 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 approximately
        263 acres of land 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, Tiens International and the Local Government entered into
        the
        Supplemental Agreement pursuant
        to which the parties agreed to the acquisition of land use right by Tiens
        Yihai
        of a reduced 80 acre parcel of land .
        At that
        time, it was not clear whether the remaining approximately 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 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.
  18
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 ·
              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. 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 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
        nine months and three months ended September 30, 2007, the Company accrued
        $152,222 and $53,809, respectively, of interest receivable which was added
        to
        the loan and included in Loan receivable. In addition, Tianjin Tianshi Group
        Co., Ltd (“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
        September 30, 2007, Tiens Yihai had obtained the land use right for
        approximately 50 acres. Therefore, the Company reclassified $2,331,042 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. 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.
 
 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.
 
 **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.
  19
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 The
        principal of the loan will be paid in ten consecutive semi-annual installments
        of $1,065,000 on the last day of June and December, commencing June 2006.
        Interest of $211,441 was paid for the six months ended June 30, 2007. Interest
        of $93,284 for the remaining loan was accrued for the three months ended
        September 30, 2007. Total principal payments for the next five years on all
        long-term debt are as follows:
 September
                    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
                      EndingSeptember
                      30,
                
                Amount2008
                
                $
                2,130,0002009
                
                
                2,130,0002010
                
                
                2,130,0002011
                
                
                1,072,742Total
                
                $
                7,462,742
 
 **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
                
                
                21,468,396
                
                
                4,293,679
                
                
                782,529
                
                
                4,695
                
                
                4,298,374Dividend
                    distribution
                
                
                (33,380,512
                )
                
                (6,676,102
                )
                
                -
                
                
                -
                
                
                (6,676,102
                )September
                    30, 2007
                
                $
                46,587,846
                
                $
                9,317,569
                
                $
                31,337,575
                
                $
                188,025
                
                $
                9,505,594
  Dividends
        declared by Biological are split pro rata between the shareholders according
        to
        their ownership interest. The payment of the dividends to the shareholders
        may
        occur at different times, resulting in distributions which do not appear
        to be
        reflective of the minority ownership percentages. As of September 30, 2007,
        minority shareholders owned approximately 20% of the Company’s subsidiaries. The
        table below shows the outstanding dividends payable of Biological, as well
        as
        the allocation of dividends between Tianshi International and the minority
        shareholder.
  20
  TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2007
 (UNAUDITED)
  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
                
                
                (2,276,441
                )
                
                (6,676,102
                )
                
                (8,952,543
                )Accumulated
                    Other Comprehensive Income (loss)
                
                
                2,513,390
                
                
                18,272
                
                
                2,531,662Dividends
                    outstanding, September 30, 2007 Balance
                
                $
                72,920,213
                
                $
                256,583
                
                $
                73,176,796
  **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.
 
 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, 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.
  21
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 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 nine months ended September 30, 2007 and 2006 were
        $1,610,653, and $2,188,491, respectively, and $344,248 and $878,931 for the
        three months ended September 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
                %
  The
        estimated tax savings due to the reduced tax rate for the nine months ended
        September 30, 2007 and 2006 amounted to $5,476,219 and $7,440,869, respectively,
        and $1,170,442 and $2,988,366 tax savings for the three months ended
        September 30, 2007 and 2006, respectively. Earnings per share for the nine
        months ended September 30, 2007 and 2006 would decrease by $0.06 and $0.08,
        respectively, and would decrease by $0.01 and $0.03 for the three months
        ended
        September 30, 2007 and 2006, 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. According to the current tax laws of the PRC, manufacturing enterprises
        do no need to pay VAT on sales of goods exported overseas, and
        the corresponding VAT on purchases will not be offset.
  22
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 VAT
        on
        sales and VAT on purchases amounted to $3 816 975and $1 618 433, respectively,
        for the nine months ended September 30, 2007 and $4,314,238 and $1,791,667,
        respectively, for the nine months ended September 30, 2006. VAT on sales
        and VAT
        on purchases amounted to $897,739 and $587,252, respectively, for the three
        months ended September 30, 2007 and $1,701,616 and $803,801, respectively,
        for
        the three months ended September 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
                
                
                1,282,937
                
                
                1,134,403
                
                
                2,513,147
                
                
                4,930,487Balance
                    as of September 30, 2007
                
                $
                3,392,011
                
                $
                2,862,095
                
                $
                4,391,369
                
                $
                10,645,475
  Accumulated
        Other Comprehensive Income incurred in Biological and Tiens Yihai is due
        to
        exchange rate differences. 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 rates on
        dividends receivable from Biological. Since this income is not realized,
        it is
        included in Accumulated Other Comprehensive Income.
 
 **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
        $450,680 and $359,863 for the nine months ended September 30, 2007
        and 2006, respectively, and amounted to $152,436 and $119,615 for the three
        months ended September 30, 2007 and 2006, respectively.
  23
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 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 $44,979 and $34,510 for the nine months ended September 30, 2007
        and 2006, respectively, and $15,227 and $11,400 for the three months ended
        September 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 $245,302 and $195,970 for the nine months ended September 30, 2007
        and 2006, respectively, and $82,942 and $64,316 for the three months ended
        September 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.
 
 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 nine
        months
        ended September 30, 2007
        and 2006, no transfer was made to this fund.
  24
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 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 nine months ended September 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**
  Tianshi
        Group is owned 90% by Mr. Jinyuan Li and 10% by his daughter, Ms. Baolan
        Li.
        Tianshi Group owns 87.66% of Tianshi
        Pharmaceuticals and 51%
        of 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.
 
 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 $15,736,494 and $20,281,510 for the nine months
        ended September 30, 2007
        and 2006, respectively. For the three months ended September 30, 2007 and
        2006,
        total sales to the related party amounted to $3,388,880 and $7,240,485,
        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.
  Beginning
        on January 1, 2007, balances under accounts receivable relating to Tianshi
        Engineering which are not remitted to the Company within 90 days are converted
        to other receivables-related parties. On January 1, 2007, we entered into
        a loan
        agreement with Tianshi Engineering. Pursuant to that agreement, beginning
        on
        January 1, 2007, $4.2 million of other receivables-related parties, which
        originated from Tianshi Engineering as accounts receivable, became interest
        bearing. The loan was due on March 31, 2007 and the stated interest rate
        was
        6.3%. Both of the principal and interest of the loan were paid off on March
        31,
        2007.
  25
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 On
        April
        24, 2007, a Term Loan Agreement similar to the loan agreement signed on January
        1, 2007 described above was signed between the Company and 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 on April 30,
        2007
        and the stated interest rate was 5.67%, the interest rate for a loan of the
        same principal amount stipulated by the People’s Bank of China as of the
        date the loan was made. Both of the principal and interest of the loan were
        paid
        off on June 30, 2007.
  On
        July
        23, 2007, a Term Loan Agreement similar to the Term Loan Agreement signed
        on April 24, 2007 described above was signed between the Company and Tianshi
        Engineering. Pursuant to that agreement, beginning on July 1, 2007, $8.5million
        of other receivables - related parties, which originated from Tianshi
        Engineering as accounts receivable, became interest bearing. The loan was
        due on
        September 30, 2007 and the stated interest rate was 5.85%, the interest rate
        for a loan of the same principal amount stipulated by the People’s
        Bank of China as of the date the loan was made. On September 30, 2007, $1
        million of the loan was paid off.
 
 On
        October 1, 2005, Biological loaned Tianshi Engineering RMB 200,000,000
        ($26,604,000). 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 interest
        rate
        stipulated by the People’s Bank of China for a loan of the same amount or 5.58%
        at January 1, 2007. On June 28, 2007, the loan was further extended to September
        30, 2007. On September 30, 2007, this loan was extended again to December
        31,
        2007. All receivables from Tianshi Engineering will be settled by cash payment.
        As of September 30,
        2007, $1,110,328 of interest receivable had been accrued and is included
        in
        loans receivable - related party.
 
 Amounts
        due from Tianshi Engineering were as follows:
 September
                    30,
                
                December
                    31,2007
                
                2006(Unaudited)Accounts
                    receivable - related parties
                
                $
                4,419,231
                
                $
                7,827,372Other
                    receivable - related parties
                
                
                15,420,459
                
                
                5,592,772Loan
                    receivable - related parties
                
                
                27,714,327
                
                
                25,640,000Total
                    receivables from Tianshi Engineering
                
                $
                47,554,017
                
                $
                39,060,144
  26
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 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
        $432,727 and $450,506 for the nine months ended September 30, 2007 and 2006,
        respectively.
 
 On
        November 10, 2006, Tiens 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
        September 30, 2007 and December 31, 2006, amounts due from Tianshi Group
        were
        $3,041,275 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 $25,848,255
        and $29,921,796 for the nine months ended September 30, 2007 and 2006. For
        the
        three months ended September 30, 2007 and 2006, total sales to these related
        parties international distributors were $7,638,598 and $11,947,263,
        respectively. Total accounts receivable as of September 30, 2007 and December
        31, 2006 were $10,596,428 and $5,099,298, respectively.
 
 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 September 30, 2007
        and
        December 31, 2006 amounted to $1,325 and $1,039.
 
 Tianjin
        Tianshi Technical School is owned by Jinyuan Li. Total other receivables
        from
        Tianjin Tianshi Technical School as of September 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 September 30, 2007 and December 31, 2006 were $108,394
        and
        $104,466
 
 Shanghai
        Tianshi Jinquan Investment Co., is owned by Jinyuan Li. Total balances due
        from
        the related party amounted to $2,473 and $2,129 as of September 30, 2007
        and
        December 31, 2006, respectively.
 
 27
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
          30, 2007
 (UNAUDITED)
 **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 nine months ended September 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:
 Nine
                    months ended September 30,
                
                Three
                    months ended September 30,Revenue
                
                2007
                
                2006
                
                2007
                
                2006(Unaudited)
                
                (Unaudited)
                
                (Unaudited)
                
                (Unaudited)China
                
                $
                15,736,494
                
                $
                20,281,510
                
                $
                3,388,880
                
                $
                7,240,485International
                
                
                25,848,255
                
                
                29,921,796
                
                
                7,638,598
                
                
                11,947,263Total
                
                $
                41,584,749
                
                $
                50,203,306
                
                $
                11,027,478
                
                $
                19,187,748
 Revenue
        by Product Group:
 Nine
                    months ended September 30,
                
                Three
                    months ended September 30,2007
                
                2006
                
                2007
                
                2006Wellness
                    products
                
                $
                37,342,692
                
                $
                43,457,716
                
                $
                9,535,575
                
                $
                16,609,578Dietary
                    supplement products
                
                
                3,878,449
                
                
                2,997,157
                
                
                1,433,867
                
                
                1,145,516Personal
                    care products
                
                
                363,608
                
                
                3,748,433
                
                
                58,036
                
                
                1,432,654Total
                
                $
                41,584,749
                
                $
                50,203,306
                
                $
                11,027,478
                
                $
                19,187,748
  28




**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 we continue
      to experience delays in the export clearance of our products; (f) whether
      Tianshi Engineering, our affiliate that sells our products in China, obtains
      a
      direct selling license in China; and (g) 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.




29




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 approximately
      263 acres of land 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 approximately 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 approximately 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.




30




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.


31




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





Three
                months ended
              September
                30
            
            
            
            Nine
                months ended
              September
                302007
            
            2006
            
            Change
            
            2007
            
            2006
            
            ChangeRevenue
                - related parties
            
            $
            11,027,478
            
            $
            19,187,748
            
            
            -42.5%
            
            $
            41,584,749
            
            $
            50,203,306
            
            
            -18.2%Cost
                of sales
            
            
            3,089,791
            
            
            5,066,051
            
            
            -39.0%
            
            
            11,979,984
            
            
            13,714,739
            
            
            -12.7%Gross
                profit
            
            
            7,937,687
            
            
            14,121,697
            
            
            -43.8%
            
            
            29,604,765
            
            
            36,488,567
            
            
            -20.3%Selling,
                general and administrative expenses
            
            
            3,801,914
            
            
            2,803,859
            
            
            35.6%
            
            
            10,353,397
            
            
            8,641,512
            
            
            14.0%Income
                from operations
            
            
            4,135,773
            
            
            11,317,838
            
            
            -63.5%
            
            
            19,251,366
            
            
            27,847,055
            
            
            -30.9%Other
                income (expense), net
            
            
            149,683
            
            
            164,104
            
            
            -8.8%
            
            
            1,044,290
            
            
            127,458
            
            
            719.3%Income
                  before provision for income taxes and minority
                  interest
            
            
            4,285,454
            
            
            11,481,942
            
            
            -62.7%
            
            
            20,295,656
            
            
            27,974,513
            
            
            -27.5%Provision
                for income taxes
            
            
            344,248
            
            
            878,931
            
            
            -60.8%
            
            
            1,610,653
            
            
            2,188,491
            
            
            -26.4%Income
                before minority interest
            
            
            3,941,206
            
            
            10,603,011
            
            
            -62.8%
            
            
            18,685,003
            
            
            25,786,022
            
            
            -27.5%Minority
                interest
            
            
            848,212
            
            
            2,167,747
            
            
            -60.9%
            
            
            3,970,791
            
            
            5,396,570
            
            
            -26.4%Net
                income
            
            
            3,092,994
            
            
            8,435,264
            
            
            -63.3%
            
            
            14,714,212
            
            
            20,389,452
            
            
            -27.8%Other
                comprehensive income:foreign
                currency translation adjustment
            
            
            1,593,144
            
            
            1,411,012
            
            
            12.9%
            
            
            4,930,487
            
            
            2,396,799
            
            
            105.7%Comprehensive
                income
            
            $
            4,686,138
            
            $
            9,846,276
            
            
            -52.4%
            
            $
            19,644,699
            
            $
            22,786,251
            
            
            -13.8%Weighted
                average number of shares
            
            
            71,333,586
            
            
            71,333,586
            
            
            
            
            
            71,333,586
            
            
            71,333,586Earnings
                per share, basic and diluted
            
            $
            0.04
            
            $
            0.12
            
            
            
            
            $
            0.21
            
            $
            0.29Gross
                profit margin
            
            
            72.0
            %
            
            73.6
            %
            
            
            
            
            71.2
            %
            
            72.7
            %Selling,
                general and administrative expenses as a percentage of
                sales
            
            
            34.5
            %
            
            14.6
            %
            
            
            
            
            24.9
            %
            
            17.2
            %Net
                profit margin
            
            
            28.0
            %
            
            44.0
            %
            
            
            
            
            35.4
            %
            
            40.6
            %


32


Revenue .
      Revenue
      for the third quarter of 2007 was $11.0 million compared to $19.2 million for
      the same period in 2006, a decrease of 42.5%. Revenue for the nine months ended
      September 30, 2007 was $41.6 million compared to $50.2 million for the same
      period in 2006, a decrease of 18.2%. The breakdown of revenue between Chinese
      and international sales is as follows.




Three
                months ended September 30,
            
            
            
            
            Nine
                months ended September 30,2007
            
            2006
            
            Change
            
            
            2007
            
            2006
            
            ChangeChina
            
            $
            3,388,880
            
            $
            7,240,485
            
            
            -53.2%
            
            
            $
            15,736,494
            
            $
            20,281,510
            
            
            -22.4%International
            
            $
            7,638,589
            
            $
            11,947,263
            
            
            -36.1%
            
            
            $
            25,848,255
            
            $
            29,921,796
            
            
            -13.6%Total
            
            $
            11,027,478
            
            $
            19,187,748
            
            
            -42.5%
            
            
            $
            41,584,749
            
            $
            50,203,306
            
            
            -17.2%




For
      the
      third quarter of 2007, revenue in China was $3.4 million, a decrease of 53.2%
      compared to the same period in 2006. For the nine months ended September 30,
      2007, revenue in China was $15.7 million, a decrease of 22.4% compared to the
      same period in 2006




During
      the third quarter of 2006, we conducted a promotion for our distributors in
      China called “Jeida”, which helped to drive sales. There was no similar
      promotion during the third quarter of 2007, and we believe that this was the
      primary reason for the decrease in revenue between the two periods. In addition,
      we believe that our sales in China have also been negatively impacted by
      increased government and media scrutiny on the direct selling industry, which
      we
      intend to pursue through our distributor in China, Tianshi Engineering,
      particularly following the enactment of the new direct selling
      regulations.




For
      the
      third quarter of 2007, international revenue was $7.6 million, a decrease of
      36.1% compared to the same period in 2006. For the nine months ended September
      30, 2007, international revenue was $25.8 million, a decrease of 13.6% compared
      to the same period in 2007. In August of this year, the General Administration
      of Quality Supervision, Inspection and Quarantine (AQSIQ) announced an ongoing
      national campaign in China against unsafe food and substandard products. The
      four-month special campaign against poor product quality was launched in
      response to a series of safety scares involving Chinese products worldwide.
      The
      campaign, which is currently scheduled to run to the end of the year, sets
      20
      detailed goals, including 12 "100 percents". For example, 100 percent of food
      producers should be licensed; 100 percent of agricultural wholesale markets
      in
      cities must be monitored; 100 percent of suppliers of raw materials for exported
      products should be inspected; and 100 percent of agricultural products must
      be
      free of five types of strong pesticides.




As
      a
      result of this campaign by the AQSIQ, there has been a general slow-down and
      backlog of export clearances for Chinese food products, and we have experienced
      significant delays in obtaining export clearance for our products which we
      sell
      to our international affiliates. However, to date, there have not been any
      specific problems identified with our products. ****** These
      delays have resulted in decrease in our international revenues and some of
      our
      international affiliates not being able to receive sufficient quantities of
      our
      products to meet their demand.




Cost
      of Sales .
      Cost of
      sales for the third quarter of 2007 decreased to $3.1million, or by 39.0%,
      compared to $5.1
      million for the same period in 2006. This decrease was primarily due to the
      corresponding decrease in revenue. Cost of sales for the nine months ended
      September 30, 2007 was $12.0 million, compared to $13.7 million for the same
      period in 2006, a decrease of 12.7%.




Gross
      Profit .
      Gross
      profit for the third quarter of 2007 was $7.9 million compared to $14.1 million
      for the same period in 2006, a decrease of 43.8%. The gross profit margin for
      the third quarter of 2007 was 72.0%, compared to 73.6% for the same period
      in
      2006. Gross profit for the nine months ended September 30, 2007 was $29.6
      million, compared to $36.5 million for the same period in 2006. The gross profit
      margin for the nine months ended September 30, 2007 was 71.2%, compared to
      72.7%
      for the same period in 2006. This decrease is due to lower sales revenue and
      the
      fact that our gross profit margin is lower for semi-finished products than
      for
      the finished products that we were still selling in part of the nine month
      period ended September 30, 2006.




Selling,
      general and administrative expenses .
      Selling, general and administrative expense increased to $3.8 million for the
      third quarter of 2007, compared to $2.8 million for the same period in 2006,
      an
      increase of 35.6%. This increase was primarily the result of the hiring of
      additional employees and increases in salaries. The selling and administrative
      expense as a percentage of sales was 34.5% for the third quarter of 2007
      compared to 14.6% for the same period in 2006. Selling, general and
      administrative expenses was $10.4 million for the nine months ended September
      30, 2007, compared to $8.6 million for the same period in 2006, an increase
      of
      19.8%. The increase in expenses was primarily due to an increase in salary
      and
      depreciation expenses, and the increase in expenses as a percentage of sales
      was
      also due to a decrease in sales between the two periods. The selling and
      administrative expense as a percentage of sales was 24.9% for the nine months
      ended September 30, 2007 compared to 17.2% for the same period in
      2006.




33




Other
      income (expense), net .
      Other
      income (expense), net was $149,683 of income for the third quarter of 2007,
      compared to $164,104 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 from Tianshi
      Engineering which are older than 90 days are transferred to other
      receivables-related party and accrue interest. Other income (expense), net
      was
      $1.0million of income for the nine months ended September 30, 2007 compared
      to
      $127,458 of income for the same period in 2006.




Net
      income .
      As a
      result of the foregoing factors, net income for the third quarter of 2007 was
      $3.1 million, a decrease of 63.3% compared to $8.4 million for the same period
      in 2006. Net income for the nine months ended September 30, 2007 was $14.7
      million, a decrease of 27.8% compared to $20.4 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 September 30, 2007 and December 31, 2006 were $5.6 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 $9.1 million to $8.7 million
      for
      the nine months ended September 30, 2007, compared to the same period in 2006.
      This difference was primarily due the decrease in revenue and an increase in
      other receivables-related party.




Net
      cash
      used in investing activities in the nine months ended September 30, 2007
      decreased by $23.2 million compared to the same period in 2006. In the first
      nine months of 2006, we made a $26.6 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. Mr. Jinyuan Li owns 100% of Tianyuan
      Capital.




Net
      cash
      used in financing activities in the nine months ended September 30, 2007
      decreased by $1.7 million compared to the same period in 2006. An installment
      payment on our $10.65 million loan from Tianyuan Capital was paid on our behalf
      by Tianshi Engineering in return for us canceling an offsetting amount of other
      receivables-related parties relating to Tianshi Engineering.




**Capital
      Resources**




As
      of
      September 30, 2007 and December 31, 2006, we had cash of $51.8 million and
      $54.3, respectively.  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




34




·
            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, which
      would include administrative offices, manufacturing facilities, warehouses
      and
      logistics.




**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.




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**




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.




35





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.




**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 $10.3 million
      for
      the three months ended September 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
      September 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.




36




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.




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
      September 30, 2007.




As
                ofSeptember
                30, 2007
            
            December
                31, 2006Accounts
                receivable, trade - related parties,net
                of allowance for doubtful accounts of$75,456
                and $86,776 as of September 30, 2007and
                December 31, 2006, respectively
            
            $
            15,015,659
            
            $
            12,926,670Other
                receivables - related parties
            
            $
            18,573,926
            
            $
            8,397,227Loans
                receivable - related parties
            
            $
            27,714,327
            
            $
            25,640,000Advances
                from customers - related parties
            
            $
            1,564,869
            
            $
            1,570,120Other
                payables - related parties
            
            $
            252,728
            
            $
            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 $2.1 million from
      December 31, 2006 to September 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 $18.6 million as of September 30, 2007 and
      $8.4 million as of December 31, 2006. Beginning on January 1, 2007, balances
      under accounts receivable relating to Tianshi Engineering which are not remitted
      to the Company within 90 days are converted to other receivables-related
      parties. On July 23, 2007, we entered into a loan agreement with Tianshi
      Engineering. Pursuant to that agreement, beginning on July 1, 2007, $8.5million
      of other receivables - related parties, which originated from Tianshi
      Engineering as accounts receivable, became interest bearing. The loan was due
      on
      September 30, 2007 and the stated interest rate was 5.85%, the interest rate
      for
      the same level of loan stipulated by the People’s Bank of China. On September
      30, 2007, $1 million of the loan was paid off.




37




**Loans
      receivable - related parties** .
      Loans
      receivable to related parties were $27.7 million and $25.6 million as of
      September 30, 2007 and December 31, 2006, respectively. The $2.1 million of
      increase was due to change in foreign currency exchange rate and accrued
      interest. On October 1, 2005, Biological loaned Tianshi Engineering $26.6
      million. 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.
      On December 22, 2006, the loan was extended to March 30, 2007 and was converted
      to an interest-bearing loan at a rate of 5.58%. On June 28, 2007 the loan was
      extended to September 30, 2007. On September 27, 2007, this loan was extended
      again to December 31, 2007. The Company accrued $1,110,328 of interest for
      this
      loan as of September 30, 2007.




**Long-term
      debt - related party.** Long-term debt -related party was $5.3 million as of September 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 September 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 September 30,
      2006
      and ending September 30, 2011. Tianshi International used the loan proceeds
      in
      Tiens Yihai. For the three months ended September 30, 2007, interest of $93,284
      on the loan was accrued.




**Advances
      from customers - related parties** .
      Advances from related party customers were $1.6 million as of September 30,
      2007
      and 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 September 30, 2007 and December 31, 2006,
      were $0.2 million and $0.5 million, respectively. These amounts arose from
      various operational transactions incurred with the following parties, each
      of
      which is owned by Jinyuan Li: Shengshi Real Estate Development, Tianjin Tianshi
      Technical School, JinMao (Group) Holding and Shanghai Tianshi Jinquan Investment
      Co.




**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 $432,727 for the
      nine
      months ended September 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.




38




**EFFECT
      OF FLUCTUATION IN FOREIGN EXCHANGE RATES**




Our
      operating subsidiary, Biological, is located in China, and buys all of its
      raw
      materials in China and sells our products in China using the renminbi as the
      functional currency. Based on Chinese government regulations, all foreign
      currencies under the category of current accounts are allowed to be freely
      exchanged with hard currencies. As of September 30, 2007, the exchange rate
      was
      $1 = RMB 7.52.




Substantially
      all our revenues and expenses are denominated in the renminbi. However, we
      use
      the dollar for financial reporting purposes. The value of renminbi against
      the
      dollar and other currencies may fluctuate and is affected by, among other
      things, changes in China’s political and economic conditions. As our operations
      are primarily in China, any significant revaluation of the renminbi may
      materially and adversely affect our cash flows, revenues and financial
      condition. For example, to the extent that we need to convert dollars into
      renminbi for our operations, appreciation of this currency against the dollar
      could have a material adverse effect on our business, financial condition and
      results of operation. Conversely, if we decide to convert our renminbi into
      dollars for other business purposes and the dollar appreciates against this
      currency, the dollar equivalent of the renminbi would be reduced.




Given
      the
      uncertainty of exchange rate fluctuations, we cannot estimate the effect of
      these fluctuations on our future business, product pricing, results of
      operations or financial condition. Currently we have not entered agreements
      or
      purchased instruments to hedge our exchange rate risks, although we may do
      so in
      the future.




**ITEM
      4.** **CONTROLS
      AND PROCEDURES**




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.




39




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.




In
      October 2004, the Company paid a deposit of $3.6 million to the Local Government
      to acquire the land use right of approximately 263 acres of land 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 approximately 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 approximately 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.




**A
      RECENT CAMPAIGN IMPOSED BY THE CHINESE GOVERNMENT AGAINST THE EXPORT OF UNSAFE
      FOOD AND SUBSTANDARD PRODUCTS, MAY INHIBIT OUR ABILITY TO EXPORT OUR PRODUCTS
      INTERNATIONALLY**




In
      August
      of this year, AQSIQ announced an ongoing national campaign in China against
      unsafe food and substandard products. The four-month special campaign against
      poor product quality was launched in response to a series safety scares
      involving Chinese products worldwide. The campaign, which is currently scheduled
      to run to the end of the year, sets 20 detailed goals, including 12 "100
      percents". For example, 100 percent of food producers should be licensed; 100
      percent of agricultural wholesale markets in cities must be monitored; 100
      percent of suppliers of raw materials for exported products should be inspected;
      and 100 percent of agricultural products must be free of five types of strong
      pesticides.




40




As
      a
      result of this campaign by the AQSIQ, there has been a general slow-down and
      backlog of export clearances for Chinese food products, and we have experienced
      significant delays in obtaining export clearance for our products which we
      sell
      to our international affiliates. However, to date, there have not been any
      problems identified with our products. ****** We
      believe that these delays have resulted in some of our international affiliates
      being unable to purchase sufficient quantities of our products to meet their
      demand and a corresponding decrease in our international revenues. Continued
      delays in the export clearance for our products may continue to result in us
      not
      being able to meet the demand for our products from our international
      affiliates. Currently we are not able to provide an estimate as to when we
      will
      receive export clearance for our products. If
      delays
      continue in the export clearance of our products, we may experience further
      decreases in sales that adversely affect our results of operations.




**UNCERTAINTY
      IN THE DEVELOPMENT OF DIRECT SELLING REGULATIONS MAY ADVERSELY AFFECT SALES
      OF
      OUR PRODUCTS IN CHINA.**




Substantially
      all of our assets are located in China, and approximately 50%, 56% and 40.5%
      of
      our revenues in 2004, 2005 and 2006, respectively, derive from our operations
      in
      China. Accordingly, our operations are subject, to a significant degree, to
      Chinese law. In China, we are aiming to expand our market share through the
      branches, chain stores, and affiliated companies of Tianshi Engineering, our
      affiliate who sells our products in China. In addition to expansion through
      branches, chain stores and affiliates companies of Tianshi Engineering, we
      also intend to pursue direct selling of our products by individual
      distributors through Tianshi Engineering. Because direct selling was only
      recently authorized in China, the regulatory environment with respect to direct
      selling in this market remains fluid and the process for obtaining the necessary
      governmental approvals have been interpreted differently by different
      governmental authorities. The
      direct selling regulations require Tianshi Engineering to apply for approval
      to
      conduct a direct selling enterprise in China.




Tianshi
      Engineering has applied for a direct selling license in a number of provinces
      and must obtain a series of approvals from the Departments of Commerce in such
      provinces, as well as the Departments of Commerce in each city and district
      in
      which we plan to operate. Tianshi Engineering is also required to obtain the
      approval of the State Ministry of Commerce, which is the national government
      authority overseeing direct selling.




Tianshi
      Engineering has found that it is taking more time than anticipated to work
      through the approval process with the Chinese authorities. These authorities
      have broad discretion in interpreting the regulations and granting necessary
      approvals. A delay in obtaining approvals at one level can delay our ability
      to
      obtain approvals at the next level. The complexity of the approval process
      as
      well as the government’s continued cautious approach as direct selling develops
      in China makes it difficult to predict a timeline for obtaining these approvals.
      If Tianshi Engineering does not receive a direct selling license in China,
      then
      its ability to compete against its competitors who have received such a license
      may be hurt. As a result, Tianshi Engineering may lose distributors who find
      a
      competitor’s direct selling business and compensation model more attractive.
      This could materially decrease the revenues that we receive from sales by
      Tianshi Engineering in China.




41


EXHIBITS





Exhibit
                No.
            
            Description10.1
            
            Term
                Loan Agreement, dated September 27, 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


42




**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:
                November 14, 2007/s/
                Jinyuan LIJinyuan
                LiChief
                Executive Officer and President(Principal
                Executive Officer)




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




43