UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


EXCHANGE
ACT OF 1934





For the
quarterly period ended June 30, 2009.





OR





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


EXCHANGE
ACT OF 1934





For the
transition period from _____ to_____.





Commission
File Number: 001-32477





TIENS
BIOTECH GROUP (USA), INC.


(Exact
name of registrant as specified in its charter)





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





No. 6,
Yuanquan Rd.


Wuqing
New Tech Industrial Park


Tianjin, China
301700


(Address
of principal executive offices)  (Zip Code)





+86-22-8213-7914


(Registrant’s
telephone number, including area code)





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





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





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





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





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





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


Yes ̈     Nox





There
were 71,333,586 shares of the registrant’s common stock outstanding on August
13, 2009.





TIENS
BIOTECH GROUP (USA), INC.


INDEX
TO FORM 10-Q


PAGEPART
      I - FINANCIAL INFORMATION
                  
                  4ITEM
      1. FINANCIAL STATEMENTS
                  
                  4Consolidated
      Balance Sheets as of June 30, 2009 (Unaudited) and December 31,
      2008
                  
                  4Consolidated
      Statements of Income and Other Comprehensive Income for the Three and Six
      Months Ended June 30, 2009 and 2008 (Unaudited)
                  
                  5Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008
      (Unaudited)
                  
                  6Notes
      to Consolidated Financial Statements (Unaudited)
                  
                  7ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                  
                  25ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                  
                  37ITEM
      4T. CONTROLS AND PROCEDURES
                  
                  37PART
      II - OTHER INFORMATION
                  
                  38ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  
                  38ITEM
      6. EXHIBITS
                  
                  39




3





PART
I - FINANCIAL INFORMATION





ITEM 1. FINANCIAL
STATEMENTS





TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS


AS OF
JUNE 30, 2009 AND DECEMBER 31, 2008





June
      30,
                      
                      
                      December
      31,2009
                      
                      
                      2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                      
                      $
                      10,387,475
                      
                      
                      $
                      20,992,573Cash
      related to assets held for sale
                      
                      
                      23,953,055
                      
                      
                      
                      23,861,938Total
      cash
                      
                      
                      34,340,530
                      
                      
                      
                      44,854,511Accounts
      receivable, trade - related parties, net of allowance for doubtful
      accounts of $913,486 and $1,108,789 as of June 30, 2009 and December 31,
      2008 , respectively
                      
                      
                      29,702,386
                      
                      
                      
                      23,941,431Inventories
                      
                      
                      5,032,446
                      
                      
                      
                      8,365,607Other
      receivables
                      
                      
                      801,210
                      
                      
                      
                      813,591Other
      receivables - related parties
                      
                      
                      13,494,896
                      
                      
                      
                      15,729,076Employee
      advances
                      
                      
                      194,073
                      
                      
                      
                      112,591Prepaid
      expenses
                      
                      
                      737,779
                      
                      
                      
                      301,898Prepaid
      taxes
                      
                      
                      1,717,898
                      
                      
                      
                      1,531,207Other
      assets held for sale
                      
                      
                      10,828,631
                      
                      
                      
                      10,904,842Total
      current assets
                      
                      
                      96,849,849
                      
                      
                      
                      106,554,754PROPERTY,
      PLANT AND EQUIPMENT, net
                      
                      
                      10,796,643
                      
                      
                      
                      10,274,643OTHER
      ASSETS:Construction
      in progress
                      
                      
                      92,323,942
                      
                      
                      
                      72,300,104Construction
      deposits
                      
                      
                      4,695,601
                      
                      
                      
                      2,586,302Intangible
      assets, net
                      
                      
                      13,002,520
                      
                      
                      
                      13,137,195Other
      assets
                      
                      
                      73,050
                      
                      
                      
                      87,541Total
      other assets
                      
                      
                      110,095,113
                      
                      
                      
                      88,111,142Total
      assets
                      
                      $
                      217,741,605
                      
                      
                      $
                      204,940,539LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                      
                      $
                      5,237,723
                      
                      
                      $
                      6,283,849Advances
      from customers - related parties
                      
                      
                      3,024,666
                      
                      
                      
                      3,239,650Wages
      and benefits payable
                      
                      
                      747,381
                      
                      
                      
                      1,449,146Other
      taxes payable
                      
                      
                      269,717
                      
                      
                      
                      117,818Contractor
      deposits
                      
                      
                      321,990
                      
                      
                      
                      163,248Contractor
      payables
                      
                      
                      14,229,565
                      
                      
                      
                      11,871,456Other
      payables
                      
                      
                      1,541,229
                      
                      
                      
                      1,933,743Other
      payables - related parties
                      
                      
                      213,263
                      
                      
                      
                      6,373,900Current
      portion of long term debt, related party
                      
                      
                      2,130,000
                      
                      
                      
                      2,130,000Liabilities
      directly associated with assets classified as held for
sale
                      
                      
                      116,729
                      
                      
                      
                      122,047Total
      current liabilities
                      
                      
                      27,832,263
                      
                      
                      
                      33,684,857NON-CURRENT
      LIABILITIESLong
      term debt, net of current portion, related party
                      
                      
                      1,072,742
                      
                      
                      
                      2,137,742Deferred
      income
                      
                      
                      11,224,209
                      
                      
                      
                      11,208,844Total
      non current liabilities
                      
                      
                      12,296,951
                      
                      
                      
                      13,346,586Total
      liabilities
                      
                      
                      40,129,214
                      
                      
                      
                      47,031,443EQUITY:Shareholders'
      equity of the Company:Common
      stock, $0.001 par value, 250,000,000 shares authorized,
                        71,333,586
      issued and outstanding, respectively
                      
                      
                      71,334
                      
                      
                      
                      71,334Paid-in-capital
                      
                      
                      9,385,565
                      
                      
                      
                      9,234,123Statutory
      reserves
                      
                      
                      13,217,217
                      
                      
                      
                      9,420,783Retained
      earnings
                      
                      
                      121,298,044
                      
                      
                      
                      106,325,356Accumulated
      other comprehensive income
                      
                      
                      24,062,054
                      
                      
                      
                      23,851,062Total
      shareholders' equity of the Company
                      
                      
                      168,034,214
                      
                      
                      
                      148,902,658Noncontrolling
      interest
                      
                      
                      9,578,177
                      
                      
                      
                      9,006,438Total
      equity
                      
                      
                      177,612,391
                      
                      
                      
                      157,909,096Total
      liabilities and equity
                      
                      $
                      217,741,605
                      
                      
                      $
                      204,940,539





The
accompanying notes are an integral part of this statement.


4




TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2009 and 2008 (UNAUDITED)





Three
      months ended June 30,
                
                
                Six
      months ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008REVENUE
      - RELATED PARTIES
                
                $
                20,551,036
                
                
                $
                19,654,447
                
                
                $
                38,788,581
                
                
                $
                32,475,268COST
      OF SALES - RELATED PARTIES
                
                
                6,117,409
                
                
                
                6,203,705
                
                
                
                11,852,468
                
                
                
                10,243,765GROSS
      PROFIT
                
                
                14,433,627
                
                
                
                13,450,742
                
                
                
                26,936,113
                
                
                
                22,231,503SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                
                
                4,014,591
                
                
                
                5,088,597
                
                
                
                7,145,527
                
                
                
                8,335,796INCOME
      FROM OPERATIONS
                
                
                10,419,036
                
                
                
                8,362,145
                
                
                
                19,790,586
                
                
                
                13,895,707Interest
      expense
                
                
                (53,201
                )
                
                
                (80,078
                )
                
                
                (105,817
                )
                
                
                (132,662
                )Interest
      income
                
                
                100,779
                
                
                
                268,517
                
                
                
                186,547
                
                
                
                505,849Other
      expense
                
                
                (28,144
                )
                
                
                (1,246,287
                )
                
                
                (73,432
                )
                
                
                (986,864
                )OTHER
      (EXPENSE) INCOME, NET
                
                
                19,434
                
                
                
                (1,057,848
                )
                
                
                7,298
                
                
                
                (613,677
                )INCOME
      BEFORE INCOME TAXES
                
                
                10,438,470
                
                
                
                7,304,297
                
                
                
                19,797,884
                
                
                
                13,282,030INCOME
      TAXES
                
                
                123,101
                
                
                
                1,664,054
                
                
                
                482,716
                
                
                
                3,144,448NET
      INCOME
                
                
                10,315,369
                
                
                
                5,640,243
                
                
                
                19,315,168
                
                
                
                10,137,582LESS:
      Net income attributable to the noncontrolling interest
                
                
                (139,071
                )
                
                
                (998,642
                )
                
                
                (546,045
                )
                
                
                (1,887,079
                )NET
      INCOME ATTRIBUTABLE TO THE COMPANY
                
                
                10,176,298
                
                
                
                4,641,601
                
                
                
                18,769,123
                
                
                
                8,250,503OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                
                
                10,989
                
                
                
                2,675,768
                
                
                
                210,992
                
                
                
                7,099,628COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE COMPANY
                
                
                10,187,287
                
                
                
                7,317,369
                
                
                
                18,980,115
                
                
                
                15,350,131COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
                
                
                140,300
                
                
                
                1,174,080
                
                
                
                559,895
                
                
                
                2,337,664COMPREHENSIVE
      INCOME
                
                $
                10,327,587
                
                
                $
                8,491,449
                
                
                $
                19,540,010
                
                
                $
                17,687,795EARNINGS
      PER SHARE, BASIC AND DILUTED
                
                $
                0.14
                
                
                $
                0.07
                
                
                $
                0.26
                
                
                $
                0.12WEIGHTED
      AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                
                
                71,333,586
                
                
                
                71,333,586
                
                
                
                71,333,586
                
                
                
                71,333,586





The
accompanying notes are an integral part of this statement.


5





TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED)





Six
      months ended June 30,2009
                        
                        
                        2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                        
                        $
                        19,315,168
                        
                        
                        $
                        10,137,582Adjustments
      to reconcile net income to cash provided by (used in) operating
      activities:Provision
      for doubtful accounts
                        
                        
                        (196,863
                        )
                        
                        
                        37,715Depreciation
                        
                        
                        1,112,849
                        
                        
                        
                        1,373,096Amortization
                        
                        
                        194,380
                        
                        
                        
                        140,911Interest
      expense (income)
                        
                        
                        2,710
                        
                        
                        
                        (92,523
                        )Gain
      on sale of assets
                        
                        
                        (15,717
                        )
                        
                        
                        (8,554
                        )(Increase)
      decrease in assets:Accounts
      receivable, trade - related parties
                        
                        
                        (5,532,449
                        )
                        
                        
                        (15,693,689
                        )Accounts
      receivable, trade - third parties
                        
                        
                        -
                        
                        
                        
                        22,722Other
      receivables
                        
                        
                        10,743
                        
                        
                        
                        498,556Other
      receivables - related parties
                        
                        
                        (992,241
                        )
                        
                        
                        (526,327
                        )Inventories
                        
                        
                        3,355,993
                        
                        
                        
                        190,894Employee
      advances
                        
                        
                        (80,805
                        )
                        
                        
                        (185,415
                        )Prepaid
      expense
                        
                        
                        (435,576
                        )
                        
                        
                        365,778Increase
      (decrease) in liabilities:Accounts
      payable
                        
                        
                        (1,579,065
                        )
                        
                        
                        1,223,358Advances
      from customers - related parties
                        
                        
                        (219,470
                        )
                        
                        
                        663,444Wages
      and benefits payable
                        
                        
                        (703,898
                        )
                        
                        
                        (422,254
                        )Other
      taxes payable
                        
                        
                        8,920
                        
                        
                        
                        1,205,680Other
      payables
                        
                        
                        (395,970
                        )
                        
                        
                        (67,118
                        )Other
      payables - related parties
                        
                        
                        (202,847
                        )
                        
                        
                        16,388Net
      cash provided by (used in) operating activities
                        
                        
                        13,645,862
                        
                        
                        
                        (1,119,756
                        )CASH
      FLOWS FROM INVESTING ACTIVITIES:Collections
      from loans to local government
                        
                        
                        105,193
                        
                        
                        
                        450,197Repayment
      of loan from related parties
                        
                        
                        -
                        
                        
                        
                        2,133,222Construction
      deposits
                        
                        
                        (3,846,961
                        )
                        
                        
                        (2,206,145
                        )Contractor
      deposits
                        
                        
                        158,551
                        
                        
                        
                        101,801Addition
      to construction in progress
                        
                        
                        (15,954,182
                        )
                        
                        
                        (9,722,463
                        )Proceeds
      from sales of properties
                        
                        
                        17,039
                        
                        
                        
                        61,152Purchase
      of equipment and automobiles
                        
                        
                        (921,388
                        )
                        
                        
                        (360,192
                        )Net
      cash used in investing activities
                        
                        
                        (20,441,748
                        )
                        
                        
                        (9,542,428
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Loan
      from (repayment to) related parties
                        
                        
                        (3,945,510
                        )
                        
                        
                        7,400,000Payments
      on long term debt, related party
                        
                        
                        -
                        
                        
                        
                        (1,065,000
                        )Proceeds
      from joint venture investor in Dongfeng
                        
                        
                        -
                        
                        
                        
                        2,828Payments
      to minority interest shareholder
                        
                        
                        -
                        
                        
                        
                        (5,070,091
                        )Increase
      in paid in capital
                        
                        
                        163,331
                        
                        
                        
                        -Net
      cash provided by (used in) financing activities
                        
                        
                        (3,782,179
                        )
                        
                        
                        1,267,737EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                        
                        
                        64,084
                        
                        
                        
                        3,053,932DECREASE
      IN CASH
                        
                        
                        (10,513,981
                        )
                        
                        
                        (6,340,515
                        )CASH,
      beginning of period
                        
                        
                        44,854,511
                        
                        
                        
                        54,081,848CASH,
      end of period
                        
                        $
                        34,340,530
                        
                        
                        $
                        47,741,333Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
                        
                        $
                        105,817
                        
                        
                        $
                        132,662Income
      taxes
                        
                        $
                        667,347
                        
                        
                        $
                        1,822,619





The
accompanying notes are an integral part of this statement.


6




TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note
1 - Background





Tiens
Biotech Group (USA), Inc. (the "Company" or "Tiens") was incorporated on July
13, 1990 as Super Shops, Inc. in the State of Michigan. In October 2000, Super
Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition
Corp., and subsequently to Strategika, Inc. in February 2002. On December 31,
2003, the Company changed its name from Strategika, Inc. to Tiens Biotech Group
(USA), Inc.





The
Company is currently owned 4.91% by public stockholders and 95.09% by Jinyuan
Li, the Company’s current Chairman, CEO and President. The Company owns 100% of
Tianshi International Holdings Group Limited ("Tianshi Holdings"). Tianshi
Holdings owns 80% of Tianjin Tianshi Biological Development Co., Ltd.
("Biological"), 96% of Tiens Yihai Co., Ltd. ("Tiens Yihai") and 100% of Tianjin
Tiens Life Resources Co., Ltd. (“Life Resources”).





The
Company plans to sell Tiens Yihai, a joint venture owned by the Company and
Tianjin Tianshi Pharmaceuticals Co., Ltd. (”Tianshi Pharmaceuticals”), in 2009.
In anticipation of this sale, the registered capital requirement of Tiens Yihai
was decreased from $200 million to $29,989,361, equal to its then-current paid
in capital. This reduction was approved by the local government on October 14,
2008. Pursuant to the change of the registered capital requirement and the
capital contributions from both investors, the share held by Tianshi Holding
decreased from 99.4% to 96% and the share held by Tianshi Pharmaceuticals
increased to 4% from 0.06%. Tianshi Holdings, Tianshi Pharmaceuticals and
Tianjin Tianshi Group Co., Ltd. ("Tianshi Group”) entered a letter of intent on
December 31, 2008, pursuant to which Tianshi Pharmaceuticals agreed to buy
Tianshi Holdings’ 96% share of Tiens Yihai, with Tianshi Group guaranteeing
payment. In addition, Tiens Yihai is currently in discussions with the Chinese
government about a potential sale of its real property to the Chinese
government.  Since the Company plans to sell its 96% share of Tiens
Yihai or the assets of Tiens Yihai in 2009, the assets and liabilities of Tiens
Yihai have been classified as assets held for sale and liabilities directly
associated with assets classified as held for sale, respectively.





Nature ofoperations





The
Company through its subsidiaries is primarily engaged in the manufacturing of
nutritional supplement products, including wellness products and dietary
supplement products. In the People’s Republic of China (“PRC”), the Company
sells its products to Tianjin Tianshi Biological Engineering Co., Ltd. (“Tianshi
Engineering”). Tianshi Engineering, in turn, sells the products to customers
through its branches and affiliated companies and at chain stores which are
owned by individual distributors. Outside the PRC, the Company sells its
products to overseas affiliated companies located in 46 countries that in
turn re-package them and sell to independent direct sales
distributors.





Note
2 – Summary of significant accounting policies





Basis of
presentation





The
financial statements of the Company and its subsidiaries are prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”). These Consolidated Financial Statements for interim
periods are unaudited. In the opinion of management, the consolidated financial
statements include all adjustments, consisting only of normal, recurring
adjustments, necessary for their fair presentation.The results reported in
these Consolidated Financial Statements are not necessarily indicative of the
results that may be reported for the entire year. The accompanying consolidated
financial statements have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission and do not include
all information and footnotes necessary for a complete presentation of financial
statements in conformity with U.S. GAAP. These Consolidated Financial Statements
should be read in conjunction with the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008, filed with the Securities and Exchange
Commission on March 31, 2009.




7


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




The reporting
entity





The
Company’s consolidated financial statements reflect the activities of the
following Company subsidiaries:





Subsidiary
                    
                    Jurisdiction
      of Formation
                    
                    %
      OwnershipTianshi
      Holdings
                    
                    British
      Virgin Islands
                    
                    
                    100.0
                    %Biological
                    
                    P.R.C.
                    
                    
                    80.0
                    %Life
      Resources
                    
                    P.R.C.
                    
                    
                    100.0
                    %





Principles of
consolidation





The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions and
balances are eliminated in consolidation.





Use of
estimates





The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Management
believes that the estimates utilized in preparing its financial statements are
reasonable and prudent. Actual results could differ from these
estimates.





Foreign currency
translation





The
reporting currency of the Company is the US dollar. Biological, Tiens Yihai and
Life Resources' financial records are maintained and the statutory financial
statements are stated in the local currency, Renminbi (RMB), as their functional
currency. Results of operations and cash flows are translated at average
exchange rates during the period, and assets and liabilities are translated at
the unified exchange rate as quoted by the People's Bank of China at the end of
each reporting period. Translation adjustments resulting from this process are
included in other comprehensive income in the statement of income and other
comprehensive income.





Translation
adjustments amounted to $210,992 and $7,099,628 for the six months ended June
30, 2009 and 2008, respectively, and $10,989 and $2,675,768 for the three months
ended June 30, 2009 and 2008, respectively. Asset and liability accounts at June
30, 2009 and December 31, 2008 were translated at 6.85 RMB to $1.00 USD. Equity
accounts are stated at their historical rate. The average translation rates
applied to income statement accounts for the six months ended June 30, 2009 and
2008 were 6.84 RMB and 7.07 RMB, respectively. Cash flows are also translated at
average translation rates for the period. Therefore, amounts reported on the
statements of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheets.





Fair value of financial
instruments





Fair
value is defined in SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), as the price that would be received to sell an asset or paid to transfer
a liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the
measurement date. SFAS 157 establishes a fair value hierarchy, which prioritizes
the inputs used in measuring fair value into three broad levels as
follows:





•
Level one — Quoted market prices in active markets for
identical  assets or liabilities;





•
Level two — Inputs other than level one inputs that are either directly or
indirectly observable; and





•
Level three — Unobservable inputs developed using estimates and assumptions,
which are developed by the reporting entity and reflect those assumptions that a
market participant would use.




Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company's financial instruments consist primarily of
cash, trade accounts receivable, trade payables, advances, other receivables,
and debt instruments. The carrying amounts of the Company's financial
instruments generally approximate their fair values at June 30, 2009 and
December 31, 2008, except for long-term debt, which has a fixed interest rate.
The fair value of the long-term debt is estimated based on the borrowing rates
currently available to the Company for bank loans with similar terms and average
maturities. The carrying value and fair value of long-term debt is as
follows:




8


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


June
      30, 2009
                
                
                December
      31, 2008Balancesheet
                  amount
                
                
                Fair
      value
                
                
                Balancesheet
                  amount
                
                
                Fair
      valueLong-term
      debt - related party
                
                $
                3,202,742
                
                
                $
                3,192,631
                
                
                $
                4,267,742
                
                
                $
                4,244,098





Cash





Cash
includes cash on hand and demand deposits in accounts maintained with banks of
which no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant risks
on its cash in bank accounts.





Accounts
receivable





The
Company's trade accounts receivable are mainly due from related companies. The
Company has made full provision for accounts receivable-related parties aged
over one year based upon the related parties ability to collect their
receivables and a general allowance for doubtful debt of 0.5% of the remaining
accounts receivable-related parties. Management reviews its accounts receivable
on a regular basis to determine if the bad debt allowance is adequate, paying
particular attention to the age of receivables outstanding. At each of June 30,
2009 and December 31, 2008, there were no receivables due from Tianshi
Engineering outstanding more than 90 days. At June 30, 2009 and December 31,
2008, receivables due from overseas related companies outstanding more than 180
days totaled $1,496,280 and $3,316,115, respectively. The Company did not incur
any losses on receivables for the periods reported. The following table
represents the changes in the allowance for doubtful accounts:





Balance
      at
                            Beginning
      of
                            Period
                          
                          
                          Increase
      (Decrease)
                            of
      Provision for
                            Doubtful
      Accounts
                          
                          
                          Balance
      at
                            End
      of PeriodPeriod
      ended June 30, 2009Reserves
      and allowancesdeducted
      from assets accounts:Allowance
      for doubtful accounts:
                          
                          $
                          1,108,789
                          
                          
                          $
                          (195,303
                          )
                          
                          $
                          913,486Period
      ended June 30, 2008Reserves
      and allowancesdeducted
      from assets accounts:Allowance
      for doubtful accounts:
                          
                          $
                          71,700
                          
                          
                          $
                          37,715
                          
                          
                          $
                          109,415





Inventories





Inventories
are stated at the lower of cost or market using the moving average basis. The
Company reviews its inventory annually for possible obsolete goods or to
determine if any reserves are necessary for potential obsolescence.




9


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Employee
advances





Employee
advances represent cash advances to various employees of the Company. In the
PRC, a majority of business transactions are completed in cash. These cash
advances represent monies advanced to certain employees to pay for various
expenses and purchases related to the Company's daily operations.





Prepaid
expenses





Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
Company reviews its advances to suppliers annually to determine whether
provisions should be made. The amount included in prepaid expense is net of any
provisions. Provisions for prepaid expenses are as follows:





Balance
      at
                                    Beginning
      of
                                    Period
                                  
                                  
                                  Increase
      of Provision
                                    for
      Doubtful
                                    Accounts
                                  
                                  
                                  Balance
      atEnd of PeriodPeriod
      ended June 30, 2009Reserves
      and provisionsdeducted from assets accounts:Provision
      for prepaid expenses:
                                  
                                  $
                                  952,071
                                  
                                  
                                  $
                                  1,305
                                  
                                  
                                  $
                                  953,376Period
      ended June 30, 2008Reserves
      and provisionsdeducted from assets accounts:Provision
      for prepaid expenses:
                                  
                                  $
                                  872,053
                                  
                                  
                                  $
                                  56,130
                                  
                                  
                                  $
                                  928,183





Property, plant
and equipment,
net





Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives of the assets are as
follows:





Estimated Useful LifeBuildings
      and improvements
                20
      yearsMachinery
      and equipment
                10
      yearsComputer,
      office equipment and furniture
                5
      yearsAutomobiles
                5
      years





The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts, and any gain or loss is included in the
consolidated statements of income and other comprehensive income. Maintenance,
repairs and minor renewals are charged directly to expenses as incurred. Major
additions and betterments to buildings and equipment are
capitalized.





Construction in
progress





Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company's plant facilities. No depreciation is
provided for construction in progress until such time as the relevant assets are
completed and are ready for their intended use.





Construction
deposits





Construction
deposits represent advances paid by the Company to contractors for construction
in progress.





Intangible assets





Intangible
assets mainly consist of land use rights. All land located in the PRC is owned
by the government and cannot be sold to any individual or company. However, the
government grants "land use rights" for a specified period of time. The Company
amortizes its land use rights according to the actual useful life of 50 years.
Other intangible assets include patents and trademarks and are amortized over
their estimated useful life ranging from five to ten years.




10


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Other
assets





Other
assets mainly consist of a deposit and a related loan made to a local government
agency for the acquisition of land use rights in Shanghai. Originally, the
deposit related to the proposed acquisition of land use rights for 263 acres of
land by Tiens Yihai. However, on November 10, 2006, Tianshi Holdings and the
local government entered a supplemental agreement pursuant to which the parties
agreed to the acquisition of land use rights by Tiens Yihai of a reduced 80
acres parcel of land. As of June 30, 2009, land use rights for only 50 of the 80
acres had been received. Since the Company plans to sell its 96% share of Tiens
Yihai in 2009, the loan made to local government agency was included in assets
held for sale in the consolidated financial statements of the Company as of June
30, 2009.





Impairment of long-lived
assets





Long-lived
assets, including intangible assets, of the Company are reviewed annually as to
whether their carrying value has become impaired. The Company considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from related operations. The Company also re-evaluates the periods of
depreciation and amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives.





Deferred
income





Deferred
income consists of government grants. On August 2, 2005 and November 20, 2006,
the Company received two government grants related to the purchase of land use
rights in the amount of RMB 35,803,461 (or US $5,230,886). On August 28, 2008,
Life Resources paid RMB 41,022,061 (or US $5,993,323) for the zoning changes to
one parcel of land on which the land use rights were changed from “industrial”
to “educational”. On September 12, 2008, the Company received RMB 41,022,061 (or
US $5,993,323) from a government grant. The grants are treated as deferred
income and will be amortized over the life of the buildings on the
land.





Noncontrollinginterest





Noncontrolling
interest represents the outside shareholder’s 20% ownership of Biological and 4%
ownership of Tiens Yihai as of June 30, 2009. Prior to January 1, 2009, the
share of Tiens Yihai owned by noncontrolling shareholders was 0.6%. The Company
has adopted SFAS No. 160, "Non-controlling Interests in Consolidated Financial
Statements – An amendment of ARB No. 51". In accordance with the Statement, the
Company reclassified noncontrolling interest from the section of the balance
sheet between liabilities and equity to equity.





Revenue
recognition





The
Company sells both semi-finished products and finished products to Tianshi
Engineering domestically. Revenue from the sale of semi-finished products is
recognized at FOB Tianjin shipping point. Revenue from the sale of finished
products is recognized only when the related party Chinese distributor
recognizes sales of the Company's products to unaffiliated third parties.
Revenues in both cases are net of taxes.





For
overseas sales, the Company sells mostly finished products. The Company
recognizes revenue from international sales (non-Chinese) to affiliated parties,
net of taxes, as goods are shipped and clear review by the customs department of
the Chinese government.





The
Company is generally not contractually obligated to accept returns. However, on
a case-by-case negotiated basis, the Company permits customers to return their
products. In accordance with SFAS No. 48, "Revenue Recognition when the Right of
Return Exists", revenue is recorded net of an allowance for estimated returns.
Such reserves are based upon management's evaluation of historical experience
and estimated costs. The amount of the reserves ultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements. As the Company did not receive any returns of
products during the past three years, and management does not anticipate
allowing any returns in 2009 related to previous revenues, no allowance for
estimated returns has been recorded as of June 30, 2009 and December 31,
2008.


11
  TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Advertisingcosts





The
Company sells all of its products to related parties, and these related parties
are primarily responsible for marketing. Advertising costs of the Company for
the six months ended June 30, 2009 and 2008 amounted to $6,211 and $213,468,
respectively, and for the three months ended June 30, 2009 and 2008 amounted to
$6,211 and $86,828, respectively, and were expensed as incurred.





Shipping andhandling





Shipping
and handling costs totaled $242,772 and $222,637 for the six months ended June
30, 2009 and 2008, respectively, and $102,070 and $171,922 for the three months
ended June 30, 2009 and 2008, respectively. The Company sells products on FOB
condition, however, it usually prepays shipping and handling expenses to
transportation companies on behalf of customers and collects these shipping and
handling expenses when it receives payments from customers. The payments
received from customers were included in revenue and the related shipping and
handling costs were included in selling, general and administrative
expenses.





Research anddevelopment





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 $668,720 and $613,662 for
the six months ended June 30, 2009 and 2008, respectively, and $ 289,260 and $
383,052 for the three months ended June 30, 2009 and 2008, respectively. These
costs are included in selling, general and administrative expenses in the
accompanying statements.





Income
taxes





The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes”. Under this method, deferred income taxes are recognized for
the estimated tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
year-end, based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established to reduce deferred tax assets to the amount
expected to be realized when, in management’s opinion, it is more likely than
not that some portion of the deferred tax assets will not be realized. The
provision for income taxes represents current taxes payable, net of the change
during the period in deferred tax assets and liabilities. The Company adopted
FIN 48, “Accounting for Uncertainty in Tax Positions”.





The
Company has not been subjected to income tax examinations by taxing authorities
for the six months ended June 30, 2009 and the year ended December 31, 2008.
During the six months ended June 30, 2009 and the year ended December 31, 2008,
the Company did not recognize any amount in interest and penalties. The Company
did not accrue any amount for the payment of interest and penalties at June 30,
2009 and December 31, 2008, respectively.





Earnings per
share





The
Company has adopted SFAS No. 128, "Earnings per Share". SFAS No. 128 requires
the presentation of earnings per share (“EPS”) as Basic EPS and Diluted EPS.
Basic EPS excludes dilution and is computed by dividing net income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. There are no differences between Basic and
Diluted EPS for the six months ended June 30, 2009 and
2008.


12





TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Other comprehensive
income





Other
comprehensive income represents foreign currency translation adjustments for the
period. The amounts shown in the Consolidated Statements of Income and Other
Comprehensive Income and Consolidated Statements of Shareholders’ Equity do not
include other comprehensive income attributed to noncontrolling
interest.





Recently issued accounting
pronouncements





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





In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements – An amendment of ARB No. 51" (“SFAS 160”).
SFAS 160 provides guidance on how to report a non-controlling interest in
consolidated financial statements. The objective of SFAS 160 is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. SFAS 160
became effective in the first quarter of 2009. As a result of the adoption of
SFAS 160 from January 1, 2009, the Company reclassified minority interest of
$9.6 million to noncontrolling interest as a component of equity on
the Company’s Consolidated Balance Sheet for the six months ended June 30,
2009.





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





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





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





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




13


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165
is to establish general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. SFAS 165 is effective for financial
statements issued for interim or annual financial periods ending after June 15,
2009. The Company evaluated subsequent events  after the balance
sheet date of June 30, 2009 through the filing of this report with the SEC
on August 14, 2009. The adoption of SFAS 165 had no effect on the Company’s
consolidated financial statements.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 is to
improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets. SFAS 166 is effective for
financial statements issued for fiscal years beginning after December 15, 2009
and interim periods within those fiscal years. The Company is evaluating
the impact that this Statement will have on the Company’s consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”). SFAS 167 is a revision to FASB Interpretation No. 46(R),
“Consolidation of Variable Interest Entities”, and changes how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. SFAS 167 is effective for financial statements
issued for fiscal years beginning after December 15, 2009 and interim
periods within those fiscal years. The Company is evaluating the impact
that this Statement will have on the Company’s consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles—a replacement of
FASB Statement No. 162” (“SFAS 168”). SFAS 168 become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of this Statement, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative. SFAS 168 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of this Statement will have no effect on the
Company’s consolidated financial statements.





Note
3 – Inventories





Inventories
consist of the following at June 30, 2009 and December 31, 2008:




14


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


June
      30,
                
                
                December
      31,2009
                
                
                2008Raw
      materials
                
                $
                1,980,445
                
                
                $
                2,507,073Packing
      materials
                
                
                842,333
                
                
                
                1,131,252Miscellaneous
      supplies
                
                
                301,296
                
                
                
                402,630Work
      in process
                
                
                428,805
                
                
                
                699,205Finished
      goods
                
                
                1,479,567
                
                
                
                3,625,447Total
                
                $
                5,032,446
                
                
                $
                8,365,607





The
Company has written off obsolete goods in the amount of $0 and $99,415 for the
six months ended June 30, 2009 and 2008, respectively, and $0 and
$ 92,064 for the three months ended June 30,2009 and 2008,
respectively.





Note
4 – Supplemental disclosure of cash flow information





On June
5, 2009, Tianshi Holdings, Biological, Tianshi International Investment Group
Co., Ltd. (“Tianshi Investment”) and Tianshi Group entered an agreement,
pursuant to which liabilities in the form of loan receivable due to Tianshi
Investment from the Company in the amount of RMB27,000,000 (or US $3.9 million)
were offset against a cash payment of RMB27,000,000 (or US $3.9 million) from
Biological to Tianshi Group.





The right
to offset existed because:





1.
            The
      Company had a determinable outstanding loan due to Tianshi
      Investment;


2.
            Tianshi
      Investment agreed to lend a determinable amount to Tianshi
      Group;


3.
            The
      Company funded the amount that Tianshi Investment agreed to lend to
      Tianshi Group;


4.
            The
      Company had the right to offset the amount of the outstanding loan due to
      Tianshi Investment with the amount that the Company funded to Tianshi
      Group;


5.
            The
      Company, Tianshi Investment and Tianshi Group agreed to offset the two
      amounts; and


6.
            The
      agreement to offset is enforceable under Chinese contract
    law.





On June
30, 2009, Tianshi Engineering paid $2,134,875.20 to Tianshi Investment on behalf
of the Company, representing a loan payment by Tianshi Holdings. In return,
$2,134,875.20 of Tianshi Holdings’ loan due from Tianshi Engineering
was offset.





The right
to offset existed because:





1.
            Tianshi
      Engineering had a determinable outstanding debt payable to the
      Company;


2.
            The
      Company had a determinable outstanding debt payable to Tianshi
      Investment;


3.
            The
      Company had the right to offset the two
amounts;


4.
            The
      Company, Tianshi Investment and Tianshi Engineering agreed to offset the
      two  amounts; and


5.
            The
      agreement to offset is enforceable under Chinese contract
    law.





On June
30, 2009, Tianshi Engineering paid $1,170,816.62 to Tianyuan Capital on behalf
of the Company, representing one installment of a loan that Tianyuan Capital
lent to the Company, plus interest on that loan for the six months ended June
30, 2009. In return, $1,170,816.62 of a loan that Tianshi Holdings made to
Tianshi Engineering was offset against such payment.





The right
to offset existed because:





1.
            Tianshi
      Engineering had a determinable outstanding debt payable to the
      Company;


2.
            The
      Company had a determinable outstanding debt payable to Tianyuan
      Capital;


3.
            The
      Company had the right to offset the two
amounts;




15


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


4.
            The
      Company, Tianyuan Capital and Tianshi Engineering agreed to offset the two
       amounts; and


5.
            The
      agreement to offset is enforceable under Chinese contract
    law.





Note
5 – Prepaid expenses





Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
details of prepaid expenses at June 30, 2009 and December 31, 2008 are as
follows:





June
      30,
                
                
                December
      31,2009
                
                
                2008Advance
      to suppliers
                
                $
                736,082
                
                
                $
                297,576Short-term
      prepaid expenses
                
                
                1,697
                
                
                
                4,322Total
                
                $
                737,779
                
                
                $
                301,898





Note
6 – Property, plant and equipment, net





Property,
plant and equipment consist of the following at June 30, 2009 and December 31,
2008:


June
      30,
                
                
                December
      31,2009
                
                
                2008Buildings
      and improvements
                
                $
                1,557,229
                
                
                $
                1,558,524Office
      equipment
                
                
                385,422
                
                
                
                383,678Computer
      equipment and software
                
                
                2,869,737
                
                
                
                2,900,333Machinery
      and equipment
                
                
                13,933,730
                
                
                
                12,835,301Automobiles
                
                
                4,466,376
                
                
                
                4,145,367Total
                
                
                23,212,494
                
                
                
                21,823,203Less:
      accumulated depreciation
                
                
                (12,415,851
                )
                
                
                (11,548,560
                )Property,
      plant and equipment, net
                
                $
                10,796,643
                
                
                $
                10,274,643





Depreciation
expense for the six months ended June 30, 2009 and 2008 amounted to $1,112,849
and $1,373,096, respectively, and $568,038 and $689,941 for the three months
ended June 30, 2009 and 2008, respectively.





Note
7 - Intangible assets





Intangible
assets consist of the following at June 30, 2009 and December 31,
2008:





June
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008Land
      use rights
                    
                    $
                    13,516,652
                    
                    
                    $
                    13,498,149Other
      intangible assets
                    
                    
                    343,897
                    
                    
                    
                    343,426Less
      accumulated amortization
                    
                    
                    (858,029
                    )
                    
                    
                    (704,380
                    )Intangible
      assets, net
                    
                    $
                    13,002,520
                    
                    
                    $
                    13,137,195





Amortization
expense for the six months ended June 30, 2009 and 2008 amounted to $194,380 and
$140,911, respectively, and $97,237 and $80,017 for the three months ended June
30, 2009 and 2008, respectively.





The
estimated amortization expense for the next five years is as
follows:




16


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Estimated
      amortization expense forthe year ending December
31,
                      
                      Amount2009
                      
                      $
                      304,9792010
                      
                      $
                      304,5942011
                      
                      $
                      298,0902012
                      
                      $
                      298,0902013
                      
                      $
                      287,008





Note
8 – Assets held for sale





Due to
the continued uncertainty relating to the Tiens Yihai project, the Company plans
to sell Tiens Yihai or the assets of Tiens Yihai in 2009. Tianshi Holdings,
Tianshi Pharmaceuticals and Tianshi Group entered a letter of intent on December
31, 2008, pursuant to which Tianshi Pharmaceuticals agreed to buy Tianshi
Holdings’ 96% share of Tiens Yihai, with Tianshi Group guaranteeing
payment.  In addition, Tiens Yihai is currently in discussions with
the Chinese government about a potential sale of its real property to the
Chinese government.





The
assets and liabilities of Tiens Yihai have been classified as assets held for
sale and liabilities directly associated with assets classified as held for
sale, respectively, for the consolidated balance sheets presented herein. The
assets and liabilities of Tiens Yihai as of June 30, 2009 and December 31, 2008
were as follows:





June 30, 2009
                      
                      
                      December 31, 2008Cash
                      
                      $
                      23,953,055
                      
                      
                      $
                      23,861,938Other
      receivables-third parties
                      
                      
                      8,890
                      
                      
                      
                      6,126Employee
      advances
                      
                      
                      804
                      
                      
                      
                      1,341Property,
      plant, and equipment,net
                      
                      
                      409,707
                      
                      
                      
                      548,717Construction
      In progress
                      
                      
                      2,541,002
                      
                      
                      
                      2,462,108Intangible
      assets, net
                      
                      
                      2,572,540
                      
                      
                      
                      2,596,029Long-term
      prepaid expense
                      
                      
                      5,295,688
                      
                      
                      
                      5,290,521Assets
      held for sale
                      
                      $
                      34,781,686
                      
                      
                      $
                      34,766,780Accounts
      payable
                      
                      
                      3,316
                      
                      
                      
                      3,312Wages
      and benefits payable
                      
                      
                      83,286
                      
                      
                      
                      88,648Other
      taxes payable
                      
                      
                      -
                      
                      
                      
                      2Other
      payables
                      
                      
                      29,939
                      
                      
                      
                      29,898Other
      payables - related parties
                      
                      
                      188
                      
                      
                      
                      187Liabilities
      directly associted with  assets classified as held for
      sale
                      
                      $
                      116,729
                      
                      
                      $
                      122,047





Note
9 – Statutory reserves





The laws
and regulations of the PRC 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 its board of directors, after the
statutory reserve.  The Company’s statutory reserves represent
restricted retained earnings and include the surplus reserve fund, the common
welfare fund, and the enterprise fund.




17


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




Statutory reserve
fund




Each of
the Company’s Chinese subsidiaries 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 that entity’s registered capital. During 2005, Biological's
statutory reserve fund had reached 50% of its registered capital, so no
statutory reserve was required thereafter. Life Resources, as a newer operating
subsidiary which has not reached its statutory reserve fund level, is currently
required to make this transfer. On June 25, 2009, Life Resources transferred
$2,530,956, representing 10% of its 2008 net income, as determined in accordance
with PRC accounting rules and regulations, to this reserve.




The
transfer to this reserve fund must be made before distribution of any dividend
to shareholders. On June 30, 2009 and December 31, 2008, the amounts of the
statutory reserve fund were $4,986,225 and $2,455,269,
respectively.




The
surplus reserve fund is non-distributable other than upon liquidation but can be
used to fund the entity’s 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 entity’s registered
capital.




Common welfare
fund




Each of
the Company’s Chinese subsidiaries is required to transfer part of its net
income in accordance with the PRC accounting rules and regulations, which is
determined by its board of directors, to a statutory common welfare fund until
the statutory reserve fund reaches 50% of that entity’s registered capital.
Beginning 2005, Biological was not required to transfer any additional net
income to the statutory reserve fund, so no transfer to the common welfare was
required thereafter. As a newer operating subsidiary which has not reached its
statutory reserve fund level, Life Resources is still required to made this
transfer accompanying the transfer of statutory reserve. On June 25, 2009, Life
Resources transferred $1,265,478, representing 5% of its 2008 net income, as
determined by its board of directors, to this 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. OnJune 30, 2009
and December 31, 2008, the amounts of the Company’s common welfare fund were
$5,974,977 and $4,709,499, respectively.




Enterprise
fund




The
enterprise fund may be used to acquire fixed assets or to increase the working
capital for production and operation of the business. No minimum contribution is
required. For the six months ended June 30, 2009 and 2008, no transfer was made
to this fund and the amount of the Company’s enterprise fund on each of June 30,
2009 and December 31, 2008 was $2,256,015.




18


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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
10 – Related party transactions and balances





The
Company mainly conducted related party transactions with Tianshi Group, Tianshi
Engineering, Tianshi Investment and overseas related companies of Tianshi
Group. Tianshi Group is owned 90% by Jinyuan Li and 10% by his daughter, Baolan
Li. Tianshi Engineering is owned 51% by Tianshi Group and 49% by Baolan Li.
Tianshi Investment is 100% owned by Jinyuan Li. Jinyuan Li owns or controls the
overseas related companies of Tianshi Group.




The
Company’s related party transactions are required to be reviewed and approved or
ratified by the Board of Directors. No director that is a related person in a
related party transaction may participate in any discussion, approval or
ratification of the related party transaction except to provide information
concerning it. The following tables are provided to facilitate an understanding
of the transactions and outstanding balances between those related
parties.




Three
      months ended June 30,
                    
                    
                    Six
      months ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Revenue-related
      parties
                    
                    $
                    20,551,036
                    
                    
                    $
                    19,654,447
                    
                    
                    $
                    38,788,581
                    
                    
                    $
                    32,475,268





June 30, 2009
                  
                  
                  December 31, 2008Accounts
      receivable, trade – related parties, net of allowance for doubtful
      accounts of $913,486 and $1,108,789 as of June 30, 2009 and December 31,
      2008, respectively
                  
                  $
                  29,702,386
                  
                  
                  $
                  23,941,431Other
      receivables – related parties
                  
                  $
                  13,494,896
                  
                  
                  $
                  15,729,076Advances
      from customers – related parties
                  
                  $
                  3,024,666
                  
                  
                  $
                  3,239,650Other
      payables – related parties
                  
                  $
                  213,263
                  
                  
                  $
                  6,373,900Current
      portion of long-term debt - related party
                  
                  $
                  2,130,000
                  
                  
                  $
                  2,130,000Long
      term debt – related party
                  
                  $
                  1,072,742
                  
                  
                  $
                  2,137,742




Revenue -related
parties




The
details of revenue-related parties are as follows:




Three
      months ended June 30,
                        
                        
                        Six
      months ended June 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Tianshi
      Engineering
                        
                        $
                        9,669,603
                        
                        
                        $
                        8,509,932
                        
                        
                        $
                        12,412,223
                        
                        
                        $
                        14,615,711Overseas
      Related Companies
                        
                        
                        10,881,433
                        
                        
                        
                        11,144,515
                        
                        
                        
                        26,376,358
                        
                        
                        
                        17,859,557Total
                        
                        $
                        20,551,036
                        
                        
                        $
                        19,654,447
                        
                        
                        $
                        38,788,581
                        
                        
                        $
                        32,475,268




The
Company markets all of its products through various domestic and international
business entities that are related to the Company through common ownership. As a
result, almost all of the Company’s total consolidated sales were to related
parties. During 2008 the Company sold products to a non-affiliated agent in
China for the purpose of exporting the Company’s products to overseas affiliated
parties in light of the slow-down and backlog of export clearances in China
during 2008. These sales accounted for less than 5% of the Company’s total
revenues in 2008.




19


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


In China,
the Company sells products to Tianshi Engineering, a related party through
common ownership. Tianshi Engineering, in turn, markets and sells the products
to customers through its branches and affiliated companies and at chain stores
owned by individual distributors. Tianshi Engineering is solely responsible for
all marketing and payments of sales commissions to independent
distributors.




Internationally,
the Company sells its products directly to overseas affiliates. These overseas
related companies re-packagethe Company’s products
and then sell to overseas independent distributors or end users of the products.
Due to the common ownership, there are no formal sales or administrative
agreements among Biological and those overseas related companies. The business
operations among these related entities are regulated through internal
ordinances.




Accounts receivable, trade -
related parties




The
details of accounts receivable, trade - related parties are as
follows:




June 30, 2009
                
                
                December 31, 2008Tianshi
      Engineering
                
                $
                9,679,338
                
                
                $
                4,362,355Overseas
      Related Companies
                
                
                20,936,534
                
                
                
                20,687,865Allowance
      for Doubtful Accounts
                
                
                (913,486
                )
                
                
                (1,108,789
                )Total
                
                $
                29,702,386
                
                
                $
                23,941,431




Other receivables- related
parties





Other
receivables - related parties are generated by the Company making various cash
advances and short term loans, the allocation of various expenses to related
parties, and amounts transferred from accounts receivable. The following table
summarizes the other receivables - related parties balances:





June 30, 2009
                
                
                December 31, 2008Tianshi
      Engineering
                
                $
                10,138,835
                
                
                $
                11,636,208Tianshi
      Group
                
                
                3,207,871
                
                
                
                4,018,078Tianshi
      Xiangda Logistic Co.,Ltd.
                
                
                57,081
                
                
                
                -Tianshi
      Yinshi Hotel
                
                
                36,525
                
                
                
                36,475Tianjin
      Xingda Travel Co., Ltd.
                
                
                8,645
                
                
                
                12,932Tianshi
      Pharmaceuticals
                
                
                2,773
                
                
                
                5,922Shengshi
      Real Estate Development
                
                
                1,075
                
                
                
                1,657Beijin
      Xingda Travel Co., Ltd.
                
                
                563
                
                
                
                1,195Shanghai
      Tianshi Jinquan Investment Co.
                
                
                -
                
                
                
                1,846Others
                
                
                41,528
                
                
                
                14,763Total
                
                $
                13,494,896
                
                
                $
                15,729,076





Historically,
Tianshi Engineering remitted payment to the Company upon sales to third party
customers. However, to support Tianshi Engineering’s marketing efforts in
anticipation of receiving a direct selling license in China, the Company agreed
to allow Tianshi Engineering to defer payment. Balances not remitted to the
Company within 90 days are converted to other receivables - related parties.
Beginning January 1, 2007, the other receivables - related parties became
interest bearing. The stated interest rate is the interest rate for the same
level of loan stipulated by the People’s Bank of China.





On April
21, 2009, the Company entered a loan agreement with Tianshi Engineering.
Pursuant to that agreement, effective as of April 1, 2009, $2,562,017 of
other receivables-related parties, which originated from Tianshi Engineering as
accounts receivable, became interest bearing. The loan was due on June 30, 2009
and the stated interest rate was 4.86%. Both the principal of $2,562,017 and
interest on the loan of $12,624 were paid off on May 7, 2009.




20


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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





On
December 25, 2008, Biological entered a Real Property Transfer Agreement (the
“2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or US $4,792,080).
Pursuant to the 2008 Transfer Agreement, Tianshi Group will pay Biological over
several installments during 2009. For the first quarter of 2009, Tianshi Group
paid RMB 5,000,000 (or US $730,500).




Advances from customers -
related parties




These
advances represent prepayments made to the Company to insure that overseas
related companies could obtain enough of the Company’s products to meet their
market demands. As of June 30, 2009 and December 31, 2008, advances from related
party customers amounted to $3.0 million and $3.2 million,
respectively.




Other payables - related
parties




The
details of other payable-related parties are as follows:




June 30, 2009
                
                
                December 31, 2008Tianshi
      Germany Co., Ltd.
                
                $
                105,499
                
                
                $
                105,553Tianyuan
      Capital Development Co. Ltd. ("Tianyuan Capital")
                
                
                84,359
                
                
                
                84,359Tianjin
      Tianshi Globlal International Trade Co., Ltd.
                
                
                23,376
                
                
                
                23,344Tianshi
      Administrative Committee of Industrial Park
                
                
                14
                
                
                
                14Tianshi
      Group
                
                
                15
                
                
                
                -Tianshi
      Investment
                
                
                -
                
                
                
                6,080,385Beijin
      Xingda Travel Co., Ltd.
                
                
                -
                
                
                
                80,245Total
                
                $
                213,263
                
                
                $
                6,373,900





These
amounts arose primarily from previous cash advances from related parties such as
management fees due to related parties and various non-operational transactions
incurred with related parties.





On
January 21, 2008, Life Resources and Tianshi Investment entered a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources of $6.5 million without interest. The loan was originally due on June
30, 2008, but subsequently extended, most recently to June 30, 2009 by the
parties on December 31, 2008. On June 30, 2009, the loan was paid in full by the
Company.





On June
5, 2009, Biological, Tianshi Holdings, Tianshi Investment and Tianshi Group
entered an agreement pursuant to which Biological agreed to pay RMB 27,000,000
(or $3.9 million) to Tianshi Group on behalf of Tianshi Investment, Tianshi
Investment agreed to cancell a RMB 27,000,000 loan owed by Tianshi Holdings, and
Tianshi Holdings agreed to cancelled a RMB 27,000,000 dividend owed by
Biological.




21


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Long term debt - related
party





On
September 10, 2004, Tianshi Holdings entered a loan agreement with Tianyuan
Capital to borrow $10.65 million to fund Tianshi Holdings' contribution due to
Tiens Yihai. Jinyuan Li is a director of Tiens Yihai and a director of Tianyuan
Capital. Jinyuan Li owns 100% of Tianyuan Capital.





The
principal of the loan is being paid in consecutive semi-annual installments of
$1,065,000 on the last day of June and December, commencing June 2006 and ending
June 30, 2011. The interest on the loan is calculated at an annual interest rate
of 5% based on the remaining balance of the principal. The interest accrued in
each period is paid along with the installment payment on the principal. Seven
installment payments had been made by the end of June 30, 2009.





The loan
balance at June 30, 2009 and December 31, 2008 consisted of the
following:





June 30, 2009
                  
                  
                  December 31, 2008Note
      payable to Tianyuan CapitalDevelopment
      Corp. Ltd., related party
                  
                  $
                  3,202,742
                  
                  
                  $
                  4,267,742Less
      current portion of long term debt
                  
                  
                  (2,130,000
                  )
                  
                  
                  (2,130,000
                  )Total
                  
                  $
                  1,072,742
                  
                  
                  $
                  2,137,742





Total
principal payments for the remaining three years on all long-term debt-related
parties are as follows:





Year
      EndingDecember 31,
                      
                      Amount2009
      (6 months remaining)
                      
                      $
                      1,065,0002010
                      
                      $
                      2,130,0002011
                      
                      $
                      7,742





Other Transactions with
Tianshi Engineering





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





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





Rent
revenue accrued from these leases amounted to $109,765 and $160,929 for the six
months ended June 30, 2009 and 2008, respectively, and $54,909 and $81,620 for
the three months ended June 30, 2009 and 2008, respectively.





Other Transactions with
Tianshi Group





On June
30, 2002, the Company entered an office and facilities lease agreement with
Tianshi Group. Under the terms of the five year agreement, the Company’s annual
rent is equal to 1% of the Company’s gross revenues. In addition, the Company is
obligated to pay insurance, maintenance and other expenses related to the
premises. This agreement expired on December 31, 2007 and was renewed, effective
as of January 1, 2008, for 2008 and again, effective as of January 1, 2009, for
2009. The Company paid rent under this lease in the amounts of $302,688 and
$399,632 for the six months ended June 30, 2009 and 2008, respectively, and
$141,700 and $211,241 for the three months ended June 30, 2009 and 2008,
respectively.




22


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 On
January 1, 2009, each of Biological and Life Resources entered a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy some workshop spaces belonged to Tianshi Group. The
leases are rent-free, except that, Biological and Life Resources are required to
pay Tianshi Group for utility charges and maintenance costs on the buildings.
The leases continue until the earlier of the date that Biological and Life
Resources acquire use of alternate facilities or the land use rights on the
underlying property expire.


Note
11 – Additional product sales information





The
Company has a single operating segment. All of the Company's revenues were
generated from related parties. Summarized enterprise-wide financial information
concerning the Company’s revenues based on geographic area and product groups is
shown in the following tables:





Revenue
by Geographic Area:





Three
      months ended June 30,
                      
                      
                      Six
      months ended June 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008China
                      
                      $
                      9,669,603
                      
                      
                      $
                      8,509,932
                      
                      
                      $
                      12,412,223
                      
                      
                      $
                      14,615,711Europe-Asia
                      
                      
                      3,174,823
                      
                      
                      
                      6,041,074
                      
                      
                      
                      6,923,507
                      
                      
                      
                      9,145,575Africa
                      
                      
                      2,383,498
                      
                      
                      
                      2,032,359
                      
                      
                      
                      4,436,254
                      
                      
                      
                      2,373,976Asia-Pacific
                      
                      
                      2,216,300
                      
                      
                      
                      2,322,134
                      
                      
                      
                      10,697,094
                      
                      
                      
                      5,489,745America
                      
                      
                      1,850,081
                      
                      
                      
                      748,948
                      
                      
                      
                      3,059,663
                      
                      
                      
                      850,261Europe
                      
                      
                      1,256,731
                      
                      
                      
                      -
                      
                      
                      
                      1,259,840
                      
                      
                      
                      -Total
                      
                      $
                      20,551,036
                      
                      
                      $
                      19,654,447
                      
                      
                      $
                      38,788,581
                      
                      
                      $
                      32,475,268





Revenue
by Product Group:





Three
      months ended June 30,
                      
                      
                      Six
      months ended June 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Wellness
      products
                      
                      $
                      19,038,898
                      
                      
                      $
                      17,980,913
                      
                      
                      $
                      36,202,610
                      
                      
                      $
                      29,737,966Dietary
      supplement products
                      
                      
                      1,494,033
                      
                      
                      
                      1,669,745
                      
                      
                      
                      2,567,866
                      
                      
                      
                      2,699,711Personal
      care products
                      
                      
                      18,105
                      
                      
                      
                      3,789
                      
                      
                      
                      18,105
                      
                      
                      
                      37,591Total
                      
                      $
                      20,551,036
                      
                      
                      $
                      19,654,447
                      
                      
                      $
                      38,788,581
                      
                      
                      $
                      32,475,268





Note
12 - Income taxes





The
Company is subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdiction in which each entity is domiciled. The
Company's subsidiary, Tianshi Holdings, was incorporated in the British Virgin
Islands and is not liable for income taxes.





The
Company's subsidiaries, Biological, Tiens Yihai and Life Resources, are
Sino-Foreign Joint Ventures incorporated in the PRC. According to US GAAP, the
following are the income tax credits granted by the Chinese government, which
are significant components of income taxes associated with continuing operations
required to be disclosed by FAS 109.





Beginning
January 1, 2008, new Enterprise Income Tax (“EIT”) laws became effective and
replaced the laws for Domestic Enterprises (“DES”) and Foreign Invested
Enterprises (“FIEs”). The new standard EIT rate of 25% replaced the 33%
rate formerly applicable to both DES and FIEs. According to the new EIT,
high-tech companies could be subject to a special reduced tax rate of 15%. The
qualification of a high-tech company is to be reviewed annually. In November
2008, Biological was qualified as a high-tech company . However,
Biological was required by the local tax authority to prepay income tax at a tax
rate of 25% every year, although the prepaid income tax could be refunded in the
next year.




23


TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 According
to the new EIT, Life Resources could still be fully exempt from PRC income taxes
for two years starting from January 1, 2008, followed by a 12.5% reduced tax
rate for the next three years. However, before the tax exemption qualification
of Life Resources was approved by the tax authority, Life Resources was required
by local tax authority to prepay income tax at a tax rate of 25%. On October 10,
2008 the approval was issued and the prepaid income tax in Life Resources could
be refunded in 2009. The prepaid income tax in Life Resources of $685,475 is
treated as prepaid income taxes in the consolidated financial statements of the
Company.


Provisions
for income taxes were all current income tax expenses and for the six months
ended June 30, 2009 and 2008, were $482,716 and $3,144,448, respectively, and
for the three months ended June 30, 2009 and 2008 were $123,101 and $1,664,054,
respectively.





The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate:





Three months ended June 30,
                
                
                Six months ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008U.S.
      Statutory rate
                
                
                34.0
                %
                
                
                34.0
                %
                
                
                34.0
                %
                
                
                34.0
                %Foreign
      income not recognized
                
                
                (34.0
                )
                
                
                (34.0
                )
                
                
                (34.0
                )
                
                
                (34.0
                )China
      income taxes
                
                
                25.0
                
                
                
                25.0
                
                
                
                25.0
                
                
                
                25.0Effect
      of reduced tax rate
                
                
                (23.8
                )
                
                
                -
                
                
                
                (22.6
                )
                
                
                -Total
      provision for income taxes
                
                
                1.2
                %
                
                
                25.0
                %
                
                
                2.4
                %
                
                
                25.0
                %





The
estimated tax savings due to the reduced tax rate for the six months ended June
30, 2009 and 2008 amounted to $3,565,280 and $2,149,240, respectively. The net
effect on earnings per share if the income tax had been applied would decrease
earnings per share for the six months ended June 30, 2009 and 2008 by
$0.05 and $0.03, respectively.





Note13–Retirement plan





Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all employees. All Company employees are entitled to a
retirement pension amount calculated based upon their salary at their date of
retirement and their length of service in accordance with a government managed
pension plan. The PRC government is responsible for the pension liability to the
retired staff.





The
Company is required to make contributions to the state retirement plan at 20% of
the employees' monthly salaries. Employees are required to contribute 8% of
their salaries to the plan. Total pension expense incurred by the Company
amounted to $451,361 and $379,255 for the six months ended June 30, 2009 and
2008, respectively, and $230,448 and $192,885 for the three months ended June
30, 2009 and 2008, respectively.





The
Company also has an unemployment insurance plan for its employees. The plan
requires each employee to contribute 1% of his or her salary to the plan. The
Company matches the contributions in an amount equal to two times the
contribution of each participant. The Company made contributions to the
unemployment insurance plan of $45,987 and $37,868 for the six months ended June
30, 2009 and 2008, respectively, and $23,566 and $19,492 for the three months
ended June 30, 2009 and 2008, respectively. All contributions are paid to a PRC
insurance company, which in turn, is responsible for the unemployment liability.
On January 1, 2002, the Company introduced a basic medical insurance plan for
its employees. Pursuant to that medical insurance plan, the Company is required
to pay an amount equal to 10% of its employees' salaries to a PRC insurance
company, which amounted to $231,759 and $192,833 for the six months ended June
30, 2009 and 2008, respectively, and $118,329 and $97,723 for the three months
ended June 30, 2009 and 2008, respectively.


24




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





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





FORWARD-LOOKING
STATEMENTS





The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The words or phrases “would be,” “will allow,” “expect to”,
“intends to,” “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimate,” “project,” or similar expressions are intended to
identify “forward-looking statements”. Such statements include those concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently and
operate profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities; (c) whether we are able to generate sufficient
revenues or obtain financing to sustain and grow our operations; (d) whether we
are able to successfully fulfill our primary requirements for cash which are
explained below under “Liquidity and Capital Resources”; and (e) whether Tianshi
Engineering, our affiliate who sells our products in China, obtains a direct
selling license in China. Statements made herein are as of the date of the
filing of this Form 10-Q with the Securities and Exchange Commission and should
not be relied upon as of any subsequent date.





Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date
of such statement.





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





OVERVIEW





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





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





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




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


25


RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30 2009 COMPARED TO THE
THREE AND SIX MONTHS ENDED JUNE 30, 2008




Three months ended June 30,
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              Six months ended June 30,2009
                                                                              
                                                                              
                                                                              2008
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              2009
                                                                              
                                                                              
                                                                              2008(Unaudited)
                                                                              
                                                                              
                                                                              (Unaudited)
                                                                              
                                                                              
                                                                              Change
                                                                              
                                                                              
                                                                              (Unaudited)
                                                                              
                                                                              
                                                                              (Unaudited)
                                                                              
                                                                              
                                                                              ChangeREVENUE
      - RELATED PARTIES
                                                                              
                                                                              $
                                                                              20,551,036
                                                                              
                                                                              
                                                                              $
                                                                              19,654,447
                                                                              
                                                                              
                                                                              
                                                                              4.6
                                                                              %
                                                                              
                                                                              $
                                                                              38,788,581
                                                                              
                                                                              
                                                                              $
                                                                              32,475,268
                                                                              
                                                                              
                                                                              
                                                                              19.4
                                                                              %COST
      OF SALES
                                                                              
                                                                              
                                                                              6,117,409
                                                                              
                                                                              
                                                                              
                                                                              6,203,705
                                                                              
                                                                              
                                                                              
                                                                              -1.4
                                                                              %
                                                                              
                                                                              
                                                                              11,852,468
                                                                              
                                                                              
                                                                              
                                                                              10,243,765
                                                                              
                                                                              
                                                                              
                                                                              15.7
                                                                              %GROSS
      PROFIT
                                                                              
                                                                              
                                                                              14,433,627
                                                                              
                                                                              
                                                                              
                                                                              13,450,742
                                                                              
                                                                              
                                                                              
                                                                              7.3
                                                                              %
                                                                              
                                                                              
                                                                              26,936,113
                                                                              
                                                                              
                                                                              
                                                                              22,231,503
                                                                              
                                                                              
                                                                              
                                                                              21.2
                                                                              %SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                                                                              
                                                                              
                                                                              4,014,591
                                                                              
                                                                              
                                                                              
                                                                              5,088,597
                                                                              
                                                                              
                                                                              
                                                                              -21.1
                                                                              %
                                                                              
                                                                              
                                                                              7,145,527
                                                                              
                                                                              
                                                                              
                                                                              8,335,796
                                                                              
                                                                              
                                                                              
                                                                              -14.3
                                                                              %INCOME
      FROM OPERATIONS
                                                                              
                                                                              
                                                                              10,419,036
                                                                              
                                                                              
                                                                              
                                                                              8,362,145
                                                                              
                                                                              
                                                                              
                                                                              24.6
                                                                              %
                                                                              
                                                                              
                                                                              19,790,586
                                                                              
                                                                              
                                                                              
                                                                              13,895,707
                                                                              
                                                                              
                                                                              
                                                                              42.4
                                                                              %OTHER
      (EXPENSE) INCOME, NET
                                                                              
                                                                              
                                                                              19,434
                                                                              
                                                                              
                                                                              
                                                                              (1,057,848
                                                                              )
                                                                              
                                                                              
                                                                              -101.8
                                                                              %
                                                                              
                                                                              
                                                                              7,298
                                                                              
                                                                              
                                                                              
                                                                              (613,677
                                                                              )
                                                                              
                                                                              
                                                                              -101.2
                                                                              %INCOME
      BEFORE PROVISION FOR INCOME TAXES
                                                                              
                                                                              
                                                                              10,438,470
                                                                              
                                                                              
                                                                              
                                                                              7,304,297
                                                                              
                                                                              
                                                                              
                                                                              42.9
                                                                              %
                                                                              
                                                                              
                                                                              19,797,884
                                                                              
                                                                              
                                                                              
                                                                              13,282,030
                                                                              
                                                                              
                                                                              
                                                                              49.1
                                                                              %PROVISION
      FOR INCOME TAXES
                                                                              
                                                                              
                                                                              123,101
                                                                              
                                                                              
                                                                              
                                                                              1,664,054
                                                                              
                                                                              
                                                                              
                                                                              -92.6
                                                                              %
                                                                              
                                                                              
                                                                              482,716
                                                                              
                                                                              
                                                                              
                                                                              3,144,448
                                                                              
                                                                              
                                                                              
                                                                              -84.6
                                                                              %NET
      INCOME
                                                                              
                                                                              
                                                                              10,315,369
                                                                              
                                                                              
                                                                              
                                                                              5,640,243
                                                                              
                                                                              
                                                                              
                                                                              82.9
                                                                              %
                                                                              
                                                                              
                                                                              19,315,168
                                                                              
                                                                              
                                                                              
                                                                              10,137,582
                                                                              
                                                                              
                                                                              
                                                                              90.5
                                                                              %LESS:
      Net income attributable to the noncontrolling interest
                                                                              
                                                                              
                                                                              139,071
                                                                              
                                                                              
                                                                              
                                                                              998,642
                                                                              
                                                                              
                                                                              
                                                                              -86.1
                                                                              %
                                                                              
                                                                              
                                                                              546,045
                                                                              
                                                                              
                                                                              
                                                                              1,887,079
                                                                              
                                                                              
                                                                              
                                                                              -71.1
                                                                              %NET
      INCOME ATTRIBUTABLE TO TIENS BIOTECH GROUP
                                                                              
                                                                              $
                                                                              10,176,298
                                                                              
                                                                              
                                                                              $
                                                                              4,641,601
                                                                              
                                                                              
                                                                              
                                                                              119.2
                                                                              %
                                                                              
                                                                              $
                                                                              18,769,123
                                                                              
                                                                              
                                                                              $
                                                                              8,250,503
                                                                              
                                                                              
                                                                              
                                                                              127.5
                                                                              %WEIGHTED
      AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                                                                              
                                                                              
                                                                              71,333,586
                                                                              
                                                                              
                                                                              
                                                                              71,333,586
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              71,333,586
                                                                              
                                                                              
                                                                              
                                                                              71,333,586EARNINGS
      PER SHARE, BASIC AND DILUTED
                                                                              
                                                                              $
                                                                              0.14
                                                                              
                                                                              
                                                                              $
                                                                              0.07
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              $
                                                                              0.26
                                                                              
                                                                              
                                                                              $
                                                                              0.12




Revenue. For the
second quarter of 2009, revenue was $20.6 million, an increase of 4.6% compared
to $19.7 million for the same period in 2008.  For the six months ended
June 30, 2009, revenue was $38.8 million, an increase of 19.4% compared to $32.5
million for the same period in 2008. The increase in revenue for the first
six months of 2009 was primarily driven by an increase of 47.7%
in international sales. The breakdown of revenue between Chinese and
international sales is as follows.




Three months ended June 30,
                        
                        
                        
                        
                        
                        Six months ended June 30,2009
                        
                        
                        2008
                        
                        
                        Change
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        ChangeChina
                        
                        $
                        9,669,603
                        
                        
                        $
                        8,509,932
                        
                        
                        
                        13.6
                        %
                        
                        $
                        12,412,223
                        
                        
                        $
                        14,615,711
                        
                        
                        
                        -15.1
                        %International
                        
                        $
                        10,881,433
                        
                        
                        $
                        11,144,515
                        
                        
                        
                        -2.4
                        %
                        
                        $
                        26,376,358
                        
                        
                        $
                        17,859,557
                        
                        
                        
                        47.7
                        %Total
                        
                        $
                        20,551,036
                        
                        
                        $
                        19,654,447
                        
                        
                        
                        4.6
                        %
                        
                        $
                        38,788,581
                        
                        
                        $
                        32,475,268
                        
                        
                        
                        19.4
                        %





For the
second quarter of 2009, revenue in China was $9.7 million, an increase of 13.6%
compared to $8.5 million for the same period in 2008. This increase in domestic
revenue was due to increased marketing efforts in China. For the six months
ended June 30, 2009, revenue in China was $12.4 million, a 15.1% decrease
compared to $14.6 million for the same period in 2008. The decrease in revenue
for the first six months of 2009 was primarily due to the 55.1% decrease in
revenue during the first quarter of 2009, which management believes was due to
customers’ reduced purchasing demand after stocking up on certain products
during the third quarter of 2008 as a result of the price increase announcement
by Tianshi Engineering during that quarter.




26





For the
second quarter of 2009, international revenue was $10.9 million, a decrease of
2.4% compared to $11.1 million for the same period in 2008. This decrease in
international revenue was mainly due to a decrease in sales in Europe-Asia
region by $2.9 million in the second quarter of 2009, as compared to the second
quarter of 2008. For the six months ended June 30, 2009, international revenue
was $26.4 million, an increase of 47.7% compared to $17.9 million for the same
period in 2008.  This increase in international revenue for the first
six months of 2009 was mainly due to the increased international revenue for the
first quarter of 2009. From August 2007 to the end of 2008, China’s
Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”)
announced an ongoing national campaign in China against unsafe food and
substandard products, which brought on  a general slow-down and
backlog of export clearances for Chinese food products. As a result our sales in
international countries in the first quarter of 2008 were adversely affected. In
the first quarter of 2009, our sales in international countries improved after
the end of the AQSIQ export restrictions.




Cost of Sales. Cost
of sales for the second quarter of 2009 decreased to $6.1 million, or by 1.4%,
compared to $6.2 million for the same period in 2008. This decrease was mainly
due to the decrease in the cost of some materials, such as capsules. For the six
months ended June 30, 2009, cost of sales was $11.9 million, an increase of
15.7% compared to $10.2 million for the same period in 2008.  Cost of
sales for the period increased at a slightly lower rate than revenue,
primarily due to fixed costs, which do not increase or decrease in line with
revenue changes.





Gross Profit. Gross
profit for the second quarter of 2009 was $14.4 million, an increase of 7.3%
compared to $13.5 million for the same period in 2008. The gross profit margin
for the second quarter of 2009 was 70.2%, compared to 68.4% for the same period
in 2008. For the six months ended June 30, 2009, gross profit was $26.9 million,
an increase of 21.2% compared to the same period in 2008, and the gross profit
margin was 69.4% compared to 68.5% for the same period in 2008. These increases
were mainly due to the increase of revenue overall and the increase in the
portion of the products we sold bearing a higher profit margin than that for the
same period of 2008.





Selling, general and
administrative expenses. Selling, general and administrative expenses
were $4.0 million for the second quarter of 2009, a decrease of 21.1% compared
to $5.1 million for the same period in 2008. The selling and administrative
expenses as a percentage of sales was 19.5% for the second quarter of 2009
compared to 25.9% for the same period in 2008. This decrease was primarily due
to the decrease in salary and insurance expenses as a result of salary
reductions and reduced headcount, research and development expenses and
commission expenses. For the six months ended June 30, 2009, selling, general
and administrative expenses were $7.1 million, a decrease of 14.3% compared to
$8.3  million in the same period in 2008. For the six months ended
June 30, 2009, selling, general and administrative expenses as a percentage of
sales was 18.4%, compared to 25.7% for the same period in 2008. This decrease
was mainly due to the decrease in salary and insurance expenses.





Other income (expense),
net.  Other income was $0.02 million for the second quarter of
2009, compared to $1.1 million of expense for the same period in 2008. The
difference was primarily due to a $1.2 million donation we made in June 2008
towards the Sichuan earthquake relief efforts. For the six months ended June 30,
2009, other income was $0.01 million compared to $0.6  million of
expense for the same period in 2008. The difference was primarily due to the
$1.2 million donation in June 2008 and the large gain on translation
of  currency from the fluctuation of foreign currency translation rate
for the six months ended June 30, 2008.





Provision for income
taxes.  Provision for income taxes was $0.1 million for the
second quarter of 2009 compared to $1.7 million for the same period in 2008. For
the six months ended June 30, 2009, provision for income taxes was $0.5 million
compared to $3.1 million for the same period in 2008. Beginning on January 1,
2008, new Enterprise Income Tax (“EIT”) laws became effective and replaced the
previous laws for Foreign Invested Enterprises (“FIEs”). A new standard EIT rate
of 25% will apply to FIEs.  According to the new EIT, high-tech
companies could be subject to a special reduced tax rate of 15%. The
qualification of a high-tech company is to be reviewed annually.  In
November 2008, Biological was qualified as a high-tech
company.  Previously, Biological paid income tax at the rate of
25%.  However, Biological was required by the local tax authority to
prepay income tax at tax rate of 25% every year, and the prepaid income tax
could be refunded in the next year. In addition, beginning in June 2008, we
transferred production and sale of semi-finished products from Biological to
Life Resources. Life Resources is located in Tianjin Wuqing Development Area, a
national new technology development zone. Pursuant to the approval of the
relevant PRC tax authorities, Life Resources is fully exempt from PRC income
taxes for two years starting from the year profits are first made, followed by a
7.5% reduced tax rate for the next three years.





Net
income.  As a result of the foregoing factors, net income for
the second quarter of 2009 was $10.3 million, an increase of 82.9% compared to
$5.6 million for the same period in 2008.  For the six months ended
June 30, 2009, net income was $19.3 million, an increase of 90.5% compared to
$10.1 million for the same period in 2008. This increase reflects the increase
in sales. In addition, beginning in June 2008, we transferred production of
semi-finished products and sale from Biological to Life Resources,
which has the exemption from PRC income taxes described above.




27





Other comprehensive
income.  Other comprehensive income decreased to $0.01 million
for the second quarter of 2009, compared to $2.7 million for the same period in
2008. For the six months ended June 30, 2009, other comprehensive income was
$0.2 million, compared to $7.1 million for the same period in
2008.  This decrease was mainly due to the slowdown in
the  rate of increase in the value of the renminbi against the dollar
for in for the six months ended June 30, 2009 compared to the same period
in 2008. Other comprehensive income represents foreign currency translation
adjustments for the period. Accumulated other comprehensive income was recorded
in Biological, Tiens Yihai and Life Resources due to balance sheet translations.
Accumulated other comprehensive income was recorded in Tianshi Holdings due to
the effect of foreign exchange rate on dividend receivables from
Biological.





Financial
Condition, Liquidity and Capital Resources





Going
forward, our primary requirements for cash consist of:





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





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





o
            the
      development costs of new products;
and





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





We
estimate that the completion of the Life Resources project will require
approximately $220 million, including the $64 million already spent to acquire
all of the registered share capital of Life Resources and $57.0 million spent on
the project from January 1, 2008 to June 30, 2009. We intend to construct the
facilities in phases over several years, based on available cash and capacity
needs. Depending on the rate of construction and our cash flow, it is likely
that we will require additional financing in the future to complete the
long-term funding requirements of that project. However, we anticipate that our
current operating activities will enable us to meet our anticipated cash
requirements, including the Life Resources project, for the next twelve
months.





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





Net cash
provided by operating activities was $13.6 million for the six months ended June
30, 2009, compared to net cash used in operating activities of $1.1 million for
the same period of 2008. The difference reflects an increase in net income of
$9.2 million between the two comparable periods. In addition, accounts
receivable-related parties increased $5.5 million for the six months ended June
30, 2009, compared with $15.7 million for the six months ended June 30,
2008.





As of
June 30, 2009, we had positive working capital of $69.0 million. Cash was $34.3
million as of June 30, 2009, compared to $44.9 million as of December 31,
2008.





Net cash
used in investing activities increased by $10.9 million for the six months ended
June 30, 2009 compared to the same period of 2008. During the first three months
of 2008, we received payment on a loan to related party in the amount of $2.1
million. In addition, we spent $16.0 million on the Life Resources construction
project for the six months ended June 30, 2009, an increase of $6.2 million
compared to the same period of 2008. Net cash used in financing activities
was $3.8 million for the six months ended June 30, 2009, compared to net cash
provided by financing activities of $1.3 million for the same period of 2008.
During the second quarter of 2009, we repaid a loan in cash to Tianshi
International Investment Group Co., Ltd. (“Tianshi Investment”), a company
wholly-owned by Jinyuan Li, in the amount of $3.9 million.




28




Assets
held for sale




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




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




Due to
the continued uncertainty relating to the Tiens Yihai project, we plan to sell
Tiens Yihai or the assets of Tiens Yihai in 2009. Tianshi Holdings, Tianshi
Pharmaceuticals and Tianshi Group entered a letter of intent on December 31,
2008, pursuant to which Tianshi Pharmaceuticals agreed to buy Tianshi Holdings’
96% share of Tiens Yihai, with Tianshi Group guaranteeing payment.  In
addition, Tiens Yihai is currently in discussions with the Chinese government
about a potential sale of its real property to the Chinese
government.





The
assets and liabilities of Tiens Yihai have been classified as assets held for
sale and liabilities directly associated with assets classified as held for
sale, respectively, for the consolidated balance sheets presented herein. The
assets and liabilities of Tiens Yihai as of June 30, 2009 and December 31, 2008
were as follows:





June 30, 2009
                                          
                                          December 31, 2008Cash
                                          
                                          $
                                          23,953,055
                                          
                                          $
                                          23,861,938Other
      receivables-third parties
                                          
                                          
                                          8,890
                                          
                                          
                                          6,126Employee
      advances
                                          
                                          
                                          804
                                          
                                          
                                          1,341Property,
      plant, and equipment,net
                                          
                                          
                                          409,707
                                          
                                          
                                          548,717Construction
      In progress
                                          
                                          
                                          2,541,002
                                          
                                          
                                          2,462,108Intangible
      assets, net
                                          
                                          
                                          2,572,540
                                          
                                          
                                          2,596,029Long-term
      prepaid expense
                                          
                                          
                                          5,295,688
                                          
                                          
                                          5,290,521Assets
      held for sale
                                          
                                          $
                                          34,781,686
                                          
                                          $
                                          34,766,780Accounts
      payable
                                          
                                          
                                          3,316
                                          
                                          
                                          3,312Wages
      and benefits payable
                                          
                                          
                                          83,286
                                          
                                          
                                          88,648Other
      taxes payable
                                          
                                          
                                          -
                                          
                                          
                                          2Other
      payables
                                          
                                          
                                          29,939
                                          
                                          
                                          29,898Other
      payables - related parties
                                          
                                          
                                          188
                                          
                                          
                                          187Liabilities
      directly associted with assets classified as held for sale
                                          
                                          $
                                          116,729
                                          
                                          $
                                          122,047





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.




29





Revenue
recognition.





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





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





We are
generally not contractually obligated to accept returns. However, on a
case-by-case negotiated basis, we permit customers to return their products. In
accordance with SFAS No. 48, “Revenue Recognition when the Right of Return
Exists”, revenue is recorded net of an allowance for estimated returns. Such
reserves are based upon management’s evaluation of historical experience and
estimated costs. The amount of the reserves ultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements.  As we did not receive any returns
of products during the past three years, and management does not anticipate
allowing any returns in 2009 related to previous revenues, no allowance for
estimated returns has been recorded as of June 30, 2009.





Bad
debts.





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





Inventories.





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





Recent
Accounting Pronouncements




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




In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – An amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 provides guidance on how to report a non-controlling interest in
consolidated financial statements. The objective of SFAS 160 is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. SFAS 160
became effective in the first quarter of 2009. As a result of the adoption of
SFAS 160 from January 1, 2009,  we reclassified minority interest of
$9.6 million to noncontrolling interest as a component of equity on our
Consolidated Balance Sheet for the six months ended June 30, 2009.




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




30




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




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





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




In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS
165 is to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS 165 is effective for financial
statements issued for interim or annual financial periods ending after June 15,
2009. We evaluated subsequent events  after the balance sheet
date of June 30, 2009 through the filing of this report with the SEC on August
14, 2009. The adoption of SFAS 165 had no effect on our consolidated
financial statements.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 is to
improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets. SFAS 166 is effective
for financial statements issued for fiscal years beginning after December 15,
2009 and interim periods within those fiscal years. We are evaluating the impact
that this Statement will have on our consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”). SFAS 167 is a revision to FASB Interpretation No. 46(R),
“Consolidation of Variable Interest Entities”, and changes how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. SFAS 167 is effective for financial
statements issued for fiscal years beginning after December 15, 2009, and
interim periods within those fiscal years. We are evaluating the impact that
this Statement will have on our consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 become the source
of authoritative U.S. generally accepted accounting principles (GAAP) recognized
by the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of this Statement, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative.   SFAS 168 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The adoption of this Statement will have no
effect on our consolidated financial statements.




31





CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS





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





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





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





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





During
2008 we sold products to a non-affiliated agent in China for the purpose of
exporting our products to overseas affiliated parties in light of the slow-down
and backlog of export clearances in China during 2008.  These sales
accounted for less than 5% of our total revenues in 2008.





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


ThreemonthsendedJune30,
                      
                      
                      SixmonthsendedJune30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Revenue-related
      parties
                      
                      $
                      20,551,036
                      
                      
                      $
                      19,654,447
                      
                      
                      $
                      38,788,581
                      
                      
                      $
                      32,475,268
 
 June 30, 2009
                    
                    
                    December 31, 2008Accounts
      receivable, trade – related parties, net of allowance for doubtful
      accounts of $913,486 and $1,108,789 as of June 30, 2009 and December 31,
      2008, respectively
                    
                    $
                    29,702,386
                    
                    
                    $
                    23,941,431Other
      receivables – related parties
                    
                    $
                    13,494,896
                    
                    
                    $
                    15,729,076Advances
      from customers – related parties
                    
                    $
                    3,024,666
                    
                    
                    $
                    3,239,650Other
      payables – related parties
                    
                    $
                    213,263
                    
                    
                    $
                    6,373,900Current
      portion of long-term debt - related party
                    
                    $
                    2,130,000
                    
                    
                    $
                    2,130,000Long
      term debt – related party
                    
                    $
                    1,072,742
                    
                    
                    $
                    2,137,742




32




Revenue
- Related Parties





The
details of revenue-related parties are as follows:





Three months ended June 30,
                    
                    
                    Six months ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Tianshi
      Engineering
                    
                    $
                    9,669,603
                    
                    
                    $
                    8,509,932
                    
                    
                    $
                    12,412,223
                    
                    
                    $
                    14,615,711Overseas
      Related Companies
                    
                    
                    10,881,433
                    
                    
                    
                    11,144,515
                    
                    
                    
                    26,376,358
                    
                    
                    
                    17,859,557Total
                    
                    $
                    20,551,036
                    
                    
                    $
                    19,654,447
                    
                    
                    $
                    38,788,581
                    
                    
                    $
                    32,475,268





Accounts
Receivable, Trade - Related Parties





June 30, 2009
                      
                      
                      December 31, 2008Tianshi
      Engineering
                      
                      $
                      9,679,338
                      
                      
                      $
                      4,362,355Overseas
      Related Companies
                      
                      
                      20,936,534
                      
                      
                      
                      20,687,865Allowance
      for Doubtful Accounts
                      
                      
                      (913,486
                      )
                      
                      
                      (1,108,789
                      )Total
                      
                      $
                      29,702,386
                      
                      
                      $
                      23,941,431





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




Other
Receivables - Related Parties





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





June 30,
                      
                      
                      December 31,2009
                      
                      
                      2008Tianshi
      Engineering
                      
                      $
                      10,138,835
                      
                      
                      $
                      11,636,208Tianshi
      Group
                      
                      
                      3,207,871
                      
                      
                      
                      4,018,078Tianshi
      Xiangda Logistic Co.,Ltd.
                      
                      
                      57,081
                      
                      
                      
                      -Tianshi
      Yinshi Hotel
                      
                      
                      36,525
                      
                      
                      
                      36,475Tianjin
      Xingda Travel Co., Ltd.
                      
                      
                      8,645
                      
                      
                      
                      12,932Tianshi
      Pharmaceuticals
                      
                      
                      2,773
                      
                      
                      
                      5,922Shengshi
      Real Estate Development
                      
                      
                      1,075
                      
                      
                      
                      1,657Beijin
      Xingda Travel Co., Ltd.
                      
                      
                      563
                      
                      
                      
                      1,195Shanghai
      Tianshi Jinquan Investment Co.
                      
                      
                      -
                      
                      
                      
                      1,846Others
                      
                      
                      41,528
                      
                      
                      
                      14,763Total
                      
                      $
                      13,494,896
                      
                      
                      $
                      15,729,076





Historically,
Tianshi Engineering remitted payment to us upon sales to third party customers.
However, to support Tianshi Engineering’s marketing efforts in anticipation of
receiving a direct selling license in China, we agreed to allow Tianshi
Engineering to defer payment. Balances not remitted to us within 90 days are
converted to other receivables - related parties. Beginning January 1, 2007, the
other receivables - related parties became interest bearing. The stated interest
rate is the interest rate for the same level of loan stipulated by the People’s
Bank of China.





On April
21, 2009, we entered a loan agreement with Tianshi Engineering. Pursuant to that
agreement, effective as of April 1, 2009, $2,562,017 of other
receivables-related parties, which originated from Tianshi Engineering as
accounts receivable, became interest bearing. The loan was due on June 30, 2009
and the stated interest rate was 4.86%. Both the principal of $2,562,017 and
interest on the loan of $12,624 were paid off on May 7, 2009.





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




33





On
December 25, 2008, Biological entered a Real Property Transfer Agreement (the
“2008 Transfer Agreement”) with Tianshi Group, pursuant to which Biological
transferred four buildings at the price of RMB 32,800,000 (or US $4,792,080).
Pursuant to the 2008 Transfer Agreement, Tianshi Group will pay Biological over
several installments during 2009. For the first quarter of 2009, Tianshi Group
paid RMB 5,000,000 (or US $730,500).





Advances
from Customers - Related Parties





Advances
from related party customers were $3.0 million and $3.2 million as of June 30,
2009 and December 31, 2008, respectively. These advances represented
prepayments made to us to insure that overseas customers could obtain enough of
our products to meet their market demands.




Other
Payables - Related Parties





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





June 30, 2009
                      
                      
                      December 31, 2008Tianshi
      Germany Co., Ltd.
                      
                      $
                      105,499
                      
                      
                      $
                      105,553Tianyuan
      Capital Development Co. Ltd. ("Tianyuan Capital")
                      
                      
                      84,359
                      
                      
                      
                      84,359Tianjin
      Tianshi Globlal International Trade Co., Ltd.
                      
                      
                      23,376
                      
                      
                      
                      23,344Tianshi
      Administrative Committee of Industrial Park
                      
                      
                      14
                      
                      
                      
                      14Tianshi
      Group
                      
                      
                      15
                      
                      
                      
                      -Tianshi
      Investment
                      
                      
                      -
                      
                      
                      
                      6,080,385Beijin
      Xingda Travel Co., Ltd.
                      
                      
                      -
                      
                      
                      
                      80,245Total
                      
                      $
                      213,263
                      
                      
                      $
                      6,373,900





These
amounts arose primarily from previous cash advances from related parties such as
management fees due to related parties and various non-operational transactions
incurred with related parties.





On
January 21, 2008, Life Resources and Tianshi Investment entered a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources of $6.5 million without interest. The loan was originally due on June
30, 2008, but subsequently extended, most recently to June 30, 2009 by the
parties on December 31, 2008. On June 30, 2009, the loan was paid in full by
us.





On June
5, 2009, Biological, Tianshi Holdings, Tianshi Investment and Tianshi Group
entered an agreement pursuant to which Biological agreed to pay RMB 27,000,000
(or $3.9 million) to Tianshi Group on behalf of Tianshi
Investment, Tianshi Investment agreed to cancell a RMB 27,000,000 loan owed
by Tianshi Holdings, and Tianshi Holdings agreed to cancelled a RMB 27,000,000
dividend owed by Biological.





Long
Term Debt - Related Party





On
September 10, 2004, Tianshi Holdings entered a term loan agreement with Tianyuan
Capital Development Co. Ltd. (“Tianyuan Capital”), pursuant to which Tianyuan
Capital agreed to lend $10.65 million (in aggregate principal amount) to Tianshi
Holdings, at an interest rate of 5% per year, with interest payable on June 30
and December 31, commencing December 31, 2004. Tianshi Holdings must repay the
loan in ten consecutive semi-annual installments of $1,065,000 ending June 30,
2011. Tianshi Holdings used the loan proceeds to fund its capital contribution
to Tiens Yihai. Mr. Jinyuan Li owns 100% of Tianyuan Capital. Interest of
$105,817 and
$132,662 accrued for the six months ended June 30, 2009 and 2008,
respectively,and
seven installment payments had been made by the end of June 30,
2009.




34





Other
Transactions with Tianshi Engineering





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




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





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





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





Rent
revenue accrued from these leases amounted to $109,765 and $160,929 for the six
months ended June 30, 2009 and 2008, respectively, and $54,909 and $81,620 for
the three months ended June 30, 2009 and 2008, respectively.




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




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




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




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




35




On June
30, 2009, Tianshi Holdings entered an agreement with Tianyuan Capital and
Tianshi Engineering, pursuant to which Tianshi Engineering paid $1,170,816.62 to
Tianyuan Capital on behalf of Tianshi Holdings, representing one installment of
a loan that Tianyuan Capital lent to Tianshi Holdings, plus interest on that
loan for the six months ended June 30, 2009. In return, $1,170,816.62 of the
loan that Tianshi Holdings made to Tianshi Engineering was offset against such
payment.





Other
Transactions with Tianshi Group





On June
30, 2002, we entered an office and facilities lease agreement with Tianshi
Group. Under the terms of the five year agreement, our annual rent is equal to
1% of our gross revenues. In addition, we are obligated to pay insurance,
maintenance and other expenses related to the premises. This agreement expired
on December 31, 2007 and was renewed, effective as of January 1, 2008, for
2008 and again, effective as of January 1, 2009, for 2009. For the six months
ended June 30, 2009 and 2008, we paid this rent in amounts of $302,688 and
$399,632, respectively, and $141,700 and $211,241, for the three months ended
June 30, 2009 and 2008, respectively.




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




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




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




Transactions
with Tianshi Investment




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




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




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


36




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




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




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




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




Transactions
with Life Science




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





MANAGEMENT
ASSUMPTIONS





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





OFF-BALANCE
SHEET ARRANGEMENTS





We have
no off-balance sheet arrangements.





ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




This
information has been omitted based on our status as a smaller reporting
company.





ITEM 4T. CONTROLS
AND PROCEDURES





Disclosure
Controls and Procedures





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


37


Changes
in Internal Control Over Financial Reporting





There has
been no change in our internal control over financial reporting during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





PART
II - OTHER INFORMATION





ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS





On May
28, 2009, the annual meeting of our stockholders (the “Annual Meeting”) was held
at our Tianjin offices for the following purposes:





1.
            Elect
      the following persons to the Board of Directors: Jinyuan Li, Zheng Wan,
      Yupeng Yan, Gilbert Raker, Howard Balloch, and Socorro
      Quintero.





2.
            Ratify
      the Board of Directors’ appointment of Crowe Horwath LLP, the independent
      registered public accountants as our auditor for the fiscal year
      2009.





In this
Annual Meeting, there were accordingly present, in person or by proxy, an
aggregate of 68,345,763 shares of our common stock, such shares being a majority
of the 71,333,586 shares of our common stock entitled to notice of and to vote
at the Annual Meeting.





The
result of the vote taken for the election of directors at the Annual Meeting was
as follows:





Directors
              
              No.
      of Shares For
              
              No.
      of Shares Against
              
              Withheld
      AuthorityJinyuan
      Li
              
              67,999,933
              
              342,080
              
              3,750Zheng
      Wan
              
              68,199,580
              
              142,433
              
              3,750Yupeng
      Yan
              
              68,199,543
              
              142,470
              
              3,750Socorro
      Quintero
              
              68,342,013
              
              0
              
              3,750Howard
      Balloch
              
              68,342,013
              
              0
              
              3,750Gilbert
      Raker
              
              68,342,013
              
              0
              
              3,750




The
result of the vote taken for the ratification of the appointment of Crowe
Horwath LLP was as follows:




·
            68,345,255
      shares voted in favor of the
proposal,




·
            300
      shares voted against the proposal,
and




·
            171
      shares abstained.




On June
1, 2009, we received notification from Zheng Wan that effective immediately, he
resigned from his positions as our Chief Financial Officer and
Director.  There were no disagreements between Mr. Wan and us on any
matter relating to our operations, policies or practices, which resulted in his
resignation.  Effective as of June 1, 2009, our Board of Directors
appointed Manbo He as Chief Financial Officer of the Company and Director to
fill the vacancy on the Board of Directors created by the resignation of Zheng
Wan.  Mr. He will serve for the remained of Mr. Wan’s term as a
director, until the next annual meeting of our stockholders.


38


ITEM 6. EXHIBITS





Exhibit
      No.
                  
                  Description10.1
                  
                  Agreement,
      dated June 5, 2009 by and among Tianjin Tianshi Biological Development Co,
      Ltd., Tianshi International Holdings Group Limited, Tianshi International
      Investment Group Co., Ltd. and Tianjin Tianshi Group Co.,
    Ltd.10.2
                  
                  Agreement
      on Debt Transfer and Offset, dated as of June 30, 2009, by and among
      Tianshi International Holdings Group Limited, Tianyuan Capital Development
      Co., and Tianjin Tianshi Biological Engineering Co.,
  Ltd.31.1
                  
                  Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      of the Chief Executive Officer and Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002


39


SIGNATURES





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





Date:
      August 14, 2009/s/ Jinyuan LiJinyuan
      LiChief
      Executive Officer and President(Principal
      Executive Officer)Date:
      August 14, 2009/s/ManboHeManbo HeChief
      Financial Officer(Principal
      Accounting and Financial
Officer)


40


EXHIBIT
INDEX




Exhibit
      No.
                  
                  Description10.1
                  
                  Agreement,
      dated June 5, 2009 by and among Tianjin Tianshi Biological Development Co,
      Ltd., Tianshi International Holdings Group Limited, Tianshi International
      Investment Group Co., Ltd. and Tianjin Tianshi Group Co.,
    Ltd.10.2
                  
                  Agreement
      on Debt Transfer and Offset, dated as of June 30, 2009, by and among
      Tianshi International Holdings Group Limited, Tianyuan Capital Development
      Co., and Tianjin Tianshi Biological Engineering Co.,
  Ltd.31.1
                  
                  Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      of the Chief Executive Officer and Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002


41