**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





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


**EXCHANGE
      ACT OF 1934**


**For
      the fiscal year ended December 31, 2007**


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 of incorporation or organization )
            (I.R.S.
                Employer Identification No.)




No.
        6,
        Yuanquan Rd.
 Wuqing
        New Tech Industrial Park
 Tianjin,
        China 301700
 ----------------------------------------
 (Address
        of principal executive offices) (Zip Code)






Registrant’s
      Telephone Number, including area code: 011 86-22-8213-7626





Securities
      registered under 12(b) of the Exchange Act:





Title
                of Each Class
            Name
                of Each Exchange on which RegisteredCommon
                Stock, par value $0.001
            The
                American Stock Exchange





Securities
      registered under 12(g) of the Exchange Act: None.





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes o No x





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No o





Indicate
      by check mark if disclosure of delinquent filers pursuant to item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
      be contained, to the best of the registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K. x





Indicate
      by check mark if the registrant is a large accelerated filer, an accelerated
      filer, a non-accelerated filer, or a smaller reporting company.


Large
                  Accelerated Filer o
              Accelerated
                  Filer o
              Non-Accelerated
                  Filer x
              Smaller
                  Reporting Company o




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





Based
      upon the closing sale price of $3.83 per share of Common Stock on the American
      Stock Exchange on June 30, 2007, the aggregate market value of the 3,503,586
      shares of voting stock held by non-affiliates of the Registrant was
      approximately $13,418,734.





There
      were 71,333,586 shares of the Company’s common stock outstanding on March 28,
      2008.





DOCUMENTS
      INCORPORATED BY REFERENCE - None









**FORWARD-LOOKING
      INFORMATION**





This
      Annual Report on Form 10-K contains forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
      Securities Exchange Act of 1934. These statements relate to future events or
      the
      Company’s future financial performance. The Company has attempted to identify
      forward-looking statements by terminology including “anticipates”, “believes”,
“expects”, “can”, “continue”, “could”, “estimates”, “expects”, “intends”, “may”,
“plans”, “potential”, “predict”, “should” or “will” or the negative of these
      terms or other comparable terminology. These statements are only predictions,
      uncertainties and other factors, including the risks outlined under Risk Factors
      contained in Item 1A of this Annual Report may cause the Company’s actual
      results, levels of activity, performance or achievements to be materially
      different from any future results, levels or activity, performance or
      achievements expressed or implied by these forward-looking statements. Although
      the Company believes that the expectations reflected in the forward-looking
      statements are reasonable, the Company cannot guarantee future results, levels
      of activity, performance or achievements. The Company expectations are as of
      the
      date this Form 10-K is filed, and the Company does not intend to update any
      of
      the forward-looking statements after the date this Annual Report on Form 10-K
      is
      filed to confirm these statements to actual results, unless required by law.





**AVAILABILITY
      OF SEC FILINGS**





The
      Company files annual reports on Form 10-K, quarterly reports on Form 10-Q,
      current reports on Form 8-K and proxy and information statements and amendments
      to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may
      read and copy these materials at the Securities and Exchange Commission’s
      (“SEC”) Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549.
      The public may obtain information on the operation of the public reference
      room
      by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website
      (http://www.sec.gov) that contains reports, proxy and information statements
      and
      other information regarding the Company and other companies that file materials
      with the SEC electronically. You may also obtain copies of the Company’s reports
      filed with the SEC, free of charge, on our website at
      http://www.tiens-bio.com.





**PART
      I**




**ITEM
      1. BUSINESS.**





***In
      this Annual Report on Form 10-K, references to “dollars” and “$” are to United
      States Dollars and references to “RMB” are to Chinese Renminbi (RMB). References
      to “we”, “us”, “our”, the “Company” or “Tiens USA” include Tiens Biotech Group
      (USA), Inc. and its subsidiaries.***





**Overview**





Tiens
      USA
      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”). We sell our products for distribution in
      China to an affiliated company that in turn sells the products to consumers
      through its chain store and its Chinese affiliated companies. Outside of China,
      we sell our products to overseas affiliated companies located in 52 countries
      that in turn sell them to independent direct sales distributors.





**Corporate
      History and Organization**





Our
      Company was incorporated on July 13, 1990 as Super Shops, Inc. under the laws
      of
      the State of Michigan. In October 2000, Super Shops, Inc. reincorporated in
      Delaware and changed its name to MIA Acquisition Corp. On February 11, 2002,
      in
      connection with a change in control transaction, MIA Acquisition Corp changed
      its name to Strategika, Inc. From 2000 until the reorganization described below,
      our Company had only nominal assets and liabilities and was a development stage
      company attempting to provide network security services to companies.




2




On
      September 9, 2003, pursuant to an Agreement and Plan of Reorganization, dated
      August 22, 2003, among the Company, Tianshi International Holdings Group Ltd.,
      a
      British Virgin Islands company (“Tianshi Holdings”), and Jinyuan Li, Wenjun Jiao
      and Yupeng Yan, all Chinese Nationals who were stockholders of Tianshi Holdings,
      the Company received from the Tianshi Holdings stockholders all of the issued
      and outstanding common stock of Tianshi Holdings in exchange for the issuance
      by
      the Company of 68,495,000 shares of our common stock to the Tianshi Holdings
      stockholders, representing 95% of the issued and outstanding common stock of
      the
      Company at such time, after giving effect to the issuance.





On
      June
      18, 2003, Tianshi Holdings acquired 80% of Biological’s outstanding shares from
      Tianshi Hong Kong International Development Co., Ltd., which is 100% owned
      by
      our Chairman, Chief Executive Officer and President, Jinyuan Li. Biological
      is a
      Chinese-foreign equity joint venture company established under Chinese laws
      on
      March 27, 1998, subject to the Law on Sino Foreign Equity Joint Ventures. On
      December 31, 2003 the Company changed its name from Strategika, Inc. to Tiens
      Biotech Group (USA), Inc.





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





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 is 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, the Company decided to suspend the proposed
      development by Tiens Yihai.





On
      December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
      with Tianshi International Investment Group Co., Ltd., a British Virgin Islands
      Company (“Tianshi Investment”). Jinyuan Li owns 100% of Tianshi Investment.
      Pursuant to the Sale and Purchase Agreement, Tianshi Holdings agreed to buy
      all
      of the registered share capital of Tianjin Tiens Life Resources Co., Ltd.,
      a
      Chinese Foreign Investment Enterprise (“Life Resources”) for $64.2 million. Life
      Resources was incorporated on April 29, 2005 as a Foreign Investment Enterprise
      (“FIE”) in Wuqing, Tianjin, PRC, with a registered share capital of $30,000,000.
      On March 13, 2008 the Chinese government approved an increase in the registered
      capital of Life Resources from $30,000,000 to $50,000,000. The closing of the
      transaction was subject to government approval of transfer of the share capital
      of Life Resources to Tianshi Holdings. On March 13, 2008, the Chinese government
      approved the transfer of the shares of Life Resources. Life Resources is
      currently constructing research and development, manufacturing and logistic
      facilities, as well as administrative offices in Tianjin, China.




The
      following chart shows the ownership interests in our subsidiaries.









**Products
      and Manufacturing**





We
      have
      developed and produce 33 nutrition supplement products, which include wellness
      products and dietary supplements.





Each
      of
      our wellness products includes at least one health function and has been issued
      a Certificate of Domestic Wellness Product by the State Food and Drug
      Administration (SFDA). This SFDA certificate is required for the production
      and
      sale of wellness products in China. Dietary supplements, which do not include
      any health functions, are considered to be “ordinary food,” and do not require a
      SFDA certificate. Each of our products has been issued a Product Standard Code
      by the Bureau of Technical Supervision.





We
      have
      put great emphasis on product quality assurance. In 2002, we were awarded a
      Quality System Certificate for compliance with the standard “ISO9001: 2000” in
      the area of Design and Development, Production and Service of Food and Health
      Care Food in China. In addition, many of our products have received a
      certificate for Hazard Analysis Critical Control Point (“HACCP”). HACCP
      identifies and assesses hazards and risk associated with the manufacture,
      distribution and use of food-handling establishments. In 2007, four of our
      products received a kosher certificate from the Kosher Supervision of America
      (“KSA”), which is recognized by rabbinical societies throughout the world. These
      products bear the KSA symbol, which tells consumers that they are in compliance
      with kosher standards.




3




Our
      products are manufactured at our facility in Tianjin, China. The manufacturing
      processes of our nutrition supplement products are categorized into six types
      depending on the different forms of the finished products: Powder, Tea,
      Capsules, Tablets, Granules and Soft Gel Capsules. All of our manufacturing
      complies with the product standards approved by the Bureau of Technical
      Supervision in China.





The
      following table lists our products.





**Wellness
                Products ***
            **Dietary
                Supplement Products ***Tianshi
                Nutrient Super Calcium Powder (a) (b)
            Tianshi
                Super Calcium Milk Powder (a) (b)Tianshi
                Super Calcium Powder with Metabolic Factors (a) (b)
            Tianshi
                Double-cellulose Tablets (a) (b)Tianshi
                Super Calcium Powder for Children (a) (b)
            Tianshi
                Lycopene Tablets (a) (b)Tianshi
                Super Calcium Capsules with Lecithin (a) (b)
            Tianshi
                Tibet-Garlic Capsules (a)Tianshi
                Throat Care Granules (b)
            Tianshi
                Pine Pollen Powder Capsules (a) (b)Tianshi
                Lipid Metabolic Management Tea (a) (b) (c)
            Tianshi
                Protein Powder (b)Tianshi
                Slimming Tea (a) (b) (c)
            Tianshi
                Eel Oil Capsules (a)Tianshi
                Spirulina Tablets (b)
            Tianshi
                Multi-Vit-Mine Coffee (a) (b)Tianshi
                Spirulina Capsules (a) (b)
            Tianshi
                Gourmet Powder with Super Calcium (b)Tianshi
                Cell Rejuvenation Capsules (a) (b)
            Tianshi
                Hemp Seed Oil Softgels (a) (b)Tianshi
                Zinc Capsules (a) (b)
            Tianshi
                Snak-powder CapsulesTianshi
                Cordyceps Capsules (a) (b)Tianshi
                Chitosan Capsules (a) (b)Tianshi
                Sweet Dreams Granules (a) (b)Tianshi
                Vitality Softgels (a) (b)Tianshi
                Metabolic Balance Capsules (a) (b) (c)Chewable
                Calcium Tablets (a) (b)Chewable
                Calcium Tablets with multi-flavor (a) (b)Grape
                Extract Capsules (a) (b)Tianshi
                Beauty Face Capsules (a) (b)(c)Bone
                Treasure Tablets (a) (b)Tianshi
                Ginkgo Leaf Tablet (a) (b)





*
            These
                products are not intended to diagnose, treat, cure or prevent any
                disease.


(a)
            This
                product has received Halal Approval, which certifies that our
                manufacturing processes comply with the requirements of Islamic dietary
                law.


(b)
            This
                product has received an HACCP
                Certificate.


(c)
            This
                product has received KSA Kosher
                Certificate.





During
      2007, we phased out production of our personal care line of products, which
      had
      not been a material part of our business, to focus on our wellness products
      and
      dietary supplements. For the years ended December 31, 2007, 2006 and 2005,
      all
      of our revenue was generated from related party customers. See note 16 to our
      consolidated financial statements for a breakdown of domestic and international
      revenue, and revenue by product group for the last three fiscal years. In 2007,
      2006 and 2005 our Tianshi
      Cordyceps Capsules accounted for 18.1%, 16.5% and 14.1% of our revenue,
      respectively, and our Tianshi
      Nutrient Super Calcium Powder accounted for 15.8%, 14.1% and 17.3% of our revenue, respectively.





**Trademarks
      and Patents**





We
      consider the “Tiens” logo important to our business and have registered our
      products under the logo “Tiens” with the State Administration of Industry and
      Commerce in China. The registration is valid for a period of ten years from
      May
      21, 2002 and can be renewed for further ten-year periods multiple times. We
      have
      conducted extensive research and developed Tianshi Super Calcium Powder with
      Metabolic Factors and Tianshi Super Calcium Powder for Children, which have
      each
      been awarded a patent from State Intellectual Properties Office in China with
      respective patent numbers of ZL97115067.2 and ZL97115068.0. These two patents
      are effective for 20 years, commencing on January 13, 2001.




4




**Suppliers**





We
      have
      established long-term relationships with most of our suppliers. We believe
      that
      the raw materials required for manufacturing our products are relatively easy
      to
      find and alternative suppliers are convenient to locate.





**Research
      and Development**





We
      incurred research and development expenses of $0.7 million, $1.0 million and
      $0.6 million in 2007, 2006 and 2005 respectively. As of December 31, 2007,
      we
      employed 69 staff members in research and development, and we anticipate hiring
      an additional 19 research and development employees in 2008.





**Marketing
      and Distribution**





In
      China,
      we sell our products to Tianshi Engineering, an affiliated Chinese company.
      Tianshi Engineering, in turn, sells the products to customers through its
      branches and affiliated companies and at chain stores which are owned by
      individual distributors. During 2007 Tianshi Engineering closed eleven of its
      less profitable branches in China. As of December 31, 2007, Tianshi Engineering
      had 100 branches in China. Prior to 2006, Biological sold all of its products
      to
      Tianshi Engineering as finished products at a price equal to 25% of the Chinese
      market price for the products. This 25% figure was negotiated between the
      parties in 2003, before we acquired Tianshi Holdings, and we believe that it
      is
      a reasonable sales price for us to receive.





At
      the
      beginning of 2006, we also began selling semi-finished products to Tianshi
      Engineering. To qualify for a direct selling license in China, Tianshi
      Engineering is required to produce a part of the products that it sells in
      China. As a result, we began to sell semi-finished products to Tianshi
      Engineering, which jointly shares with us licenses to produce, manufacture
      and
      sell the products. The price of semi-finished goods sold to Tianshi Engineering
      was originally set at the beginning of 2006 to provide us with a 75% gross
      profit margin. However, based on fluctuations in the cost of raw materials
      and
      quantities produced, this percentage varied during the year. This 75% figure
      was
      negotiated between the parties, and we believe that it is reasonable. The goal
      of this new pricing policy was to try to maintain the Company’s gross margins on
      semi-finished goods at a similar level to historical gross margins for finished
      goods.





Internationally,
      our strategy is to develop a strong direct sales force through our international
      affiliated companies. Currently the United States is not a significant part
      of
      our business. We sell our products to overseas affiliated companies located
      in
      52 countries who in turn sell them to independent direct sales distributors.
      During 2007, in order to consolidate our international distribution, we reduced
      the number of countries where we sell directly to overseas affiliates from
      63 to
      52. Therefore, some of our overseas affiliate customers also now sell our
      products on to other overseas affiliates which are no longer our direct
      customers. In 2007 our highest sales outside of China were to the following
      ten
      countries, in descending order: Indonesia, Russia, Ukraine, Kazakhstan, Congo,
      Hungary, South Africa, Peru, India and Columbia.





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





Backlog
      was $12.2 million as of December 31, 2007, compared to $15.4 million as of
      December 31, 2006. We expect all of the backlog at the end of 2007 to be filled
      within the 2008 fiscal year.





**Competition**





We
      compete with other direct selling organizations, some of which have a longer
      operating history and higher visibility, name recognition and financial
      resources than we do. The leading direct selling companies in our existing
      markets are Avon and Alticor (Amway). Some of our competitors, including Avon
      and Alticor (Amway), have been granted a direct selling business license in
      China pursuant to China’s recent regulations governing direct selling. In some
      instances, these licenses can be limited to certain cities and/or provinces.
      The
      direct selling regulations require Tianshi Engineering, our affiliate who sells
      our products in China, to apply for approval to conduct a direct selling
      enterprise in China. Tianshi Engineering has made an application for, but has
      not yet received, a direct selling license in China.




5




**Regulatory
      Framework**





**Product
      Regulation**





The
      central governing authority in China for wellness products is the SFDA, which
      is
      under the jurisdiction of the State Council. SFDA issues administrative rules.
      Provincial, city and town authorities implement the rules of the SFDA. Other
      than the SFDA, other ministries and administrations also have certain
      responsibility for the management of wellness or nutrition supplement products,
      such as the State Administration for Industry and Commerce.





We
      develop and manufacture products that are mainly classified as nutrition
      supplement products, which includes wellness products and dietary supplement
      products. Wellness products may not be sold in China without a wellness products
      certificate. The governmental approval process in China for a newly developed
      wellness product is as follows:





1.
            An
                application for a product certificate is filed with SFDA, which directs
                the applicant to send the product samples to one of the government
                appointed research institutes;





2.
            The
                appointed research institute conducts clinic trials, stability tests,
                function tests and toxicity tests on the product, makes a report
                and sends
                the report back to SFDA within 6 months;
                and





3.
            The
                Expert Committee of SFDA makes a final decision on the application
                and
                issues a “wellness products certificate” or a refusal notice to the
                applicant.





This
      certificate authorizes the sales and marketing of the product in China. The
      certificate does not expire and does not require renewal. The whole process
      generally takes 9 to 12 months. Dietary supplement products are not subject
      to
      SFDA regulation.





**Sales
      and Marketing Regulations**





In
      most
      countries, sales of our products are usually considered under the categories
      of
      general commodities, which do not require specific permits and are not subject
      to the strict regulations applied to drugs and medicine. In some countries,
      direct selling (or multi-level marketing) is highly regulated or prohibited.
      Since we sell our products to our affiliated companies for sale internationally,
      the local approval issues with respect to sales and distribution are addressed
      by our affiliates.





In
      China,
      we are aiming to expand our market share through the branches, chain stores,
      and
      affiliated companies of Tianshi Engineering, our affiliate who sells our
      products in China. Because direct selling was only recently authorized in China,
      the regulatory environment with respect to direct selling in this market remains
      fluid and the process for obtaining the necessary governmental approvals have
      been interpreted differently by different governmental authorities. The direct
      selling regulations require Tianshi Engineering to apply for approval to conduct
      a direct selling enterprise in China.





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




6




Tianshi
      Engineering has found that it is taking more time than anticipated to work
      through the approval process with the Chinese authorities. These authorities
      have broad discretion in interpreting the regulations and granting necessary
      approvals. A delay in obtaining approvals at one level can delay its ability
      to
      obtain approvals at the next level. The complexity of the approval process
      as
      well as the government’s continued cautious approach as direct selling develops
      in China makes it difficult to predict a timeline for obtaining these approvals.
      Until the application is approved, Tianshi Engineering will continue to sell
      our
      products through its branches, chain stores, and affiliated companies in
      China.





**Environmental
      Compliance**





We
      are
      subject to China’s National Environmental Protection Law, as well as a number of
      other national and local laws and regulations regulating air, water and noise
      pollution and setting pollutant discharge standards. We believe that all our
      manufacturing operations are in material compliance with all applicable
      environmental laws.





**Employees**





As
      of
      December 31, 2007, we had 1,405 employees. We believe that our relations with
      our employees are satisfactory.





**ITEM
      1A. RISK FACTORS.**





THE
      FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON THE
      BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS,
      FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY STATEMENT
      IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED
      TO
      BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL
      RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR
      STATEMENTS. WE ARE SUBJECT TO, AMONG OTHERS, THE FOLLOWING RISKS:





**RISKS
      RELATED TO OUR BUSINESS**





**WE
      MAY NOT BE ABLE TO RAISE ADEQUATE FUNDS TO COMPLETE THE CONSTRUCTION OF OUR
      NEW
      HEADQUARTERS, RESEARCH AND DEVELOPMENT AND MANUFACTURING FACITILITIES BEING
      BUILT BY LIFE RESOURCES.**





In
      December 2007, we entered into an agreement to acquire Life Resources, a company
      which is currently constructing research and development, manufacturing and
      logistic facilities, as well as administrative offices totaling approximately
      420,000 square meters in Tianjin, China. **** We
      currently estimate that the budget for completion of the Life Resources project
      will be approximately $220 million, including the $64 million already spent
      to
      acquire all of the registered share capital of Life Resources. 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,
      we
      may require additional financing to complete the funding of that project. If
      we
      are not able to fund the completion of the new facilities, our future growth
      opportunities may be limited.





**OUR
      REPUTATION, REVENUES AND OPERATING INCOME MAY BE ADVERSELY AFFECTED BY PRODUCT
      LIABILITY CLAIMS.**





As
      a
      manufacturer of products designed for human consumption, claims may be brought
      against us that a product injured its consumer. Our dietary supplement products
      consist of vitamins, minerals, herbs and other ingredients that are not subject
      to pre-market regulatory approval. Our products could contain contaminated
      substances, and some of our products contain innovative ingredients that do
      not
      have long histories of human consumption. Previously unknown adverse reactions
      resulting from human consumption of these ingredients could occur. A product
      liability claim against us could result in increased costs and could adversely
      affect our reputation with our customers, which in turn could adversely affect
      our revenues and operating income.




7




**OUR
      NEWLY DEVELOPED PRODUCTS MAY NOT BE COMPATIBLE WITH MARKET
      NEEDS.**





Our
      business is particularly subject to changing consumer trends and preferences.
      Our continued success depends in part on our ability to anticipate and respond
      to these changes, and we may not respond in a timely or commercially appropriate
      manner to such changes. Because markets for nutrition supplement products
      differentiate geographically, we must accurately assess demand in each specific
      market into which we wish to make sales. If we fail to accurately assess
      consumer health needs in each market we target, we may face limited market
      acceptance of our products, which could have a material adverse effect on our
      sales and revenue.





**OUR
      PRODUCTS MUST KEEP PACE WITH ADVANCES IN THE INDUSTRY OR THEY MAY BE DISPLACED
      BY COMPETITORS’ NEWLY DEVELOPED PRODUCTS.**





The
      nutrition supplement products industry is characterized by rapid product
      development, with significant competitive advantages gained by companies that
      introduce products that are first to market, deliver constant innovation in
      products and techniques, offer frequent new product introductions and have
      competitive prices. Our future growth partially depends on our ability to
      develop products that are more effective in meeting consumer needs. In addition,
      we must be able to manufacture and effectively market those products. The sales
      of our existing products may decline if a competing product is introduced by
      other companies.





The
      success of our new product offerings depends upon a number of factors, including
      our ability to:





·
            accurately
                anticipate consumer needs;





·
            innovate
                and develop new products;





·
            successfully
                commercialize new products in a timely manner;





·
            price
                our products competitively;





·
            manufacture
                and deliver our products in sufficient volumes and in a timely manner;
                and





·
            differentiate
                our product offerings from those of our competitors.





If
      we
      fail to do any of the above or we focus on technologies that do not lead to
      more
      effective products, our current and future products could be surpassed by more
      effective or advanced products of others.





**OUR
      PRODUCTS MAY BE COPIED BY OUR COMPETITORS.**





In
          general, we rely on trade secrets to protect our intellectual property.
          We have
          been issued patents from the State Intellectual Properties Office in China
          for
          two of our products: Tianshi Super Calcium Powder with Metabolic Factors
          and
          Tianshi Super Calcium Powder for Children. These two patents are effective
          for
          20 years, which commenced on January 13, 2001. If we fail to adequately
          protect
          our intellectual property and trade secrets, our competitors may copy our
          products, which could hurt our business.





**OUR
      MANUFACTURING PROCESS IS SUBJECT TO RISKS.**





There
      are
      risks associated with ingredients mixing and production processes and
      techniques. Our manufacturing process requires a significant degree of technical
      expertise. If we fail to manufacture our products to specifications or
      inadvertently use defective materials in the manufacturing process, the
      reliability and performance of our products will be compromised.





We
      rely
      on our manufacturing operations to produce nearly all of the proprietary
      products we sell. Any significant disruption in those operations for any reason,
      such as regulatory requirements and loss of certifications, power interruptions,
      fires, hurricanes, war or other force majeure, could adversely affect our sales
      and customer relationships.




8




**WE
      HAVE LIMITED CONTROL OVER THE ACTIVITIES OF OUR
      DISTRIBUTORS.**





We
      place
      significant reliance on a network of affiliates to act as our primary sales
      force. Although a majority of our affiliated companies are controlled in whole
      or part by Jinyuan Li, our Chairman, Chief Executive Officer and President,
      such
      affiliates are not employed or otherwise controlled by us and are generally
      free
      to conduct their business at their own discretion. The distributors are
      dedicated more to establishing their own reputations and business relationships
      than to promoting our products. The simultaneous loss of a number of these
      distributors could have a material adverse effect on our business, financial
      condition, and results of operations.





**WE
      CONDUCT OUR BUSINESS WITH RELATED PARTIES, AND YOUR INVESTMENT MAY BE SUBJECT
      TO
      CONFLICT OF INTEREST AND SELF-DEALING RISKS.**





Due
      to
      the inter-related ownership and business dealings among us and our affiliates,
      there are conflict of interest and self-dealing risks and increased potential
      for manipulation of financial results. We have affiliated companies or business
      entities that are owned by Jinyuan Li and his immediate family members (mostly
      his daughter Baolan Li). Although all affiliated companies and business entities
      were established so that they are legally and financially independent, except
      for the common ownership, they are centrally administrated by Tianshi Group.
      The
      decisions of Tianshi Group could materially affect the operation of our
      business, which could be adverse to our investors.





We
      sell
      all of our products for resale in China to Tianshi Engineering. As both we
      and
      Tianshi Engineering are majority owned by Jinyuan Li, even given consideration
      to the internal price transferring policies set among the related parties,
      these
      internal policies could be faulty or might not be strictly followed.





**WE
      FACE RISKS DUE TO OUR RELIANCE ON SALES IN INTERNATIONAL
      MARKETS.**





Our
      future success will depend in part on the continued expansion of international
      sales. Such international operations expose us to certain risks, including
      but
      not limited to; a need for export licenses; unexpected regulatory requirements;
      tariffs and other potential trade barriers and restrictions; political, legal
      and economic instability in foreign markets; longer account receivable cycles;
      difficulties in managing operations across disparate geographic areas; foreign
      currency fluctuations; limited protection of our intellectual property rights
      in
      some countries; dependence on local distributors; and potential disruptions
      in
      sales due to military or terrorist acts. Any or a combination of these risks
      could result in a material adverse effect on our business, financial condition
      or results of operations.





**OUR
      PRODUCTS ARE SUBJECT TO REGULATION OVER NUTRITIONAL SUPPLEMENT PRODUCTS IN
      MARKETS OUTSIDE CHINA.**





Nutrition
      supplement products are subject to regulatory requirements that vary by country.
      Obtaining approval to sell nutrition supplement products internationally
      involves complexities of dealing with a variety of governmental regulations.
      We
      have limited experience in dealing with the specific regulations that may be
      required to sell our products in certain international markets, which could
      delay our ability to obtain relevant regulatory approval for our products.
      In
      addition, our product sales in other countries are subject to product regulatory
      regimes of various degrees and direct marketing or distribution regulations.
      Although currently these aspects are handled by our affiliated distributors
      in
      the relevant jurisdictions, there can be no assurance that the current
      operations of our company and our affiliates and distributors will not be
      adversely affected by compliance issues and changes in applicable laws and
      regulations in relevant jurisdictions.





**THE
      DISTRIBUTION OF OUR PRODUCTS IS SUBJECT TO REGULATION OUTSIDE
      CHINA.**





Products
      distributed outside China are subject to government regulations of different
      jurisdictions, which could be stricter than in China. In some developed
      countries, the government regulations for product approval could be stricter
      than in China, while in developing countries, government regulation could be
      uncertain. Our products could take a significantly longer time than we expect
      to
      gain regulatory approval or may never gain approval in certain countries, which
      could limit our ability to promote, sell and distribute products. In addition,
      in terms of our marketing approach, multi-level marketing may also be prohibited
      in some countries. As such, our sales may be adversely affected if such approval
      cannot be obtained in certain jurisdictions.




9




**OUR
      MANAGEMENT LACKS EXPERIENCE OPERATING A U.S. PUBLIC
      COMPANY.**





Our
      management had no experience operating a U.S. public company before our
      acquisition of Tianshi Holdings. The initial difficulties with public company
      regulations faced by U.S. managers of a newly public company are aggravated
      with
      respect to our management, by our unfamiliarity with Western regulatory regimes
      and language and time zone differences. In addition, management must integrate
      new accounting rules and control procedures. Learning compliance is likely
      to
      distract management from operations to a greater degree than might be the case
      of management of a U.S. company, and the period during which our management
      masters the rules, when errors are more likely to occur, may be longer.
      Accordingly, the expense and operational risks inherent to a transition from
      private to public company are greater for Tiens USA than might usually be the
      case.





**RISKS
      RELATED TO DOING BUSINESS IN CHINA**





**WE
      ARE SUBJECT TO THE RISKS ASSOCIATED WITH DOING BUSINESS IN
      CHINA.**





As
      most
      of our operations are conducted in China, we are subject to special
      considerations and significant risks not typically associated with companies
      operating in North America and Western Europe. These include risks associated
      with, among others, the political, economic and legal environments and foreign
      currency exchange. Our results may be adversely affected by changes in the
      political and social conditions in China, and by changes in governmental
      policies with respect to laws and regulations, anti-inflationary measures,
      currency conversion and remittance abroad, and rates and methods of taxation,
      among other things.





Although
      the majority of productive assets in China are owned by the Chinese government,
      in the past several years the government has implemented economic reform
      measures that emphasize decentralization and encourage private economic
      activity. Because these economic reform measures may be inconsistent or
      ineffectual, there are no assurances that:





·
            We
                will be able to capitalize on economic
                reforms;





·
            The
                Chinese government will continue its pursuit of economic reform policies;





·
            The
                economic policies, even if pursued, will be successful;
                and





·
            Economic
                policies will not be significantly altered from time to
                time.





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





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





As
      a
      result of this campaign by the AQSIQ, there has been a general slow-down and
      backlog of export clearances for Chinese food products, and we have experienced
      significant delays in obtaining export clearance for all of the products which
      we sell to our international affiliates. We believe that these delays have
      resulted in some of our international affiliates not being able to purchase
      sufficient quantities of our products to meet their demand, resulting in a
      loss
      of sales. Continued delays in the export clearance for our products may continue
      to result in us not being able to meet the demand for our products from our
      international affiliates and future loss of sales. Currently we are not able
      to
      provide an estimate as to the timing for the clearance of our products for
      export.




10




**THE
      RESEARCH, DEVELOPMENT, TESTING, MANUFACTURING AND MARKETING OF OUR PRODUCTS
      ARE
      SUBJECT TO VARIOUS GOVERNMENTAL REGULATIONS IN CHINA.**





Government
      regulation includes inspection of and controls over testing, manufacturing,
      safety and environmental controls, efficacy, labeling, advertising, promotion,
      record keeping and the sale and distribution of wellness products. Tianshi
      Engineering is also subject to government regulations with respect to the prices
      it will charge, the rebates it may offer to customers and the methods of its
      marketing. Government regulation may substantially increase the cost of
      developing, manufacturing and selling our products.





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





Substantially
      all of our assets are located in China, and approximately 56.0%, 40.5% and
      40.9%
      of our revenues in 2005, 2006 and 2007, respectively, were derived from our
      operations in China. Accordingly, our operations are subject, to a significant
      degree, to Chinese law. In China, we are aiming to expand our market share
      through the branches, chain stores, and affiliated companies of Tianshi
      Engineering, our affiliate who sells our products in China. Because direct
      selling was only recently authorized in China, the regulatory environment with
      respect to direct selling in this market remains fluid and the process for
      obtaining the necessary governmental approvals have been interpreted differently
      by different governmental authorities. The direct selling regulations require
      Tianshi Engineering to apply for approval to conduct a direct selling enterprise
      in China.





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





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





**WE
      MAY NOT BE REFUNDED** **MONIES WE HAVE PAID FOR THE TIENS YIHAI PROPERTY.**





In
      2005,
      the Chinese central government issued its “Adjustment of Macro-Economic Policy”.
      This policy implemented a new system of investment and use of state-owned
      assets, including land. Pursuant to this policy, local government organizations
      adjusted and re-allotted projects, including investment, construction and
      reconstruction of state-owned resources. As a result, projects and enterprises
      that had been affected, including Tiens Yihai, were awaiting further decisions
      by state and local government.





On
      November 10, 2006, Tiens International and the Local Government entered into
      a
      supplemental agreement pursuant to which the parties have agreed to the
      acquisition of land use rights by Tiens Yihai of a reduced 486 mu (80 acres)
      parcel of land. In order to proceed with the purchase of land use rights of
      the
      property by Tiens Yihai, Tianshi Holdings is required to provide a loan of
      $6.4
      million to the Local Government for relocation costs for people living on the
      property. The $6.4 million loan is to be funded in two
      installments:





·
            The
                first installment of $3.2 million was paid on November 27,
                2006.





·
            The
                second installment of $3.2 million is to be paid after Tiens Yihai
                obtains
                a construction license to develop the property. The parties have
                agreed to
                allow Tianshi Holdings to reduce this second installment by the amount
                of
                the $1.6 million refund due to it.




11




In
      return
      for the loan, Tiens Yihai will receive a tax credit in the amount of the loan.
      In March 2007, we received notice that the Local Government had approved the
      land use rights for 50 acres of the Tiens Yihai property. As a result of the
      reduction in the number of acres for which we have received land use rights
      and
      continued uncertainty relating to the Tiens Yihai project, management made
      a
      decision to suspend the development of the project. We are currently reviewing
      alternative commercial uses for the Tiens Yihai site, as well as the possibility
      of selling the land use rights to a third party. If Tiens Yihai does not proceed
      with construction on the Tiens Yihai site or is not able to sell the land use
      rights to a third party, it is not clear whether the Local Government will
      return the $1.6 million it previously agreed to refund or repay the initial
      loan
      of $3.2 million made in November 2006.




**THE
      LEGAL AUTHORITIES IN CHINA ARE IN THE PROCESS OF EVALUATING HERETOFORE TAX
      AND
      FEE BENEFITS PROVIDED TO FOREIGN INVESTORS AND COMPANIES TO ENCOURAGE
      DEVELOPMENT WITHIN THE COUNTRY SUCH THAT THESE BENEFITS MAY BE LESSENED OR
      REMOVED WITH THE CONSEQUENCE THAT EXPENSES MAY RISE IMPACTING MARGINS AND NET
      INCOME.**





Biological
      is located in Tianjin Wuqing Development Area, a national new technology
      development zone, and is subject to the special reduced income tax rate of
      15%.
      Pursuant to the approval of the relevant PRC tax authorities, Biological is
      fully exempt from PRC income taxes for two years starting from the year profits
      are first made, followed by a 7.5% reduced tax rate for the next three years.





Prior
      to
      the year ended December 31, 2002, Biological suffered operating losses.
      Biological started generating taxable profits in the year ended December 31,
      2003. Effective January 1, 2005, the two-year full
      exemption for income taxes expired for Biological and it became subject to
      income tax at a reduced rate of 7.5%.





Beginning
      January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
      existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
      (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently
      applicable to both DES and FIEs. The two years tax exemption, three years 50%
      tax reduction tax holiday for production-oriented FIEs will be eliminated.
      According to the new EIT, high-tech companies could be subject to a special
      reduced tax rate of 15%. The qualification of a high-tech company is to be
      reviewed annually. Biological currently qualifies as a high-tech company.
      However, there are no detailed regulations regarding the implementation of
      new
      EIT. In the first quarter of 2008, we were required by local tax authority
      to
      prepay income tax at a tax rate of 25%. We are currently evaluating the effect of the new EIT law will have on our financial
      position.





**WE
      ARE SUBJECT TO COMPLEX CHINESE BUSINESS REGULATIONS.**





As
      China
      changes its economy from planned to more market-oriented, uncertainties arise
      regarding governmental policies and measures. Although, in recent years, the
      Chinese government has implemented measures emphasizing the use of market forces
      for economic reform, reduction of state ownership of productive assets, and
      establishment of sound corporate governance practices, a substantial portion
      of
      productive assets in China are still owned by the Chinese government. For
      example, all lands are state owned and leased to business entities or
      individuals through governmental grants of state-owned land use rights. The
      grant process is typically based on government policies at the time of grant,
      which can be lengthy and complex and may adversely affect our planned
      manufacturing expansion. The Chinese government also exercises significant
      control over China’s economic growth through allocation of resources, foreign
      currency control and providing preferential treatment to particular industries
      or companies.





**BECAUSE
      MOST OF OUR DIRECTORS AND OFFICERS RESIDE OUTSIDE OF THE UNITED STATES, AND
      SUBSTANTIALLY ALL OF OUR ASSETS ARE LOCATED OUTSIDE OF THE UNITED STATES, IT
      MAY
      BE DIFFICULT FOR INVESTORS TO ENFORCE THEIR LEGAL RIGHTS AGAINST SUCH
      INDIVIDUALS OR SUCH ASSETS.**





Most
      of
      our directors and officers reside outside of the United States, and
      substantially all of our assets are located outside of the United States. As
      a
      result, it may not be possible for investors in the United States to enforce
      their legal rights, to effect service of process upon our directors or officers
      or to enforce judgments of United States courts predicated upon civil
      liabilities and criminal penalties of our directors and officers under Federal
      securities laws. Although China has executed the Agreement on Mutual Judicial
      Assistance in Criminal Matters with the United States in June 2000, there is
      no
      extradition treaty between the United States and China. Therefore, it is unclear
      whether criminal penalties under United States federal securities laws would
      be
      enforced effectively in China, if at all.




12




**OUR
      OPERATING COMPANY IS SUBJECT TO RESTRICTIONS ON DIVIDEND PAYMENTS AND OTHER
      DISTRIBUTIONS TO US.**





Current
      regulations in China would permit our operating company in China to pay
      dividends to us only out of its accumulated distributable profits, if any,
      determined in accordance with Chinese accounting standards and regulations.
      In
      addition, our operating company in China will be required to set aside at least
      10% (up to an aggregate amount equal to half of its registered capital) of
      its
      accumulated profits each year. Such cash reserve may not be distributed as
      cash
      dividends. In addition, if our operating company in China incurs debt on its
      own
      behalf in the future, the instruments governing the debt may restrict its
      ability to pay dividends or make other payments to us.





**THE
      CHINESE LEGAL SYSTEM IS NOT FULLY DEVELOPED AND HAS INHERENT UNCERTAINTIES
      THAT
      COULD LIMIT THE LEGAL PROTECTIONS AVAILABLE TO INVESTORS.**





The
      Chinese legal system is a system based on written statutes and their
      interpretation by the Supreme People’s Court. Prior court decisions may be cited
      for reference but have limited legal precedents. Since 1979, the PRC government
      has been developing a comprehensive system of commercial laws, and considerable
      progress has been made in introducing laws and regulations dealing with economic
      matters such as foreign investment, corporate organization and governance,
      commerce, taxation and trade. Two examples are the promulgation of the Contract
      Law of the PRC to unify the various economic contract laws into a single code,
      which went into effect on October 1, 1999, and the Securities Law of the
      People’s Republic of China, which went into effect on July 1, 1999. However,
      because these laws and regulations are relatively new, and because of the
      limited volume of published cases and their non-binding nature, interpretation
      and enforcement of these laws and regulations involve uncertainties. In
      addition, as the Chinese legal system develops, changes in such laws and
      regulations, their interpretation or their enforcement may have a material
      adverse effect on our business operations.





**ENFORCEMENT
      OF REGULATIONS IN CHINA MAY BE INCONSISTENT.**





Although
      the Chinese government introduced new laws and regulations to modernize its
      securities and tax systems on January 1, 1994, China does not yet possess an
      expansive body of business law. As a result, the enforcement, interpretation
      and
      implementation of regulations may prove to be inconsistent and it may be
      difficult to enforce contracts.





**WE
      MAY EXPERIENCE LENGTHY DELAYS IN RESOLUTION OF LEGAL
      DISPUTES.**





As
      China
      has not developed a dispute resolution mechanism similar to the Western court
      system, dispute resolution over Chinese projects and joint ventures can be
      difficult and there is no assurance that any dispute involving our business
      in
      China can be resolved expeditiously and satisfactorily.





**CHINESE
      ECONOMIC, POLITICAL AND SOCIAL CONDITIONS AS WELL AS GOVERNMENT POLICIES COULD
      ADVERSELY AFFECT OUR BUSINESS.**





All
      of
      our assets and operations are located in China. The economy of China differs
      from the economies of most developed countries in many respects, including
      government involvement, level of development, growth rate, control of foreign
      exchange, and allocation of resources. The economy of China has been
      transitioning from a planned economy to a more market-oriented economy. Although
      in recent years the Chinese government has implemented measures emphasizing
      the
      utilization of market forces for economic reform, the reduction of state
      ownership of productive assets and the establishment of sound corporate
      governance in business enterprises, a substantial portion of productive assets
      in China is still owned by the Chinese government. In addition, the Chinese
      government continues to play a significant role in regulating industry by
      imposing industrial policies. It also exercises significant control over China’s
      economic growth through the allocation of resources, controlling payment of
      foreign currency-denominated obligations, setting monetary policy and providing
      preferential treatment to particular industries or companies.




13




The
      economy of China has experienced significant growth in the past 20 years, but
      growth has been uneven both geographically and among various sectors of the
      economy. The Chinese government has implemented various measures from time
      to
      time to control the rate of economic growth. Some of these measures benefit
      the
      overall economy of China, but may have a negative effect on us. For example,
      our
      operating results and financial condition may be adversely affected by:





·
            changes
                in the rate or method of taxation;





·
            imposition
                of additional restrictions on currency conversion and remittances
                abroad;





·
            reduction
                in tariff or quota protection and other import restrictions;
                and





·
            changes
                in the usage and costs of state-controlled transportation
                services.





**FLUCTUATIONS
      IN THE VALUE OF THE CHINESE RENMINBI RELATIVE TO FOREIGN CURRENCIES COULD AFFECT
      OUR OPERATING RESULTS.**





Substantially
      all our revenues and expenses are denominated in the Chinese Renminbi. However,
      we use the United States dollar for financial reporting purposes. The value
      of
      Chinese Renminbi against the United States dollar and other currencies may
      fluctuate and is affected by, among other things, changes in China’s political
      and economic conditions. The Chinese government values the exchange rate of
      the
      Chinese Renminbi against a number of currencies, rather than just exclusively
      the United States dollar. Although the Chinese government has stated its
      intention to support the value of the Chinese Renminbi, we cannot assure you
      that the government will not revalue it. As our operations are primarily in
      China, any significant revaluation of the Chinese Renminbi may materially and
      adversely affect our cash flows, revenues and financial condition. For example,
      to the extent that we need to convert United States dollars into Chinese
      Renminbi for our operations, appreciation of this currency against the United
      States dollar could have a material adverse effect on our business, financial
      condition and results of operation. Conversely, if we decide to convert our
      Chinese Renminbi into United States dollars for other business purposes and
      the
      United States dollar appreciates against this currency, the United States dollar
      equivalent of the Chinese Renminbi would be reduced. To date, we have not
      engaged in any hedging transactions in connection with our
      operations.





**RISKS
      RELATED TO OUR COMMON STOCK**





**THE
      LIQUIDITY OF OUR COMMON STOCK IS AFFECTED BY ITS LIMITED TRADING
      MARKET.**





Shares
      of
      our common stock are traded on the American Stock Exchange under the symbol
      “TBV”. There is currently no broadly followed established trading market for our
      common stock. An established trading market may never develop or be maintained.
      Active trading markets generally result in lower price volatility and more
      efficient execution of buy and sell orders. The absence of an active trading
      market reduces the liquidity of shares. The trading volume of our common stock
      historically has been limited and sporadic. As a result of this trading
      activity, the quoted price for our common stock is not necessarily a reliable
      indicator of its fair market value. Further, if we cease to be quoted, holders
      would find it more difficult to dispose of, or to obtain accurate quotations
      as
      to the market value of our common stock and the market value of our common
      stock
      likely would decline.





**OUR
      COMMON STOCK MAY BE SUBJECT TO REGULATIONS PRESCRIBED BY THE SECURITIES AND
      EXCHANGE COMMISSION RELATING TO “PENNY STOCK”.**





The
      Securities and Exchange Commission has adopted regulations that generally define
      a penny stock to be any equity security that has a market price (as defined
      in
      such regulations) of less than $5.00 per share, subject to certain exceptions.
      If our common stock meets the definition of a penny stock, it will be subjected
      to these regulations, which impose additional sales practice requirements on
      broker-dealers who sell such securities to persons other than established
      customers and accredited investors.





**WE
      ARE MAJORITY OWNED BY ONE STOCKHOLDER.**





Our
      president and chief executive officer, Jinyuan Li, controls a majority of our
      common stock. Mr. Li beneficially owns approximately 92% of our outstanding
      common stock. As a result, Mr. Li has the ability to exert significant control
      over our management and affairs requiring stockholder approval, including
      approval of significant corporate transactions. This concentration of ownership
      may have the effect of delaying or preventing a change in control, including
      a
      merger, consolidation or other business combination involving us, or
      discouraging a potential acquirer from making a tender offer or otherwise
      attempting to obtain control, even if such change of control would benefit
      our
      other shareholders.





**OUR
      COMMON STOCK WILL LIKELY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME
      FLUCTUATIONS.**





The
      stock
      market has experienced extreme price and volume fluctuations in recent years
      that have significantly affected the quoted prices of securities of many
      companies, including companies in our industry. The changes often appear to
      occur without regard to specific operating performance. In addition, there
      has
      been a limited public market for our common stock. We cannot predict the extent
      to which investor interest in us will be maintained. Such interest is necessary
      for an active, liquid trading market for our common stock. Active trading
      markets generally result in lower price volatility and more efficient execution
      of buy and sell orders for investors. The price and trading volumes of our
      common stock may fluctuate widely due to the limited public market for our
      stock.




14




**SHARES
      AVAILABLE FOR FUTURE SALE MAY DILUTE AND DEPRESS THE PRICE OF OUR COMMON
      STOCK.**





A
      significant number of our shares are eligible for sale pursuant to Rule 144,
      and
      their sale could depress the market price of our stock. Some or all of the
      shares of common stock may be offered from time to time in the open market
      pursuant to Rule 144, and these sales may have a depressive effect on the market
      for the shares of common stock. In general, a person who has held restricted
      shares for a period of one year may, upon filing with the SEC a notification
      on
      Form 144, sell into the market common stock in an amount equal to the greater
      of
      1% of the outstanding shares or the average weekly number of shares sold in
      the
      last four weeks prior to such sale. Such sales may be repeated once each three
      months, and any of the restricted shares may be sold by a non-affiliate after
      they have been held two years.





**WE
      DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE, AND THE LACK
      OF
      DIVIDENDS MAY HAVE A NEGATIVE EFFECT ON THE STOCK PRICE.**





We
      have
      never declared or paid any cash dividends or distributions on our common stock.
      We currently intend to retain our future earnings to support operations and
      to
      finance expansion and, therefore, do not anticipate paying any cash dividends
      on
      our common stock in the foreseeable future.




**ITEM
      1B. UNRESOLVED STAFF COMMENTS.**





Not
      applicable.





**ITEM
      2. PROPERTIES.**





We
      conduct our main business activities in Tianjin, China. Our primary facilities
      are located at No. 6. Yuanquan Road, Wuqing New-tech Industrial Park, Tianjin,
      PRC.




15




Since
      2003, Biological has leased office space and manufacturing facilities from
      Tianshi Group. The lease expired at the end of 2007 and required annual rent
      at
      1% of our total gross revenues. The rent was negotiated by the parties before
      we
      acquired Tianshi Holdings, and we believe that it is a reasonable rent for
      the
      facilities. In 2007 we paid $522,318 to Tianshi Group under the lease. In
      addition, we are obligated to pay insurance, maintenance and other expenses
      related to the premises. Effective January 1, 2008, we entered into a new lease
      with Tianshi Group regarding the following properties on the same terms as
      the
      lease which expired at the end of 2007:





•
            three
                office buildings with a total area of 8,265 square
                meters;





•
            one
                research building with an area of 2,400 square meters;
                and





•
            one
                dormitory with an area of 2,365 square
                meters.





On
      December 14, 2007, Biological entered into a Real Property Transfer Agreement
      (the “Transfer Agreement”) with Tianshi Group. Under the Transfer Agreement,
      Biological transferred to Tianshi Group title to buildings consisting of
      approximately 34,000 square meters of office, workshop, conference and
      exhibition space located at the Company’s headquarters in Tianjin China for
      $15,316,496. Biological also transferred land use rights on the underlying
      land,
      which is owned by the government of China, continuing through December 30,
      2054
      with respect to the conference center property and May 31, 2043 with respect
      the
      other properties. On December 14, 2007, Biological and Tianshi Group also
      entered a Lease Agreement pursuant to which Biological has the right to use
      and
      occupy the office and workshop spaces being transferred under the 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
      offices being constructed by Life Resources, or the land use rights on the
      underlying property expire.





The
      following properties are covered by the December 14, 2007 lease:





·
            two
                workshops with an area of 8,600 square
                meters;





·
            two
                warehouses with an area of 9,447 square meters;
                and





·
            one
                power station with an area of 615 square
                meters





**Tiens
      Yihai Property**





In
      April
      2004, Tianshi Holdings entered a joint venture contract with Tianshi
      Pharmaceuticals to establish Tiens Yihai. Tiens Yihai is 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, which would also produce certain of our products. In October 2004,
      the
      Company paid a deposit of $3.6 million to Zhu Jia Jiao Industrial Park
      Economic  Development
      Ltd (representative of the local government, “Local Government”) for acquiring
      the land use right of 1,600 mu (263 acres) located in Shanghai. However, in
      2005, the Chinese central government issued its “Adjustment of Macro-Economic
      Policy”. This policy implemented a new system of investment and use of
      state-owned assets, including land. Pursuant to this policy, local government
      organizations adjusted and re-allotted projects, including investment,
      construction and reconstruction of state-owned resources. As a result, projects
      and enterprises that had been affected, including Tiens Yihai, were awaiting
      further decisions by state and local government.





On
      November 10, 2006, Tiens International and the Local Government entered into
      a
      supplemental agreement pursuant to which the parties have agreed to the
      acquisition of land use rights by Tiens Yihai of a reduced 486 mu (80 acres)
      parcel of land. The remaining 1,114 mu (184 acres) may not be available for
      purchase in the future. Therefore, the Local Government has agreed to refund
      to
      us $1.6 million of the original $3.6 million deposit when we receive a
      construction license for the development.





In
      order
      to proceed with the purchase of the property by Tiens Yihai, Tianshi Holdings
      is
      required to provide a loan of $6.4 million to the Local Government for
      relocation costs for people living on the property. The $6.4 million loan is
      to
      be funded in two installments:





·
            The
                first installment of $3.2 million was paid on November 27,
                2006.





·
            The
                second installment of $3.2 million is to be paid after Tiens Yihai
                obtains
                a construction license to develop the property. The parties have
                agreed to
                allow Tianshi Holdings to reduce this second installment by the amount
                of
                the $1.6 million refund due to it.




16




In
      return
      for the loan, Tiens Yihai will receive a tax credit in the amount of the loan.
      In March 2007, we received notice that the Local Government had approved the
      land use rights for 50 acres of the Tiens Yihai property. As a result of the
      reduction in the number of acres for which we have received land use rights
      and
      continued uncertainty relating to the Tiens Yihai project, management made
      a
      decision to suspend the development of the project. We are currently reviewing
      alternative commercial uses for the Tiens Yihai site, as well as the possibility
      of selling the land use rights to a third party.





**Life
      Resources Property**





On
      December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
      with Tianshi Investment to buy all of the registered share capital of Life
      Resources for $64.2 million. The closing of the transaction was subject to
      government approval of transfer of the share capital of Life Resources to
      Tianshi Holdings. On March 13, 2008, the Chinese government approved the
      transfer. Pursuant to the Sale and Purchase Agreement, the Tianshi Holdings
      advanced a deposit of $64,247,182 to Tianshi Investment on December 20, 2007.
      This acquisition deposit was settled as follows:





·
            $28,592,743
                was paid by canceling a loan in the principal amount of RMB200,000,000
                to
                Tianshi Engineering owned by Biological together with interest accrued;


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


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





Life
      Resources is currently constructing research and development, manufacturing
      and
      logistic facilities, as well as administrative offices totaling approximately
      420,000 square meters. Construction began in July 2006. The facilities are
      located 7 kilometers from our current headquarters in Tianjin, China. We
      currently estimate that the budget for completion of the Life Resources project
      will be approximately $220 million, including the $64 million already spent
      to
      acquire all of the registered share capital of Life Resources. We intend to
      move
      our headquarters to these new facilities upon its completion.




**ITEM
      3. LEGAL PROCEEDINGS.**




We
      are
      not a party to any material pending legal proceedings.




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





On
      December 4, 2007, the annual meeting of stockholders of the Company (the “Annual
      Meeting”) was held at the Company’s Tianjin offices for the following purposes:





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





2.
            Ratify
                the Board of Directors’ appointment of Grobstein, Horwath & Company
                LLP, the independent public accountants as the auditor of the Company
                for
                the fiscal year 2007.





In
      this
      Annual Meeting, there were accordingly present, in person or by proxy, an
      aggregate of 67,970,169 shares of Common Stock, such shares being a majority
      of
      the 71,333,586 shares of Common Stock entitled to notice of and to vote at
      the
      meeting.





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





**Directors**
            
            **No.
                of Shares For**
            
            **No.
                of Shares Against**
            
            **Withheld
                Authority**Jinyuan
                Li
            
            67,959,959
            
            10,210
            
            0Wenjun
                Jiao
            
            67,959,959
            
            10,210
            
            0Yupeng
                Yan
            
            67,959,959
            
            10,210
            
            0Socorro
                Quintero
            
            67,959,959
            
            10,210
            
            0Howard
                Balloch
            
            67,959,359
            
            10,810
            
            0Gilbert
                Raker
            
            67,959,959
            
            10,210
            
            0




The
      result of the vote taken for the ratification of the appointment of Grobstein,
      Horwath & Company LLP was as follows:





·
            67,959,924
                shares voted in favor of the proposal,





·
            7,208
                shares voted against the proposal, and





·
            3,037
                shares abstained.




17




**PART
      II**




**ITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASERS OF EQUITY SECURITIES.**





**Stock
      Performance Presentation**





The
      following chart compares the cumulative stockholder return on the Company’s
      common stock with the cumulative total stockholder return of (i) the AMEX
      Composite Index and (ii) the Nasdaq Biotechnology Index.





**Cumulative
      Total Return**


**Among
      Tiens Biotech Group (USA), Inc.,**


**AMEX
      Composite Market Index and NASDAQ Biotech Index (1) (2)**














**October
                7,**
              **2003**
            
            **December
                31,**
              **2003**
            
            **December
                31,**
              **2004**
            
            **December
                31,**
              **2005**
            
            **December
                31,**
              **2006**
            
            **December
                31,**
              **2007**Tiens
                Biotech Group (USA), Inc.
            
            $
            100.00
            
            $
            301.25
            
            $
            175.00
            
            $
            90.50
            
            $
            98.25
            
            $
            58.50Amex
                Composite Index
            
            $
            100.00
            
            $
            115.51
            
            $
            141.18
            
            $
            173.14
            
            $
            202.41
            
            $
            237.17Nasdaq
                Biotechnology Index
            
            $
            100.00
            
            $
            95.61
            
            $
            101.47
            
            $
            104.35
            
            $
            105.42
            
            $
            110.25





(1)
      Assumes $100 invested on October 7, 2003 and assumes dividends reinvested.
      The
      Company has not paid any dividends on its common stock, and no dividends are
      included in the report of the Company’s performance. Measurement points are at
      the last trading day of the fiscal years ended December 31, 2003, 2004, 2005,
      2006 and 2007. The material in this chart is not soliciting material, is not
      deemed filed with the SEC and is not incorporated by reference in any filing
      of
      the Company under the Securities Act of 1933, as amended, or the Exchange Act,
      whether made before or after the date of this proxy statement and irrespective
      of any general incorporation language in such filing.





(2)
      The
      Company was listed on the American Stock Exchange as of April 25, 2005. The
      Company’s common stock began quotation on the OTC Bulletin Board on October 7,
      2003. Prior to October 7, 2003, the Company’s common stock was eligible for
      quotation on the OTC Bulletin Board, but there was no trading
      activity.





18


**Market
      Prices of Common Stock**





Our
      common stock was listed on the OTC Bulletin Board under the symbol “TBGU” from
      January 1, 2004 to April 24, 2005. On April 25, 2005, our common stock was
      listed on the American Stock Exchange under the symbol “TBV”. The following
      table sets forth the range of high and low bid prices for our common stock
      reported by the American Stock Exchange in each fiscal quarter from January
      1,
      2006 to December 31, 2007.





****
            **High**
            
            **Low**Fiscal
                2006Quarter
                Ended March 31, 2006
            
            $
            5.02
            
            $
            3.62Quarter
                Ended June 30, 2006
            
            $
            7.47
            
            $
            4.01Quarter
                ended September 30, 2006
            
            $
            4.40
            
            $
            2.61Quarter
                ended December 31, 2006
            
            $
            4.02
            
            $
            2.80Fiscal
                2007Quarter
                Ended March 31, 2007
            
            $
            6.99
            
            $
            3.75Quarter
                Ended June 30, 2007
            
            $
            4.55
            
            $
            3.55Quarter
                ended September 30, 2007
            
            $
            4.55
            
            $
            2.65Quarter
                ended December 31, 2007
            
            $
            6.85
            
            $
            2.25





**Shareholders**





As
      of
      March 25, 2008, there were a total of 71,333,586 shares of our common stock
      outstanding, held by approximately 941 stockholders of record. This number
      of
      holders of record does not represent the actual number of beneficial owners
      of
      shares of our common stock because shares are frequently held in “street name”
by securities dealers and others for the benefit of individual owners who have
      the right to vote their shares.





**Dividend
      Policy**





We
      have
      not declared any dividends on our common stock since inception and do not intend
      to pay dividends on our common stock in the foreseeable future.





**Recent
      Sales of Unregistered Securities**





None.





**Authorization
      of Securities for Issuance Under Equity Compensation Plans**





None.





**Issuer
      Purchases of Equity Securities**





None.





19


**ITEM
      6. SELECTED FINANCIAL DATA.**





The
      following table sets forth certain of our historical financial data. The
      selected consolidated historical financial data set forth below are not
      necessarily indicative of the results of future operations and should be read
      in
      conjunction with the discussion under the heading “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations,” and the historical
      consolidated financial statements and accompanying notes included elsewhere
      in
      this document. The following selected financial data as of and each of the
      five
      years ended December 31, 2003 through 2007 have been derived from our audited
      consolidated financial statements.





**Year
                Ended December 31****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****Income
                Statement Data:**Revenue
                - related parties
            
            $
            54,900,060
            
            $
            66,790,466
            
            $
            68,688,669
            
            $
            58,910,532
            
            $
            38,392,208Cost
                of sales
            
            
            16,526,695
            
            
            18,082,441
            
            
            17,451,605
            
            
            17,483,739
            
            
            12,725,161Gross
                profit
            
            
            38,373,365
            
            
            48,708,025
            
            
            51,237,064
            
            
            41,426,793
            
            
            25,667,047Selling,
                general and administrative expenses
            
            
            14,306,660
            
            
            12,789,810
            
            
            13,413,875
            
            
            7,363,248
            
            
            3,171,338Income
                from operations
            
            
            24,066,705
            
            
            35,918,215
            
            
            37,823,189
            
            
            34,063,545
            
            
            22,495,709Other
                income (expense), net
            
            
            1,520,208
            
            
            161,091
            
            
            (639,137
            )
            
            388,266
            
            
            (1,178,389
            )Income
                before provision for income taxesand
                minority interest
            
            
            25,586,913
            
            
            36,079,306
            
            
            37,184,052
            
            
            34,451,811
            
            
            21,317,320Provision
                for income taxes
            
            
            2,026,875
            
            
            2,823,899
            
            
            2,984,302
            
            
            0
            
            
            0Income
                before minority interest
            
            
            23,560,038
            
            
            33,255,407
            
            
            34,199,750
            
            
            34,451,811
            
            
            21,317,320Minority
                interest
            
            
            4,966,397
            
            
            6,963,330
            
            
            7,321,630
            
            
            7,013,515
            
            
            4,263,498Net
                income
            
            
            18,593,641
            
            
            26,292,077
            
            
            26,878,120
            
            
            27,438,296
            
            
            17,053,822Other
                comprehensive incomeForeign
                currency translation adjustment
            
            
            8,265,358
            
            
            3,480,775
            
            
            2,246,380
            
            
            (8,239
            )
            
            0Comprehensive
                income
            
            $
            26,858,999
            
            $
            29,772,852
            
            $
            29,124,500
            
            $
            27,430,057
            
            $
            17,053,822Weighted
                average number of shares outstanding
            
            
            71,333,586
            
            
            71,333,586
            
            
            71,333,586
            
            
            71,801,819
            
            
            44,730,609Earnings
                per share, basic and diluted
            
            $
            0.26
            
            $
            0.37
            
            $
            0.38
            
            $
            0.38
            
            $
            0.38**Balance
                Sheet Data**(at
                end of period)**:**Cash
                and cash equivalents and current investments
            
            $
            48,678,945
            
            $
            54,270,065
            
            $
            77,545,991
            
            $
            39,243,872
            
            $
            12,725,043Working
                capital
            
            
            59,323,558
            
            
            74,008,466
            
            
            81,067,056
            
            
            53,716,852
            
            
            28,121,818Total
                assets
            
            
            181,627,637
            
            
            148,746,998
            
            
            121,624,154
            
            
            83,518,933
            
            
            57,101,642Current
                potion of long-term debt
            
            
            2,130,000
            
            
            2,130,000
            
            
            2,130,000
            
            
            155,442
            
            
            259,364Long-term
                debt
            
            
            4,267,742
            
            
            6,397,742
            
            
            8,527,742
            
            
            10,657,742
            
            
            155,591Stockholders’
                equity
            
            $
            146,348,355
            
            $
            119,420,251
            
            $
            89,647,399
            
            $
            60,522,899
            
            $
            33,086,192





20




**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF**  **OPERATIONS.**





**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-K 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 “Item 6.
      Selected Financial Data” and our consolidated financial statements and the
      related notes thereto and other financial information contained elsewhere in
      this Form 10-K.





**Overview**





Tiens
      USA
      researches, develops, manufactures, and markets nutrition supplement products,
      including wellness products and dietary supplement products. Our operations
      are
      conducted from our headquarters in Tianjin, China through our 80% owned
      subsidiary, Biological. We sell our products to affiliated companies in China
      and internationally.





We
      develop our products at our product research and development center, which
      employs highly qualified professionals in the fields of pharmacology, biology,
      chemistry and fine chemistry. We have developed and produce 33 nutrition
      supplement products, which include wellness products and dietary nutrition
      supplements. During 2007, we phased out production of our personal care line
      of
      products, which had not been a material part of our business, to focus on our
      wellness products and dietary supplements.





In
      China,
      we sell our products to Tianshi Engineering, an affiliated company. Tianshi
      Engineering, in turn, sells the products to customers through its branches
      and
      affiliated companies and at chain stores which are owned by individual
      distributors. Internationally, we sell our products to overseas affiliates
      who
      in turn sell to independent distributors who use the products themselves and/or
      resell them to other distributors or consumers.





21


**Results
      of Operations**





**Year
      Ended December 31, 2007 Compared to Year Ended December 31,
      2006**





**Revenue.** In
      2007
      revenue was $54.9 million compared to $66.8 million in 2006, a decrease of
      17.8%. The breakdown of revenue between Chinese and international sales is
      as
      follows.





**Chinese
      and International Revenue**





**Revenue**
            
            **Year
                2007**
            
            **Year
                2006**
            
            **%
                Change**China
            
            $
            22,476,135
            
            $
            27,074,979
            
            
            -17.0%International
            
            $
            32,423,925
            
            $
            39,715,487
            
            
            -18.4%





In
      2007
      revenue from China decreased to $22.5 million, or 17.0% compared to $27.1
      million in 2006, primarily due to a decrease in sales. In order to qualify
      for a
      direct selling license in China, Tianshi Engineering, our related party customer
      in China, is required to produce a part of the products that it sells in China.
      Therefore, at the beginning of 2006, we began selling semi-finished products
      to
      Tianshi Engineering, which jointly shares with us licenses to produce,
      manufacture and sell the products. These semi-finished products have a lower
      sales price than the finished products we had previously sold to Tianshi
      Engineering. During 2006 we still had a considerable inventory of finished
      products that we continued to sell to Tianshi Engineering. As a result, during
      2006 we were still selling some of the higher-priced finished products. In
      2007,
      substantially all of the products we sold to Tianshi Engineering were
      semi-finished products.





In
      addition, in the third quarter of 2006, Tianshi Engineering conducted a special
      promotion to stimulate sales in China. No similar promotion was held in 2007.
      The application of Tianshi Engineering for a direct selling license in China
      is
      still pending. Until the application is approved, Tianshi Engineering will
      continue to sell our products through its branches, affiliated companies and
      chain stores in China.





In
      2007,
      international sales decreased by 18.4% to $32.4 million, compared to $39.7
      million in 2006. This mainly reflects a sharp decrease in sales to countries
      in
      Africa during the second quarter of 2007 and a decrease in sales generally
      in
      other countries. In addition, in August of 2007, AQSIQ announced an ongoing
      national campaign in China against unsafe food and substandard products. The
      special campaign against poor product quality was launched in response to a
      series safety scares involving Chinese products worldwide. The campaign set
      20
      detailed goals, including twelve "100 percents". For example, 100 percent of
      food producers should be licensed; 100 percent of agricultural wholesale markets
      in cities must be monitored; 100 percent of suppliers of raw materials for
      exported products should be inspected; and 100 percent of agricultural products
      must be free of five types of strong pesticides. The campaign, which was
      originally scheduled to finish at the end of 2007, is currently scheduled to
      continue throughout 2008.





As
      a
      result of this campaign by the AQSIQ, there has been a general slow-down and
      backlog of export clearances for Chinese food products, and we have experienced
      significant delays in obtaining export clearance for all of the products which
      we sell to our international affiliates. However, to date, there have not been
      any specific problems identified with our products. We believe that these delays
      have resulted in some of our international affiliates not being able to purchase
      sufficient quantities of our products to meet their demand and a corresponding
      decrease in our international revenues. Continued delays in the export clearance
      for our products may continue to result in us not being able to meet the demand
      for our products from our international affiliates.





**Cost
      of sales.** Cost of
      sales were $16.5 million in 2007 compared to $18.1 million in 2006, a decrease
      of 8.6%. This decrease was primarily due to the corresponding decrease in sales
      revenue. Cost of sales decreased at a lesser rate than revenue because the
      cost
      of raw materials increased during 2007 while our product prices remained
      unchanged.





**Gross
      profit.** Gross
      profit decreased by 21.2% to $38.4 million in 2007, compared to $48.7 million
      in
      2006. The gross profit margin for 2007 was 69.9% compared to 72.9% in 2006.
      The
      semi-finished products which we were selling in China during 2007 had a lower
      profit margin than the finished products which we were selling in
      2006.




22




**Selling,
      general and administrative expenses.** Selling,
      general and administrative expenses increased by 11.9% to $14.3 million in
      2007,
      compared to $12.8 million in 2006. The increase was primarily due to increases
      in salaries and benefits ($629,769), consulting expenses ($392,751), insurance
      costs ($340,571) and depreciation expenses ($247,071). The selling and
      administrative expenses as a percentage of sales increased to 26.1% in 2007
      from 19.1% in 2006.





**Other
      income, net.** Other
      income, net was $1.5 million of income in 2007, compared to income of $0.2
      million in 2006. Other income mainly includes interest income. On January 1,
      2007, the $25.6 million loan to Tianshi Engineering became interest bearing.
      In
      addition beginning in January 2007, accounts receivable relating to Tianshi
      Engineering and which are older than 90 days are transferred to other
      receivables-related parties and become interest bearing.





**Net
      income.** For the
      above stated reasons, net income in 2007 was $18.6 million compared to $26.3
      million in 2006, a decrease of 29%.





**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**





**Revenue.** In 2006
      revenue was $66.8 million compared to $68.7 million in 2005, a decrease of
      2.8%.
      The breakdown of revenue between Chinese and international sales is as
      follows.





**Chinese
      and International Revenue**





**Revenue**
            
            **Year
                2006**
            
            **Year
                2005**
            
            **%
                Change**China
            
            $
            27,074,979
            
            $
            38,181,090
            
            
            -29.1%International
            
            $
            39,715,487
            
            $
            30,507,579
            
            
            30.2%





In
      2006
      revenue from China decreased to $27.1 million, or 29.1% compared to $38.2
      million in 2005. At the beginning of 2006, we began selling semi-finished
      products to Tianshi Engineering. In order to qualify for a direct selling
      license in China, Tianshi Engineering, our related party customer in China,
      is
      required to produce a part of the products that it sells in China. As a result,
      in 2006, we began to sell semi-finished products to Tianshi Engineering, which
      jointly shares with us licenses to produce, manufacture and sell the products.
      These semi-finished products have a lower sales price than the finished products
      we had previously sold to Tianshi Engineering.





In
      addition, we believe that sales to China in 2006 were negatively impacted by
      other factors, including:





·
            continued
                consumer uncertainty in China regarding the impact of direct selling
                regulations and uncertainty regarding the timing of the direct selling
                license application process and approval;
                and





·
            increased
                government and media scrutiny on the direct selling industry, particularly
                following publication of new direct selling regulations at the end
                of
                2005.





In
      2006,
      international sales increased to $39.7 million, or 30.2% compared to $30.5
      million in 2005. The strong growth reflected a significant increase in demand
      for our products in Indonesia, as well as strong revenue growth in Kazakhstan,
      South Africa, Thailand, Ukraine, Congo and Ghana.





**Cost
      of sales.** Cost of
      sales increased by $0.6 million in 2006, a 3.6% increase compared with 2005.
      Cost of sales as a percentage of revenue increased to 27.1% for the twelve
      months ended December 31, 2006 compared to 25.4% for 2005. In order to improve
      the quality of our products, during 2006 we introduced some new manufacturing
      procedures and stricter quality control testing than previously, which added
      to
      our manufacturing costs. In addition, due to the uncertainty of the Chinese
      market, we did not achieve domestic sales growth and the average fixed cost
      per
      unit was higher than in 2005 *.*





**Gross
      profit.** Gross
      profit decreased by 4.9% to $48.7 million in 2006, compared to $51.2 million
      in
      2005. The gross profit margin for 2006 was 72.9% compared to 74.6% in 2005
      as a
      result of the reasons discussed under cost of sales.




23




**Selling,
      general and administrative expenses.** Selling,
      general and administrative expenses decreased to $12.8 million in 2006, or
      4.7%
      compared to $13.4 million in 2005. This decrease primarily reflects a decrease
      in transportation expenses, as well as a decrease in low cost supplies expenses
      and expenses relating to the startup costs of Tiens Yihai. In 2006 we began
      to
      sell semi-finished goods to Tianshi Engineering and the transportation costs
      that were previously incurred by us are now incurred by Tianshi Engineering.
      The
      selling and administrative expenses as a percentage of sales decreased to 19.1%
      in 2006 from 19.5% in 2005.





**Other
      income (expense), net.** Other
      income (expense), net was $0.2 million of income in 2006, compared to expense
      of
      $0.6 million in 2005.





The
      increase was a result of improved cash management, including the purchase of
      an
      investment product and deposits in higher interest-bearing
      accounts.





**Net
      income.** For the
      above stated reasons, net income in 2006 was $26.3 million compared to $26.9
      million in 2005, a decrease of 2.2%.





**Quarterly
      Results of Operations**





The
      following table sets forth selected unaudited quarterly data for the periods
      shown.




**Quarter
                Ended****Dec.
                31,**
              **2007**
            
            **Sept.
                30,**
              **2007**
            
            **June
                30,**
              **2007**
            
            **March
                31,**
              **2007**
            
            **Dec.
                31,**
              **2006**
            
            **Sept.
                30,**
              **2006**
            
            **June
                30,**
              **2006**
            
            **March
                31, 2006**Revenue-related
                parties
            
            $
            13,315,311
            
            $
            11,027,478
            
            $
            14,320,482
            
            $
            16,236,789
            
            $
            16,587,160
            
            $
            19,187,748
            
            $
            14,292,998
            
            $
            16,722,560Cost
                of sales
            
            
            4,546,711
            
            
            3,089,791
            
            
            4,454,594
            
            
            4,435,599
            
            
            4,367,702
            
            
            5,066,051
            
            
            3,842,392
            
            
            4,806,296Gross
                profit
            
            
            8,768,600
            
            
            7,937,687
            
            
            9,865,888
            
            
            11,801,190
            
            
            12,219,458
            
            
            14,121,697
            
            
            10,450,606
            
            
            11,916,264Selling,
                general and administrative expenses
            
            
            3,953,263
            
            
            3,801,914
            
            
            3,328,727
            
            
            3,222,756
            
            
            4,148,297
            
            
            2,803,859
            
            
            3,271,232
            
            
            2,566,422Income
                from operations
            
            
            4,815,337
            
            
            4,135,773
            
            
            6,537,161
            
            
            8,578,434
            
            
            8,071,161
            
            
            11,317,838
            
            
            7,179,374
            
            
            9,349,842Other
                (expense) income, net
            
            
            475,918
            
            
            149,683
            
            
            446,994
            
            
            447,613
            
            
            33,633
            
            
            164,104
            
            
            1,075
            
            
            (37,721
            )Income
                before provision for income taxes and minority interest
            
            
            5,291,255
            
            
            4,285,456
            
            
            6,984,155
            
            
            9,026,047
            
            
            8,104,794
            
            
            11,481,942
            
            
            7,180,449
            
            
            9,312,121Provision
                for income taxes
            
            
            416,222
            
            
            344,248
            
            
            555,395
            
            
            711,010
            
            
            635,408
            
            
            878,931
            
            
            576,029
            
            
            733,531Income
                before minority interest
            
            
            4,875,033
            
            
            3,941,208
            
            
            6,428,760
            
            
            8,315,037
            
            
            7,469,386
            
            
            10,603,011
            
            
            6,604,420
            
            
            8,578,590Minority
                interest
            
            
            995,606
            
            
            848,212
            
            
            1,369,361
            
            
            1,753,218
            
            
            1,566,759
            
            
            2,167,747
            
            
            1,419,943
            
            
            1,808,881Net
                income
            
            
            3,879,427
            
            
            3,092,996
            
            
            5,059,399
            
            
            6,561,819
            
            
            5,902,627
            
            
            8,435,264
            
            
            5,184,477
            
            
            6,769,709Other
                comprehensive income foreign currency translation
                adjustment
            
            
            3,334,871
            
            
            1,593,144
            
            
            2,062,282
            
            
            1,275,061
            
            
            1,083,976
            
            
            1,411,012
            
            
            267,960
            
            
            717,827Comprehensive
                income
            
            $
            7,214,298
            
            $
            4,686,140
            
            $
            7,121,681
            
            $
            7,836,880
            
            $
            6,986,603
            
            $
            9,846,276
            
            $
            5,452,437
            
            $
            7,487,536Weighted
                average number of shares outstanding
            
            
            71,333,586
            
            
            71,333,586
            
            
            71,333,586
            
            
            71,333,586
            
            
            71,333,586
            
            
            71,333,586
            
            
            71,333,586
            
            
            71,333,586Earnings
                per share, basic and diluted
            
            $
            0.05
            
            $
            0.04
            
            $
            0.07
            
            $
            0.09
            
            $
            0.08
            
            $
            0.12
            
            $
            0.07
            
            $
            0.09





24




**Contractual
      Obligations and Commercial Commitments**





The
      following table sets forth payments due by period for fixed contractual
      obligations as of December 31, 2007.





**Payments
                due by period (1)****Total**
            
            **Less
                than**
              **1
                year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More
                than**
              **5
                years**Long-term
                Debt Obligations
            
            $
            6,397,742
            
            $
            2,130,000
            
            $
            4,260,000
            
            $
            7,742
            
            $
            0Operating
                Lease Obligations
            
            
            574,550
            
            
            574,550
            
            
            0
            
            
            0
            
            
            0Total
                fixed contractual obligations
            
            $
            6,972,292
            
            $
            2,704,550
            
            $
            4,260,000
            
            $
            7,742
            
            $
            0





(1)
      We
      lease our office building and manufacturing facilities in Tianjin, China from
      Tianshi Group, a related party, through common ownership. On June 30, 2002,
      we
      entered into a written lease agreement with Tianshi Group to pay annual rent
      at
      1% of our total gross revenues. This agreement expired on December 31, 2007.
      We
      have entered into a new on-year lease agreement with Tianshi Group, effective
      January 1, 2008, with the same terms. Because the rent is based upon a
      percentage of our gross total revenues, we are not able to include a fixed
      figure in the table relating to this obligation. The total amount paid in 2007
      under this lease was $522,318.





**Financial
      Condition, Liquidity and Capital Resources**





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





Net
      cash
      provided by operating activities was $5.5 million in 2007, compared to $12.9
      million in 2006. The decrease primarily reflects the decrease in net income
      and
      the fact that, during 2007, Tianshi Engineering did not pay us cash for products
      it purchased from us, but offset such amounts from other liabilities we owed
      Tianshi Engineering and other affiliates.





As
      of
      December 31, 2007, we had positive working capital of $59.3 million. Cash was
      $48.7 million as of December 31, 2007, compared to $54.3 as of December 31,
      2006.





Net
      cash
      used in investing activities was $8.3 million in 2007 compared to $35.9 million
      in 2006. In 2006 we made a $25.6 million loan to Tianshi Engineering. That
      loan
      was paid off on December 20, 2007 by canceling an equal amount of the
      consideration due to Tianshi Investment for the acquisition of Life Resources.





Net
      cash
      used in financing activities was $6.2 million for 2007, compared to $2.1 million
      for 2006. In 2007 Biological paid a $6.7 million dividend to its minority
      shareholder.





Accounts
      receivable-related parties increased slightly to $14.3 million as of December
      31, 2007 from $12.9 million as of December 31, 2006. Other receivable-related
      parties increased to $13.1 million as of December 31, 2007 from $8.4 million
      as
      of December 31, 2006. 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 to us. Beginning
      in January 2007, accounts receivable relating to Tianshi Engineering older
      than
      90 days are transferred to other receivables-related parties and become interest
      bearing.




25




Going
      forward, our primary requirements for cash consist of:





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





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





·
            the
                development costs of new products;
                and





·
            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. 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, we
      may
      require additional financing to complete the funding of that project. We
      anticipate that our current operating activities will enable us to meet our
      anticipated cash requirements for 2008.





**Management
      Assumptions**





Management
      anticipates, based on internal forecasts and assumptions relating to our current
      operations that existing cash and funds generated from operations will be
      sufficient to meet working capital for at least the next 12 months. In the
      event
      that our business 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.





**Critical
      Accounting Policies**





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





**Revenue
      Recognition**





During
      2007, the Company sold both semi-finished products and finished products to
      Tianshi Engineering domestically. Revenue from semi-finished products was
      recognized at FOB Tianjin
      shipping point. Revenue from finished products was recognized only when the
      related party Chinese distributors recognized sales of the Company's products
      to
      unaffiliated third parties. Revenues in both cases are net of
      taxes.





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





The
      Company is generally not contractually obligated to accept returns. However,
      on
      a case by case negotiated basis, the Company permits customers to return their
      products. In accordance with SFAS No. 48, "Revenue Recognition when the Right
      of
      Return Exists", revenue is recorded net of an allowance for estimated returns.
      Such reserves are based upon management's evaluation of historical experience
      and estimated costs. The amount of the reserves ultimately required could differ
      materially in the near term from amounts included in the accompanying
      consolidated financial statements. As of December 31, 2007, Tianshi Engineering,
      an affiliated company, owned all of the related party distributors which sell
      our products in China.




26




**Allowance
      for Doubtful Accounts**





Our
      trade
      accounts receivables are mainly due from related companies. We have a general
      allowance for doubtful debts of 0.5% of the year-end balance of accounts
      receivable-related parties. Management reviews its accounts receivable on a
      regular basis to determine if the bad debt allowance is adequate 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.
      Management reviews inventory annually for possible obsolete goods or to
      determine if any reserves are necessary for potential obsolescence.





**Recent
      Accounting Pronouncements**





On
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 157, "Fair Value Measurement"
      ("SFAS 157"), which provides enhanced guidance for using fair value to measure
      assets and liabilities. This standard also responds to investors' requests
      for
      expanded information about the extent to which companies measure assets and
      liabilities at fair value, the information used to measure fair value, and
      the
      effect of fair value measurements on earnings. The standard applies whenever
      other standards require (or permit) assets or liabilities to be measured at
      fair
      value.





The
      standard does not expand the use of fair value in any new circumstances. SFAS
      157 is effective for financial statements issued for fiscal years beginning
      after November 12, 2007, and interim periods within those fiscal years. Early
      adoption is permitted. The Company is currently evaluating whether the adoption
      of SFAS 157 will have a material effect on its consolidated results of
      operations and financial condition.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an amendment of FASB
      Statement No. 115" (“SFAS 159”). SFAS 159 permits companies to choose to measure
      many financial instruments and certain other items at fair value
      that  are
      not
      currently required to be measured at fair value. The objective of SFAS 159
      is to
      provide opportunities to mitigate volatility in reported earnings caused
      by  measuring
      related assets and liabilities differently, without having to apply hedge
      accounting provisions. SFAS 159 also establishes presentation and
      disclosure  requirements
      designed to facilitate comparisons between companies that choose different
      measurement attributes for similar types of assets and liabilities.
      SFAS  159
      will
      be effective in the first quarter of fiscal 2009. The Company is evaluating
      the
      impact that this statement will have on its consolidated financial  statements.





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





In
      December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
      Consolidated Financial Statements- and amendment of ABB No. 51" (“SFAS 160”).
      SFAS 160 provide a guide on how to report non-controlling interest in
      consolidated financial statement. The objective of SFAS 160 is to improve the
      relevance, comparability, and transparency of the financial information that
      a
      reporting entity provides in its consolidated financial statements.
      SFAS  160
      will
      be effective in the first quarter of fiscal 2009. The Company is evaluating
      the
      impact that this statement will have on its consolidated financial  statements.




27




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**





**Effects
      of Inflation**





We
      are
      subject to commodity price risks arising from price fluctuations in the market
      prices of the various raw materials that comprise our products. Price risks
      are
      managed by each business unit through productivity improvements and
      cost-containment measures. For the time being, the management does not believe
      that inflation risk is material to our business or our consolidated financial
      position, results of operations or cash flows.





**Effect
      of Fluctuations in Foreign Exchange Rates**





Our
      operating subsidiary, Biological, is located in China, and buys all of its
      raw
      materials in China and sells our products in China using the renminbi as the
      functional currency. Based on Chinese government regulations, all foreign
      currencies under the category of current accounts are allowed to be freely
      exchanged with hard currencies. As of December 31, 2007, the exchange rate
      was
      $1 = RMB 7.31, compared to $1 = RMB 7.80 as of December 31, 2006.





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





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





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**





The
      financial statement required by this item may be found following the signature
      page of this annual report.





**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.**





On
      September 26, 2007, we received notice from our principal independent
      accountant, Moore Stephens Wurth Frazer & Torbet, LLP (“MSWF&T”), that
      it was resigning as our accountant effective immediately.




During
      the two most recent fiscal years through the date of MSWF&T’s resignation,
      there was no disagreement between us and MSWF&T on any matter of accounting
      principles or practices, financial statement disclosure, or auditing scope
      or
      procedure, which disagreement, if not resolved to the satisfaction of
      MSWF&T, would have caused MSWF&T to make reference to the subject matter
      of the disagreement in connection with its report, and MSWF&T did not advise
      us that the internal controls necessary for us to develop reliable financial
      statements did not exist. None of the reportable events described under Item
      304(a)(1)(v) of Regulation S-K occurred during the two most recent fiscal years
      through the date of MSWF&T’s resignation.




The
      audit
      report of MSWF&T on our financial statements for the past two fiscal years
      did not contain any adverse opinion or disclaimer of opinion, and such audit
      report was not qualified or modified as to uncertainty, audit scope or
      accounting principles.




On
      September 26, 2007, we engaged Grobstein, Horwath & Company LLP (“GH&C”)
      to serve as our new principal independent accountant in connection with the
      review of our third quarter financial statements for the three months ended
      September 30, 2007 and the audit of our financial statements for the year ended
      December 31, 2007. The decision to engage GH&C as our principal independent
      accountants was approved by our Audit Committee on September 26, 2007.




28




During
      the fiscal years ended December 31, 2006 and 2005 and in the subsequent interim
      periods prior to the engagement of GH&C, neither we nor any person on our
      behalf consulted with GH&C concerning (i) the application of accounting
      principles to a specified transaction, either completed or proposed, or the
      type
      of audit opinion that might be rendered on our financial statements, and no
      written report was provided to us or oral advice was provided that GH&C
      concluded was an important factor considered by us in reaching a decision as
      to
      any accounting, auditing or financial reporting issue, or (ii) any matter that
      was either the subject of a disagreement (as defined in Item 304(a)(1)(iv)
      of
      Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of
      Regulation S-K).





**ITEM
      9A(T). CONTROLS AND PROCEDURES.**





**Disclosure** **Control** **s** **** **and
      Procedures**





Under
      the
      supervision and with the participation of management, including our chief
      executive officer and the chief financial officer, we conducted an evaluation
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act,
      as of the end of December 31, 2007. Based on this evaluation, our chief
      executive officer and chief financial officer concluded as of December 31,
      2007
      that our disclosure controls and procedures were effective such that the
      material information required to be included in our SEC reports is recorded,
      processed, summarized and reported within the time periods specified in SEC
      rules and forms relating to our company, including our consolidating
      subsidiaries, and was made known to them by others within those entities,
      particularly during the period when this report was being prepared.





**Managemen** **t’s
      Report on Internal Control O** **ver
      Financial Reporting**





Internal
      control over financial reporting refers to the process designed by, or under
      the
      supervision of, our Chief Executive Officer and Chief Financial Officer, and
      effected by our board of directors, management and other personnel, to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles, and includes those policies and
      procedures that:





(1)
      Pertain to the maintenance of records that in reasonable detail accurately
      and
      fairly reflect the transactions and dispositions of our assets;





(2)
      Provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being made
      only in accordance with authorization of our management and directors;
      and





(3)
      Provide reasonable assurance regarding prevention or timely detection of
      unauthorized acquisitions, use or disposition of our assets that could have
      a
      material effect on the financial statements.





Internal
      control over financial reporting cannot provide absolute assurance of achieving
      financial reporting objectives because of its inherent limitations. Internal
      control over financial reporting is a process that involves human diligence
      and
      compliance and is subject to lapses in judgment and breakdowns resulting from
      human failures. Internal control over financial reporting also can be
      circumvented by collusion or improper management override. Because of such
      limitations, there is a risk that material misstatements may not be prevented
      or
      detected on a timely basis by internal control over financial reporting.
      However, these inherent limitations are known features of the financial
      reporting process. Therefore, it is possible to design into the process
      safeguards to reduce, though not eliminate, this risk. Management is responsible
      for establishing and maintaining adequate internal control over financial
      reporting for the company.





Management
      has used the framework set forth in the report entitled Internal
      Control—Integrated Framework published by the Committee of Sponsoring
      Organizations of the Treadway Commission, known as COSO, to evaluate the
      effectiveness of the Company’s internal control over financial reporting. Based
      on this assessment, management has concluded that our internal control over
      financial reporting was effective as of December 31, 2007.




29




This
      annual report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting. Our
      management's report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the Securities and Exchange
      Commission that permit us to provide only our management's report in this annual
      report .





**Changes
      in Internal Control Over Financial Reporting**





There
      has
      been no change in our internal control over
      financial reporting during the fourth quarter of 2007 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.





**PART
      III**




**ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.**





Set
      forth
      below are the names of the directors and executive officers of the Company
      as of
      March 29, 2008. With the exception of Jinyuan Li, who served on the Board since
      the reorganization in September 2003, all other directors served on the Board
      since January 2004.





**NAME**
            
            **AGE**
            
            **POSITION**Jinyuan
                Li
            
            50
            
            Chairman,
                Chief Executive Officer, President and DirectorWenjun
                Jiao
            
            44
            
            Chief
                Financial Officer, Director and SecretaryYupeng
                Yan
            
            45
            
            Executive
                Vice President and DirectorSocorro
                Quintero
            
            56
            
            DirectorHoward
                Balloch
            
            57
            
            DirectorGilbert
                Raker
            
            64
            
            Director





None
      of
      our directors and officers was selected pursuant to any agreement or
      understanding with any other person. There is no family relationship between
      any
      director or executive officer and any other director or executive officer.





**Jinyuan
      Li**





Mr.
      Li
      has served as the Chairman of the Board and a Director since September 2003.
      Mr.
      Li is also the President and founder of the Company. He also serves as President
      of Tianshi Group and has held that position since 1995. Mr. Li has 14 years
      of
      experience in the petroleum and plastics industries. He holds a number of
      leadership positions in government and social associations, including as
      commissioner of the Tianjin Political Consultative Conference; Standing Director
      of China Entrepreneur’s National Council; Executive Commissioner of All-China
      Federation of Industry and Commerce; Vice President of Chinese Bioengineering
      Association; and Vice president of Chinese Healthcare Association. Mr. Li was
      elected as one of the Top Ten Most Outstanding Talents in the Greater China
      Area; one of the Ten Most Popular Personages Among the High-Ranking, by China
      Economic Forum; Excellent Entrepreneur, by the Organization Committee of the
      Second Chinese Entrepreneur Forum in 2003, and as the Most Creative Chinese
      Businessman of Asia in 2004. Mr. Li holds an MBA from Nankai University.





**Wenjun
      Jiao**





Mr.
      Jiao
      has served as the Chief Financial Officer of the Company since September 2003
      and Secretary since February 2007. Prior to that, Mr. Jiao served as the Chief
      Financial Officer of Tianjin Tianshi Biological Development Co. Ltd from May
      2001 through 2003. Mr. Jiao is a Certified Public Accountant in China. Before
      he
      joined Tianjin Tianshi Biological Development Co. Ltd, Mr. Jiao served as CFO
      of
      various large companies and as chairman of a consulting company in China. Mr.
      Jiao has 19 years of financial management experience in the manufacturing,
      trade, construction and consulting industries and received the 2005 and 2006
      “Top Ten CFO of China Award” jointly from the China Enterprise Confederation,
      CFO World Magazine and International Data Group. Mr. Jiao holds a Doctorate
      in
      Accounting from Tianjin University of Finance and Economics and an MBA from
      Oklahoma City University.




30




**Yupeng
      Yan**





Mr.
      Yan
      has served as Executive Vice-President of the Company since September 2003.
      Mr.
      Yan has also served as Vice-President of Tianshi Group since March 1997, acting
      as general manager of its Information Technology Center since June 2007 and
      as
      head of Tianshi Marketing Group from June 2004 to June 2007. Mr. Yan currently
      holds a number of leadership positions including Vice-Dean of Tianshi
      Occupational Technique Institute, and Vice-Chairman of Tianshi Science and
      Technique Association. Mr. Yan was elected as one of the Chinese Ten Outstanding
      Professional Managers in 2004. Mr. Yan received an Executive MBA from Nankai
      University in July 2004.





**Socorro
      Quintero**





Dr.
      Quintero serves as a director of the Company. Dr. Quintero is an Associate
      Professor of Finance and Managing Director of the Corporate Directors Institute
      at Oklahoma City University’s Meinders School of Business (“OCU”). Prior to
      joining OCU in 1993, she served as Assistant Professor of Finance at the
      University of South Florida. Dr. Quintero has extensive work experience in
      various industrial engineering capacities and management levels while working
      for Atlantic Steel Company, Abbott Laboratories and Levi Strauss & Co. She
      received a Bachelor of Science in Physics from the University of the
      Philippines, an M.S. in Industrial Engineering from the Georgia Institute of
      Technology, and a Doctorate in Finance from the University of Texas at Austin.





**Gilbert
      Raker**





Mr.
      Raker
      serves as a director of the Company, and has served as the President, Chief
      Executive Officer and Chairman of the Board of SEMX Corporation (Pink Sheets:
      SEMX) since 1988. SEMX Corporation manufactures materials and components used
      in
      microelectronic circuitry, primarily for the automotive, consumer electronics,
      defense, medical and aerospace industries. Prior to 1988, Mr. Raker worked
      at
      two private equity investment firms and was employed as Chief Financial Officer
      by two New York Stock Exchange listed companies and several private companies.
      Mr. Raker received his B.S. in Chemistry from Eastern University and his MBA
      in
      Production Management from Syracuse University.





**Howard
      Balloch**





Mr.
      Balloch serves as a director of the Company and is the founder and President
      of
      The Balloch Group, an investment advisory and merchant banking firm located
      in
      Beijing, China. Mr. Balloch served as the Canadian ambassador to the People’s
      Republic of China from February of 1996 until July of 2001. Mr. Balloch
      currently serves on the board of directors of the following companies: Magic
      Lantern Group (AMEX: GML), Zi Corporation (TSX: ZIC, NASDAQ: ZICA), Oztime
      Media, a wholly-owned subsidiary of Zi Corporation, Ivanhoe Energy, Inc. (TSX:
      IE, NASDAQ: IVAN), Ivanhoe Mines Ltd. (TSX, NYSE, NASDAQ: IVN), East Energy
      Corp. (TSX: EEC), Methanex Corporation (TSX:MX, NASDAQ: MEOH), Maple Leaf
      Education Holding and Capital Club, Beijing. Mr. Balloch is also the
      Vice-Chairman of the Canada China Business Council and currently serves as
      an
      Adjunct Professor of International Business at the University of British
      Columbia. Mr. Balloch received his B.A. and M.A. degrees from McGill University.





**Audit
      Committee**





The
      Board
      of Directors has established an audit committee in accordance with Rule 10A-3
      of
      the Exchange Act. The members of the Audit Committee are Socorro Quintero
      (Chairman), Howard Balloch and Gilbert Raker, each of whom is independent as
      defined under Section 121(A) of the American Stock Exchange listing standards
      currently in effect. None of the Audit Committee members is a current officer
      or
      employee of the Company or any of its affiliates.





The
      Board
      of Directors has determined that Socorro Quintero and Gilbert Raker each qualify
      as an “audit committee financial expert” under Item 401(b) of Regulation S-K of
      the Exchange Act.




31




**Code
      of Business Conduct and Ethics**





The
      Board
      has adopted a Code of Business Conduct and Ethics to promote its commitment
      to
      the legal and ethical conduct of the Company’s business. The Chief Executive
      Officer, Chief Financial Officer, and other senior officers are required to
      abide by the Code of Business Conduct and Ethics, which provides the foundation
      for compliance with all corporate policies and procedures, and best business
      practices.





The
      Code
      of Business Conduct and Ethics was filed as an exhibit to the Company’s annual
      report on Form 10-KSB for the year ended December 31, 2004. A written copy
      of
      the Code of Business Conduct and Ethics will be provided upon request at no
      charge by writing to the Company’s corporate secretary, Alexander Jiao, at Tiens
      Biotech Group (USA), Inc., No. 6, Yuanquan Road, Wuqing New-Tech Industrial
      Park, Tianjin, China 301700.




**Section
      16(a) Beneficial Ownership Reporting Compliance**





Based
      solely upon a review of Forms 3 and 4 and amendments to these forms furnished
      to
      the Company, all parties subject to the reporting requirements of Section 16(a)
      of the Exchange Act filed all such required reports during and with respect
      to
      2007.





**ITEM
      11. EXECUTIVE COMPENSATION.**





**Compensation
      Discussion and Analysis**





All
      compensation decisions for our executive officers, including the salary of
      our
      CEO and President, Jinyuan Li, are made by Jinyuan Li. Because Mr. Li owns
      more
      than 50% of our voting stock, we are a “controlled company” pursuant to Rule
      801(a) of the American Stock Exchange Rules (“Amex Rules”). Therefore, we are
      exempt from Amex Rule 805(a), which requires that the compensation of a CEO
      and
      all other executive officers be determined, or recommended to the Board for
      determination, by a compensation committee composed of independent directors,
      or
      the majority of independent directors on the Board.





*The
      objectives of our compensation programs.*





We
      seek
      to attract and retain executive officers of the highest caliber and motivate
      them to maximize the success of our business.





*What
      our compensation program is designed to reward.*





Our
      CEO
      believes that he is incentivized by his large equity ownership in the Company.
      Therefore, he believes that a long-term employment contract providing a base
      salary is appropriate compensation for him. With respect to the other executive
      officers’ base salaries, our CEO bases his recommendations on past salary levels
      with the Company and his perception of the quality of their respective
      performances and attempts to match their salaries with his perception of
      compensation levels at a small number of companies he considers comparable.
      Our
      CEO also takes into consideration the relatively low salary provided to
      executive officers by companies in China compared to public companies in the
      United States. Our CEO assesses the normal responsibilities of each position,
      as
      well as the extra responsibilities and additional work related to special
      projects which such executive officers may be expected to perform. No relative
      weight was assigned to any of the foregoing factors. **





*Elements
      of compensation.*





Each
      executive officer receives cash compensation as a base salary. Base salary
      for
      our executive officers is fixed by their respective employment agreements,
      as
      described under “Employment Agreements.” Jinyuan Li and Wenjun Jiao’s salaries
      for 2007 were fixed pursuant to employment agreements with Biological entered
      into in 2005. Their base salaries were based on our CEO’s subjective perceptions
      of salaries paid by comparable companies for comparable positions. The amount
      of
      the payments required to be paid upon termination of employment agreements
      for
      specified reasons are determined according to local Chinese employment
      regulations.




32




Jinyuan
      Li holds 92.3% of our shares of common stock. Our other executive officers
      have
      also been holders of our common stock as disclosed under “Security Ownership
      Table” since the reorganization of our Company in September 2003. Each of our
      executive officers received shares in the Company as a result of their share
      ownership of our business before the reorganization. Our CEO believes that
      the
      executive officers’ equity interests in our Company motivate them to maximize
      the success of our business and therefore did not consider bonuses for
      2007.





*Why
      we chose to pay each element.*





We
      have
      entered into long-term employment agreements with Messrs. Li and Jiao which
      provide for a base salary.





Our
      employment agreements with Messrs. Li and Jiao provide for payments upon
      termination for specified reasons. These payments are required by local Chinese
      employment regulations. Additional information regarding applicable payments
      under such agreements is provided under the heading “Potential Payments Upon
      Termination or Change of Control.”





*How
      we determine the amount for each element of pay.*





With
      respect to the executive officers’ base salaries, our CEO bases his
      recommendations on past salary levels and his perception of the quality of
      their
      respective performances and attempts to match their salaries with his perception
      of compensation levels at a small number of companies he considers comparable,
      although not necessarily included in the AMEX Composite Index or Nasdaq
      Biotechnology Index. Our CEO assesses the normal responsibilities of each
      position, as well as the extra responsibilities and additional work related
      to
      special projects which such executive officers may be expected to perform.
      Our
      CEO also takes in to consideration the relatively low salary provided to
      executive officers by companies in China compared to public companies in the
      United States.





**Compensation
      Committee Report**





The
      Compensation Committee has reviewed and discussed the Compensation Discussion
      and Analysis required by Item 402(b) of Regulation S-K of the Exchange Act
      with
      management and the full Board. Based on that review and discussion, the
      Compensation Committee recommended to the Board that the Compensation Discussion
      and Analysis be included in the Company’s Annual Report on Form 10-K for
      2007 *.*





The
      Compensation Committee





Gilbert
      Raker, Chairman





Wenjun
      Jiao





Yupeng
      Yan





**Compensation
      Committee Interlocks and Insider Participation**





During
      2007, the members of the Compensation Committee were Gilbert Raker, Wenjun
      Jiao,
      Yupeng Yan, and Ping Bai (who resigned as a director as of February 25, 2007).
      The Compensation Committee did not deliberate on executive compensation for
      fiscal 2007. Wenjun Jiao, Yupeng Yan and Ping Bai were each an employee and
      officer of the Company during 2007. No member of the Compensation Committee
      has
      a relationship that would constitute an interlocking relationship with Executive
      Officers or Directors of the Company or another entity.




33




**Summary
      Compensation Table**





The
      table
      below summarizes the total compensation paid or earned by each of the named
      executive officers for the fiscal year ended December 31,
      2007.


**Name
                  and**
                **Principal
                  Position (1)**
              
              **Year**
              
              **Salary**
                **($)**
              
              **Total**
                **($)**Jinyuan
                  Li
              
              
              2007
              
              $
              166,660
              
              $
              166,660Chairman,
                  Chief Executive
              
              
              2006
              
              $
              166,660
              
              $
              166,6602005
              
              $
              145,455
              
              $
              145,455Wenjun
                  Jiao
              
              
              2007
              
              $
              77,000
              
              $
              77,000Chief
                  Financial Officer
              
              
              2006
              
              $
              77,000
              
              $
              77,0002005
              
              $
              48,000
              
              $
              48,000




(1)
            Ping
                Bai and Yupeng Yan were employee Directors of the Company during
                2007 but
                did not qualify as a “named executive officer” because their respective
                total compensation was less than
                $100,000.




**Grants
      of Plan Based Awards; Outstanding Equity Awards at Fiscal Year-End; Option
      Exercises and Stock Vested**





The
      Company does not have any stock option plans.





**Pension
      Benefits**





None.





**Nonqualified
      Deferred Compensation**





We
      do not
      provide any nonqualified deferred compensation to any of its
      employees.





**Employment
      Agreements**





Our
      subsidiary, Biological, has entered into an employment agreement with each
      of
      its named executive officers and employee directors of the Company. Jinyuan
      Li’s
      contract is dated June 1, 2005 and has an indefinite period. Wenjun Jiao’s
      contract is dated June 1, 2005 and terminates on June 30, 2010. The employment
      contracts for Ping Bai and Yupeng Yan are dated April 1, 2004 and expire on
      March 31, 2009. Under each of these employment contracts, the employee may
      terminate the contract with 30 days written notice. For 2007, we paid a salary
      of $166,660 to Jinyuan Li and $77,000 to each of Ping Bai, Wenjun Jiao and
      Yupeng Yan.





34


**Potential
      Payments Upon Termination or Change of Control**





The
      employment contracts of Messrs. Li and Jiao each provide for a one-time lump
      sum
      payment equal to six months of the employee’s then current salary if we
      terminate their employment contract for one of the following
      reasons:





·
            The
                employee has a non-work-related injury and is unable to perform his
                responsibilities; or





·
            The
                employee is unable to perform his responsibilities for other reasons;
                or





·
            The
                circumstances based on which the employment contract was entered
                into have
                materially changed and the performance of the contract becomes
                impractical; or





·
            We
                are contemplating bankruptcy and determine to reduce
                staff.





Assuming
      that Messrs. Li and Jiao were terminated for one of the above-stated reason,
      Mr.
      Li would receive $83,330 and Mr. Jiao would receive $38,500. There are no other
      circumstances, including a change of control of our Company, where we are
      required to make any additional payment to Messrs. Li and Jiao.





**Director
      Compensation**





For
      the
      fiscal year ended December 31, 2007, members of the Board who are not our
      employees are entitled to receive an annual cash retainer of
      $30,000.





**Director
      Summary Compensation Table**





The
      table
      below summarizes the compensation we paid to non-employee Directors for the
      fiscal year ended December 31, 2007.


**Name
                  (1)**
              
              **Fees Earned or**
                **Paid
                  in Cash**
                **($)**
              
              **Total**
                **($)**Howard
                  Balloch
              
              $
              30,000
              
              $
              30,000Ping
                  Bai (2)
              
              $
              0
              
              $
              0Gilbert
                  Raker
              
              $
              30,000
              
              $
              30,000Socorro
                  Quintero
              
              $
              30,000
              
              $
              30,000Yupeng
                  Yan (2)
              
              $
              0
              
              $
              0




(1)
            Jinyuan
                Li and Wenjun Jiao are not included in this table as they are our
                employees and thus receive no compensation for their services as
                Directors. Their compensation is disclosed in the table in the “Summary
                Compensation Table”.(2)
            Yupeng
                Yan and Ping Bai were employee Directors of the Company during 2007
                and
                received no additional compensation for their services as Directors.
                They
                are not named executive officers and are excluded from the “Summary
                Compensation Table”.




35




**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.**





The
      following table sets forth information with respect to the beneficial ownership
      of shares of common stock as of March 28, 2008 by each person or entity who
      is
      known by the Company to beneficially own five percent or more of the common
      stock; each director and executive officer of the Company; and all directors
      and
      executive officers of the Company as a group.





**Name
                of Beneficial Owner (1)**
            
            **Number
                of Shares**
            
            **Percent
                of Class**Jinyuan
                Li
            
            
            65,835,000
            
            
            92.3%Wenjun
                Jiao
            
            
            665,000
            
            
            *Yupeng
                Yan
            
            
            665,000
            
            
            *Socorro
                Quintero
            
            
            --
            
            
            --Howard
                Balloch
            
            
            --
            
            
            --Gilbert
                Raker
            
            
            --
            
            
            --All
                Directors and Executive Officers as a Group (6 persons)
            
            
            67,165,000
            
            
            94.2%


____________________


*
      Less
      than one percent.


(1)
      Unless
      otherwise indicated, the address for each named individual or group is c/o
      Tiens
      Biotech Group (USA), Inc., No. 6, Yuanquan Road, Wuqing New-Tech Industrial
      Park, Tianjin, China 301700.





Unless
      otherwise indicated, the Company believes that all persons named in the table
      have sole voting and investment power with respect to all shares of common
      stock
      beneficially owned by them.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.**





We
      markets 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 total consolidated sales in 2007 were to related parties.





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





Internationally,
      we sell our products to overseas related companies located in 52 countries
      who
      in turn sell them to independent direct sales distributors. Our CEO, Jinyuan
      Li,
      owns or controls these overseas related companies. During 2007, in order to
      consolidate our international distribution, we reduced the number of countries
      where we sell directly to overseas affiliates from 63 to 52. Therefore, some
      of
      our overseas affiliate customers also now sell our products on to other overseas
      affiliates which are no longer our direct customers. 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 ordinances.




36




Our
      related party transactions are required to be reviewed and approved or ratified
      by a majority of our non-interested Board of Directors. The following tables
      are
      provided to facilitate your understanding of the transactions and outstanding
      balances between those related parties and us during 2007 and 2006.





**December
                31, 2007**
            
            **December
                31, 2006**Revenue-related
                party
            
            $
            54,900,060
            
            $
            66,790,466Accounts
                receivable, trade - related parties, net of allowance for doubtful
                accounts of $71,700 and $86,776 as of December 31, 2007 and 2006,
                respectively
            
            $
            14,268,229
            
            $
            12,926,670Other
                receivables - related parties
            
            $
            13,070,907
            
            $
            8,397,227Loans
                receivable - related parties
            
            $
            0
            
            $
            25,640,000Advances
                from customers - related parties
            
            $
            1,700,838
            
            $
            1,570,120Other
                payables - related parties
            
            $
            7,938,205
            
            $
            522,105Current
                portion of long-term debt - related party
            
            $
            2,130,000
            
            $
            2,130,000Long
                term debt - related party
            
            $
            4,267,742
            
            $
            6,397,742





**Revenue-related
      Parties**





The
      details of revenue-related parties are as follows:


**2007**
              
              **2006**Tianshi
                  Engineering
              
              $
              22,476,135
              
              $
              27,074,979Overseas
                  Related Companies
              
              
              32,423,925
              
              
              39,715,487Total
              
              $
              54,900,060
              
              $
              66,790,466





**Accounts
      Receivable-related Parties**





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





**December
                31, 2007**
            
            **December
                31, 2006**Tianshi
                Engineering
            
            $
            2,062,333
            
            $
            7,827,372Overseas
                Related Companies
            
            
            12,277,596
            
            
            5,186,074Allowance
                for Doubtful Accounts
            
            
            (71,700
            )
            
            (86,776
            )Total
            
            $
            14,268,229
            
            $
            12,926,670




37




**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:




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




**December 31, 2007**
              
              **December 31, 2006**Tianshi
                  Engineering
              
              $
              9,460,811
              
              $
              5,592,772Shengshi
                  Real Estate Development
              
              
              2,238
              
              
              1,039Tianjin
                  Tianshi Technical School
              
              
              -
              
              
              46,589JinMao
                  (Group) Holding
              
              
              -
              
              
              104,466Shanghai
                  Tianshi Jinquan Investment Co.
              
              
              874
              
              
              2,129Tianshi
                  Group
              
              
              2,334,493
              
              
              2,650,232Tianshi
                  Pharmaceuticals
              
              
              5,065
              
              
              -Life
                  Resource
              
              
              1,259,528
              
              
              -Beijin
                  Xingda Travel Co., Ltd
              
              
              5,959
              
              
              -Tianjin
                  Xingda Travel Co., Ltd
              
              
              1,939
              
              
              -Total
              
              $
              13,070,907
              
              $
              8,397,227





Historically,
      Tianshi Engineering remitted payment to us upon sales to third party customers.
      However, in order to support Tianshi Engineering’s marketing efforts in
      anticipation of receiving a direct selling license in China, we have agreed
      to
      allow Tianshi Engineering to defer payment to us. Balances not remitted to
      us
      within 90 days are converted to other receivables - related parties. Beginning
      on January 1, 2007, the other receivables - related parties became interest
      bearing. The stated interest rate is the interest rate for the same level of
      loan stipulated by the People’s Bank of China. The credit terms provide an
      interest-free credit term of three months. Any amounts exceeding this term
      are
      transferred from accounts receivable - related parties to other receivable
      -
      related parties. Beginning January 1, 2007, the other receivables - related
      parties will then become interest bearing once a loan contract is adopted.
      The
      interest rate is the interest rate, on the date the loan commences, that is
      stipulated by the People’s Bank of China for a loan of the same
      level.





On
      January 1, 2007, Biological entered into a loan agreement (the “Q1 Loan”) with
      Tianshi Engineering. The Q1 Loan provided that, beginning January 1, 2007,
      $4.5
      million of other receivables-related parties, which originated from Tianshi
      Engineering as accounts receivable, became interest bearing. The Q1 Loan was
      due
      March 31, 2007 and the stated interest rate was 6.3%. Both of the principal
      and
      interest of $41,876 were paid off February 28, 2007.





On
      April
      24, 2007, a loan agreement (the “Q2 Loan”) was signed between Biological and
      Tianshi Engineering. The Q2 Loan provided that beginning April 1, 2007, $5.1
      million of other receivables-related parties, which originated from Tianshi
      Engineering as accounts receivable, became interest bearing. The Q2 Loan was
      due
      June 30, 2007 and the stated interest rate was 5.67%, the interest rate for
      a
      loan of the same principal amount stipulated by the People’s Bank of China as of
      the date the loan was made. Both of the principal and interest of $65,882 were
      repaid on June 30, 2007.





On
      July
      23, 2007, a loan agreement (the “Q3 Loan”) was signed between Biological and
      Tianshi Engineering. The Q3 Loan provided that, beginning July 1, 2007, $8.8
      million of other receivables-related parties, which originated from Tianshi
      Engineering as accounts receivable, became interest bearing. The Q3 Loan was
      due
      September 30, 2007 and the stated interest rate was 5.85%, the interest rate
      for
      a loan of the same principal amount stipulated by the People’s Bank of China as
      of the date the loan was made. On September 30, 2007, $1 million of the Q3
      Loan
      was repaid.





On
      October 15, 2007, a loan agreement (the “Q4 Loan”) was signed between Biological
      and Tianshi Engineering. Pursuant to the Q4 Loan, beginning October 1, 2007,
      $6.5 million of other receivables-related parties, which originated from Tianshi
      Engineering as accounts receivable, became interest bearing. The loan was due
      December 31, 2007 and the stated interest rate was 6.48%, the interest rate
      for
      a loan of the same principal amount stipulated by the People’s Bank of China as
      of the date the loan was made. On December 20, 2007, the remaining principal
      balance of $14,294,686 on the Q3 Loan and the Q4 Loan plus interest on the
      two
      loans of $306,360 was repaid by canceling an equal amount of the consideration
      paid by us for the acquisition of Life Resources from Tianshi
      Investment.




38




During
      the years ended December 31, 2007 and 2006, we and Tianshi Group used common
      meters at our headquarters for electricity and water, and also used the same
      employee insurance account. When making payments to these outside parties,
      we
      usually pay the fees first and then are reimbursed by Tianshi Group. These
      pro-rated amounts relating to Tianshi Group are categorized as other receivables
      - related parties. In addition, during 2006 we were owed other
      receivables-related parties in the amount of RMB 7,560,000 ($1,033,603) from
      Tianjin Juchao Commercial and Trading Co., Ltd (“Juchao”), a related party owned
      by Jinyuan Li. On March 31, 2006, Juchao declared termination of its operations,
      and all of its rights and liabilities were transferred to Tianshi Group. This
      amount was also included in other receivables - related parties.





In
      June
      2007, Biological signed four agreements with equipment suppliers in Europe
      and
      Australia, pursuant to which Biological agreed to purchase four production
      lines
      for use at its headquarters in Tianjin, China. At that time Biological paid
      $996,711, one-third of the total consideration, to those equipment suppliers.
      But, due to a government investment limitation policy, Biological could not
      clear the equipment with Chinese customs without having to pay a large import
      duty. However, no such import duty would need to be paid if Life Resources
      imported the production lines. Therefore, on August 16, 2007, Biological, Life
      Resources and the equipment suppliers entered into a new agreement. In this
      new
      agreement, Life Resources agreed: (i) to replace Biological as the purchaser
      of
      the equipment, (ii) to pay $996,711 to Biological, and (iii) to pay the
      remaining balance of the consideration to the equipment suppliers. As of
      December 31, 2007, Life Resources had paid the consideration due to the
      equipment suppliers and received the equipment, and the amount of $996,711
      due
      to Biological had not been paid.





As
      Life
      Resources is still in the construction process and all of the construction
      is
      outsourced to third party contractors, it currently has no employees. All of
      the
      administrative work relating to the construction has been performed by employees
      of the construction department of Biological. In December 2007, Biological
      charged Life Resources $262,817 for this administrative work. At December 31,
      2007 and 2006, amounts due from Life Resources were $1,259,528 and $0
      respectively.





**Loans
      Receivable-related Party**





Related
      party loans receivable were $0 and $25.6 million as of December 31, 2007 and
      2006 respectively. On January 1, 2006, Biological loaned Tianshi Engineering
      $25.6 million. The loan was non-interest bearing and matured on December 31,
      2006. The purpose of the loan was to enable Tianshi Engineering to strengthen
      its sales network in China. On December 22, 2006, the loan was extended to
      June
      30, 2007 and was converted to an interest-bearing loan. The interest rate for
      the loan was 22 base points plus the current interest rate for the same level
      of
      loan stipulated by the People’s Bank of China, which was 5.58%. The actual
      interest rate on this loan totaled to 5.8%, On June 28, the loan was further
      extended to September 30, 2007. On September 30, 2007, the loan was extended
      to
      December 31, 2007. On December 20, 2007, the principal loan and accrued interest
      of $1,461,248, was repaid by canceling an equal amount of the consideration
      payable by us for the acquisition of Life Resources from Tianshi Investment.





**Advances
      from Customers-related Parties**





Advances
      from related party customers were $1.7 million and $1.6 million as of December
      31, 2007 and 2006, respectively. These advances represented prepayments made
      to
      us to insure that overseas customers could obtain enough of our products to
      meet
      their market demands.




39




**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:


**December 31, 2007**
              
              **December 31, 2006**Tianshi
                  Investment
              
              $
              7,490,136
              
              $
              -Tianshi
                  Engineering
              
              
              244,980
              
              
              -Tianshi
                  Germany Co., Ltd
              
              
              109,233
              
              
              98,581Beijin
                  Xingda Travel Co., Ltd
              
              
              -
              
              
              255Shenzhen
                  Logistics Co., Ltd
              
              
              -
              
              
              295,333Tianshi
                    Administrative Committee of Industrial Park
              
              
              13
              
              
              13Tianyuan
                    Capital Development Co. Ltd.
              
              
              84,359
              
              
              84,359Tianshi
                  Pharmaceuticals
              
              
              9,308
              
              
              8,728Tianshi
                  Shanghai Co., Ltd
              
              
              176
              
              
              165Director
                  - Jinyuan Li
              
              
              -
              
              
              34,671Total
              
              $
              7,938,205
              
              $
              522,105




On
      December 21, 2007 Tianshi Holdings signed an agreement with Tianshi Investment
      pursuant to which it agreed to reimburse Tianshi Investment for a $7.5 million
      capital contribution to be made to Life Resources. The reimbursement was to
      be
      made after the government approved the acquisition of Life Resources by Tianshi
      Holdings. As of December 31, 2007 such approval had not been
      received.





**Long
      Term Debt-related Party**





In
      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 the aggregate 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 commencing June 30, 2006 and ending June 30, 2011.
      Tianshi Holdings used the loan proceeds in Tiens Yihai. Mr. Jinyuan Li owns
      100%
      of Tianyuan Capital. Interest of $399,543 and two installment payments totaling
      $2,130,000 were made in 2007.





**Other
      T** **ransactions
      with Tianshi Group**





Since
      2003, Biological has leased office space and manufacturing facilities from
      Tianshi Group. The lease provides for an annual rent at 1% of our total gross
      revenues. The rent was negotiated by the parties before we acquired Tianshi
      Holdings, and we believe that it is a reasonable rent for the facilities. The
      term of the lease was for five years and expired on December 31, 2007. In
      addition, we are obligated to pay insurance, maintenance and other expenses
      related to the premises. The total amount paid on this lease amounted to
      $522,318 for the 12 months ended December 31, 2007. We entered into a new
      one-year lease agreement with Tianshi Group, effective January 1, 2008 covering
      the same facilities and having identical rent terms.





On
      December 14, 2007, Biological entered into a Real Property Transfer Agreement
      (the “Transfer Agreement”) with Tianshi Group. Under the 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 the Company’s 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 being 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.




40




On
      December 14, 2007, Biological and Tianshi Group also entered a Lease Agreement
      pursua nt
      to
      which Biological has the right to use and occupy the office and workshop spaces
      being transferred under the 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.





**Other
      Transactions with Tianshi Engineering**





On
      December 31, 2005, Biological entered into four lease agreements with Tianshi
      Engineering which enabled Tianshi Engineering to share the use of certain of
      Biological’s product production workshops and equipment to manufacture products
      which Tianshi Engineering owns, or jointly owns with Biological for one year
      started from January 1 st ,
      2006.
      These four lease agreements were renewed in December 2006 for the 2007 fiscal
      year and on October 17, 2007 for the 2008 fiscal year. Rent revenue from these
      leases amounted to $379,083 and $295,588 for the years ended 2007 and 2006
      respectively.





On
      October 31, 2007, Biological entered into four lease agreements with Tianshi
      Engineering which enable Tianshi Engineering to share the use of certain of
      Biological’s product production workshops and equipment to manufacture products
      which Tianshi Engineering owns, or jointly owns with Biological. Each of the
      four agreements is effective as of January 1, 2008 and expires on December
      31,
      2009. Following is a summary of the monthly rent payable to Biological under
      the
      leases:





**Lease
                Agreement**
            
            **Monthly
                rent**Lease
                Agreement for Health Products Production Equipment
            
            $
            11,481Lease
                Agreement for Health Products Production Workshops
            
            $
            13,367Lease
                Agreement for Personal Care Product Production Equipment
            
            $
            5,160Lease
                Agreement for Personal Care Products Production Workshops
            
            $
            2,891





On
      December 14, 2007, Biological entered into the Transfer Agreement with Tianshi
      Group, the parent company of Tianshi Engineering, pursuant to which Biological
      transferred to Tianshi Group title to two of the four buildings included in
      the
      Lease Agreement for Health Products Production Workshops. On December 31,
      Biological and Tianshi Engineering entered into a Supplement Agreement of Lease
      Agreement for Health Products Production Workshops. The Supplement Agreement
      removed the two buildings purchased by Tianshi Group from the lease and reduced
      the rent to $5,928 per month.





On
      December 31, 2007, Biological and Tianshi Engineering entered into a Supplement
      Agreement of Lease Agreement for Personal Care Products Production Equipment.
      The Supplement Agreement added additional production equipment to the lease
      and
      increased the rent to $5,635 per month.





In
      November 2007, we sold two cars to a supplier of Tianshi Engineering for
      $110,275. The proceeds from the sale to the supplier of Tianshi Engineering
      were
      recorded as other receivables from Tianshi Engineering, as both parties agree
      that we transferred our right to receive the proceeds from the sale of the
      cars
      to Tianshi Engineering.





**Transactions
      with Tianshi Investments**





On
      December 20, 2007, Tianshi Holding entered into a Sale and Purchase Agreement
      with Tianshi Investment, Biological and Tianshi Engineering. Pursuant to the
      Sale and Purchase Agreement, Tianshi Holdings agreed to buy all of the
      registered share capital of Life Resources from Tianshi Investment for
      RMB474,674,415 ($64,247,182). The closing of the transaction was subject to
      government approval of the transfer of Life Resources to Tianshi Holdings.
      On
      March 13, 2008, the government approved the transfer.




41




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 RMB200,000,000
                to
                Tianshi Engineering owned by Biological together with interest accrued;


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


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





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





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




**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES.**





On
      September 26, 2007, the Board appointed Grobstein, Horwath & Company LLP
      (GH&C”) as independent auditors to audit our financial statements for the
      fiscal year ended December 31, 2007. Prior to September 26, 2007 Moore Stephens
      Wurth Frazer and Torbet, LLP (“MSWF&T”) had served as our independent
      auditor since 2002.





**Public
      Accounting Fees**





Moore
                Stephens Wurth Frazer and Torbet, LLP2007
            
            2006Audit
                Fees
            
            $
            200,000
            
            $
            240,000Audit
                Related Fees
            
            $
            0
            
            $
            0Tax
                Fees
            
            $
            5,000
            
            $
            5,000All
                Other Fees
            
            $
            0
            
            $
            11,000





Audit
      fees were for professional services rendered by MSWF&T during the 2006
      fiscal year for the audit of our annual financial statements and the review
      of
      the financial statements included in our quarterly reports on Forms 10-Q, and
      services that are normally provided by MSWF&T in connection with statutory
      and regulatory filings or engagements for that fiscal year. Audit fees were
      for
      professional services rendered by MSWF&T during the 2007 fiscal year for the
      review of the financial statements included in our first and second quarter
      reports on Forms 10-Q, and services that are normally provided by MSWF&T in
      connection with statutory and regulatory filings or engagements for that fiscal
      year. MSWF&T did not bill any other fees for services rendered to us during
      the fiscal years ended December 31, 2006 and 2007 for assurance and related
      services in connection with the audit or review of our financial statements.
      Tax
      fees involved preparation of the consolidated tax returns. All other fees
      consisted of professional advice on the Company’s compliance with Section 404 of
      the Sarbanes-Oxley Act of 2002.




42





Grobstein,
                Horwath & CompanyLLP2007
            
            2006Audit
                Fees
            
            $
            20,000
            
            $
            0Audit
                Related Fees
            
            $
            0
            
            $
            0Tax
                Fees
            
            $
            0
            
            $
            0All
                Other Fees
            
            $
            0
            
            $
            0





Audit
      fees were for professional services rendered by GH&C during the 2007 fiscal
      year for the review of the financial statements included in our third quarter
      report on Form 10-Q, and services that are normally provided by GH&C in
      connection with statutory and regulatory filings or engagements for that fiscal
      year. GH&C did not bill any other fees for services rendered to us during
      the fiscal year ended December 31, 2007 for assurance and related services
      in
      connection with the review of our financial statements.





**Pre-approval
      of Services**





The
      Audit
      Committee has adopted pre-approval policies for all services, including both
      audit and non-audit services, provided by the Company’s independent auditors.
      For audit services, each year the independent auditor provides the Audit
      Committee with an engagement letter outlining the scope of the audit services
      proposed to be performed during the year, which must be formally accepted by
      the
      Audit Committee before the audit commences. The independent auditor also submits
      an audit services fee proposal, which also must be approved by the Committee
      before the audit commences. The audit, tax, and all other fees and services
      described above were pre-approved for 2006 and 2007.





43


**PART
      IV**





**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**





**Exhibits**




Exhibit
                No.
            
            Description2.1
            
            Agreement
                and Plan of Reorganization, as amended, dated as of August 22, 2003,
                by
                and among Strategika,Tianshi
                Holdings and the Stockholders of Tianshi Holdings. (1)3.1*
            
            Certificate
                of Incorporation of the Company, as amended3.2
            
            By-laws
                ofthe
                Company (2)4.1
            
            Specimen
                Stock Certificate (2)10.1
            
            Lease
                Agreement, dated June 30, 2002, by and between Tianshi Group Co.,
                Ltd. and
                Tianjin Tianshi Biological Development Co., Ltd. (3)10.2
            
            Product
                Purchase and Sales Agreement, dated June 25, 2003, by and between
                Tianjin
                Tianshi Biological Development Co., Ltd. And Tianjin Tianshi Biological
                Engineering Co. Ltd. (3)10.3
            
            Supplemental
                Agreement for the Construction and Development of Tiens Yihai Industrial
                Park Project, dated November 10, 2006 by and between Shanghai Zhu
                Jia Jiao
                Industrial Park Economic Development Ltd. Company, Tianshi International
                Holdings Group Ltd. Company and Zhu Jia Jiao Townhouse, Qing Pu District,
                Shanghai (4)10.4
            
            Term
                LoanAgreement,
                dated March 29, 2007 by and between Tianjin Tianshi Biological Development
                Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd.
                (5)10.5
            
            Term
                LoanAgreement,
                dated April 24, 2007 by and between Tianjin Tianshi Biological Development
                Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd.
                (6)10.6
            
            Term
                LoanExtension
                Agreement, dated June 28, 2007 by and between Tianjin Tianshi Biological
                Development Co., Ltd. and Tianjin Tianshi Biological Engineering
                Co., Ltd.
                (6)10.7*
            
            Term
                LoanAgreement,
                dated July 23, 2007 by and between Tianjin Tianshi Biological Development
                Co., Ltd. and Tianjin Tianshi Biological Engineering Co.,
                Ltd.10.8
            
            Term
                LoanExtension
                Agreement, dated September 27, 2007 by and between Tianjin Tianshi
                Biological Development Co., Ltd. and Tianjin Tianshi Biological
                Engineering Co., Ltd. (7)10.9*
            
            Term
                LoanAgreement,
                dated October 15, 2007 by and between Tianjin Tianshi Biological
                Development Co., Ltd. and Tianjin Tianshi Biological Engineering
                Co.,
                Ltd.10.10*
            
            Health
                Products Production Workshops Lease Agreement,
                dated October 31, 2007 by and between Tianjin Tianshi Group Co.,
                Ltd. and
                Tianjin Tianshi Biological Development Co., Ltd.10.11*
            
            Personal
                Care Products Production Workshops Lease Agreement,
                dated October 31, 2007 by and between Tianjin Tianshi Group Co.,
                Ltd. and
                Tianjin Tianshi Biological Development Co., Ltd.10.12*
            
            Health
                Products Production Equipment Lease Agreement,
                dated October 31, 2007 by and between Tianjin Tianshi Group Co.,
                Ltd. and
                Tianjin Tianshi Biological Development Co., Ltd.10.13*
            
            Personal
                Care Products Production Equipment Lease Agreement,
                dated October 31, 2007 by and between Tianjin Tianshi Group Co.,
                Ltd. and
                Tianjin Tianshi Biological Development Co., Ltd.10.14*
            
            Real
                Property Transfer Agreement, dated December 14, 2007, by and between
                Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi
                Group
                Co. Ltd.10.15*
            
            Lease
                Agreement, dated December 14, 2007, by and between Tianjin Tianshi
                Biological Development Co., Ltd. and Tianjin Tianshi Group Co.
                Ltd.10.16*
            
            Sale
                and Purchase Agreement dated December 20, 2007by
                and among Tianshi International Investment Group Co., Ltd., Tianshi
                International Holdings Group Limited, Tianjin Tianshi Biological
                Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co.,
                Ltd.10.17*
            
            Capital
                Contribution Agreement dated December 21, 2007 by and between TianshiInternational
                Holdings Group Co., Ltd. and Tianshi International Investment Group
                Co.
                Ltd.10.18*
            
            Health
                Products Production Workshops Supplemental Agreement,
                dated December 31, 2007 by and between Tianjin Tianshi Group Co.,
                Ltd. and
                Tianjin Tianshi Biological Development Co., Ltd.10.19*
            
            Personal
                Care Products Production Equipment Supplemental Agreement,
                dated December 31, 2007 by and between Tianjin Tianshi Group Co.,
                Ltd. and
                Tianjin Tianshi Biological Development Co.,
                Ltd.




44




10.20*
            Loan
                Agreement dated January14,
                2008 by and between Tianshi International Holdings Group Co., Ltd.
                and
                Tianshi International Investment Group Co. Ltd.10.21*
            Lease
                Agreement, dated January 17, 2008, by and between Tianjin Tianshi
                Biological Development Co., Ltd. and Tianjin Tianshi Group Co.
                Ltd.21.1*
            Subsidiaries31.1*
            Certification
                of the Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2*
            Certification
                of the Chief Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1*
            Certification
                of the Chief Executive Officer and Chief Financial Officer pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of
                2002





*
      Filed
      herewith





(1)
      Filed
      as an exhibit to the Registrant’s Annual Report on Form 10-KSB filed with the
      Securities and Exchange Commission on March 31, 2005.


(2)
      Filed
      as an exhibit to the Registrant’s Form 10-KSB filed with the Securities and
      Exchange Commission on March 7, 2002.


(3)
      Filed
      as an exhibit to the Registrant’s Form 10-K filed with the Securities and
      Exchange Commission on March 31, 2006


(4)
      Filed
      as an exhibit to the Registrant’s Form 10-K filed with the Securities and
      Exchange Commission on March 29, 2007.


(5) Filed
      as
      an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange
      Commission on May 15, 2007.


(6) Filed
      as
      an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange
      Commission on August 14, 2007.


(7) Filed
      as
      an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange
      Commission on November 14, 2007.




45





**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) 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.


**TIENS
                BIOTECH GROUP (USA), INC.**Date:
                  March 31, 2008/s/
                  Jinyuan LiJinyuan
                  LiChief
                  Executive Officer and President(Principal
                  Executive Officer)Date:
                  March 31, 2008/s/
                  Wenjun JiaoWenjun
                  JiaoChief
                  Financial Officer(Principal
                  Financial and Accounting
                  Officer)




46





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.




*Signature*
            
            *Title*
            
            *Date*/s/
                Jinyuan Li
              
              Jinyuan
                Li
            
            Chairman
                of the Board, Chief Executive Officer and President (Principal Executive
                Officer)
            
            March 31,
                2008/s/
                Wenjun Jiao
              
              Wenjun
                Jiao
            
            Chief
                Financial Officer (Principal Executive and Accounting Officer) and
                Director
            
            March 31,
                2008/s/
                Yupeng Yan
              Yupeng
                Yan
            
            Executive
                Vice President And Director
            
            March 31,
                2008/s/
                Gilbert Raker
              
              Gilbert
                Raker
            
            Director
            
            March 31,
                2008/s/
                Howard Balloch
              
              Howard
                Balloch
            
            Director
            
            March 31,
                2008/s/
                Socorro Quintero
              
              Socorro
                Quintero
            
            Director
            
            March 31,
                2008





47




**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Stockholders and Board of Directors of Tiens Biotech Group (USA), Inc.
 
 We
        have
        audited the accompanying consolidated balance sheet of Tiens Biotech Group
        (USA), Inc. (the “Company”) as of December 31, 2007 and the related consolidated
        statements of income and other comprehensive income, stockholders’ equity and
        cash flows for the year then ended. These consolidated financial statements
        are
        the responsibility of the Company’s management. Our responsibility is to express
        an opinion on these consolidated financial statements based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. The
        Company
        is not required to have, nor were we engaged to perform, an audit of its
        internal control over financial reporting. Our audit included consideration
        of
        internal control over financial reporting as a basis for designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the Company’s internal control
        over financial reporting. Accordingly, we express no such opinion. An audit
        also
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall consolidated financial statement
        presentation. We believe that our audit provides a reasonable basis for our
        opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of Tiens Biotech
        Group (USA), Inc. as of December 31, 2007, and the consolidated results of
        their
        operations and their cash flows for the year then ended in conformity with
        U.S.
        generally accepted accounting principles.
 
 As
        discussed in Notes 1, 10, 11 and 12 to the consolidated financial statements,
        the Company has had numerous significant transactions with entities that
        are
        under common control. The most significant of these transactions is that
        all of
        the Company’s sales are currently and have historically been made to a related
        party controlled by the shareholder of the Company.
 
  **/s/
        GROBSTEIN, HORWATH & COMPANY LLP**
 
 Sherman
        Oaks, California
 March
        25,
        2008
 
 F-1




**Report
        of Independent Registered Public Accounting Firm**
 
 To
        the
        Board of Directors and Stockholders
 of
        Tiens
        Biotech Group (USA), Inc. and Subsidiaries
 
 
 We
        have
        audited the accompanying consolidated balance sheets of Tiens Biotech Group
        (USA), Inc. and Subsidiaries as of December 31, 2006, and the related
        consolidated statements of income and other comprehensive income, and equity,
        and cash flows for each of the years in the two-year period ended December
        31,
        2006. These consolidated financial statements are the responsibility of the
        Company’s management. Our responsibility is to express an opinion on these
        consolidated financial statements based on our audits.
 
 We
        conducted our audits in accordance with standards of the Public Company
        Accounting Oversight Board (United States of America). Those standards require
        that we plan and perform the audit to obtain reasonable assurance about whether
        the consolidated financial statements are free of material misstatement.
        The
        Company is not required to have, nor were we engaged to perform, an audit
        of its
        internal control over financial reporting. Our audit included consideration
        of
        internal control over financial reporting as a basis for designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the Company’s internal control
        over financial reporting. Accordingly, we express no such opinion. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall financial statement presentation.
        We believe that our audits provide a reasonable basis for our
        opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Tiens Biotech Group (USA),
        Inc. and Subsidiaries as of December 31, 2006, and the results of their
        operations and their cash flows for each of the years in the two-year period
        ended December 31, 2006, in conformity with accounting principles generally
        accepted in the United States of America.
 
 
 /S/
        Moore
        Stephens Wurth Frazer and Torbet, LLP
 
 
 Walnut,
        California
 
 
 March
        19,
        2007




F-2




TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        BALANCE SHEETS
 AS
        OF
        DECEMBER 31, 2007 AND DECEMBER 31, 2006
 **2007**
                ****
                **2006**ASSETSCURRENT
                    ASSETS:Cash
                
                $
                48,678,945
                
                $
                54,270,065Accounts
                    receivable, trade - related parties, net ofallowance
                    for doubtful accounts of $71,700 and $86,776as
                    of December 31, 2007 and 2006, respectively
                
                
                14,268,229
                
                
                12,926,670Accounts
                    receivable, trade - third parties
                
                
                104,398
                
                
                18,135Inventories
                
                
                5,949,963
                
                
                6,845,108Other
                    receivables
                
                
                892,489
                
                
                349,905Other
                    receivables - related parties
                
                
                13,070,907
                
                
                8,397,227Employee
                    advances
                
                
                64,336
                
                
                111,121Prepaid
                    expenses
                
                
                623,638
                
                
                2,135,917Total
                    current assets
                
                
                83,652,905
                
                
                85,054,148PROPERTY,
                    PLANT AND EQUIPMENT, net
                
                
                18,322,619
                
                
                30,511,319OTHER
                    ASSETS:Intangible
                    assets, net
                
                
                2,603,084
                
                
                510,183Long-term
                    prepaid expenses
                
                
                5,301,847
                
                
                7,031,348Loans
                    receivable - related party
                
                
                -
                
                
                25,640,000Acquisition
                    deposit
                
                
                71,747,182
                
                
                -Total
                    other assets
                
                
                79,652,113
                
                
                33,181,531Total
                    assets
                
                $
                181,627,637
                
                $
                148,746,998LIABILITIES
                    AND SHAREHOLDERS' EQUITYCURRENT
                    LIABILITIES:Accounts
                    payable
                
                $
                4,070,906
                
                $
                4,123,105Advances
                    from customers - related parties
                
                
                1,700,838
                
                
                1,570,120Wages
                    and benefits payable
                
                
                1,250,685
                
                
                992,068Other
                    taxes payable
                
                
                536,819
                
                
                93,714Income
                    taxes payable
                
                
                665,726
                
                
                876,046Other
                    payables
                
                
                1,133,539
                
                
                500,213Other
                    payables - related parties
                
                
                7,938,205
                
                
                522,105Dividend
                    payable to minority interest
                
                
                4,902,629
                
                
                238,311Current
                    portion of long term debt, related party
                
                
                2,130,000
                
                
                2,130,000Total
                    current liabilities
                
                
                24,329,347
                
                
                11,045,682NON-CURRENT
                    LIABILITIESLong
                    term debt, net of current portion, related party
                
                
                4,267,742
                
                
                6,397,742Other
                    payables-non current
                
                
                538,130
                
                
                -Total
                    non current liabilities
                
                
                4,805,872
                
                
                6,397,742Total
                    liabilities
                
                
                29,135,219
                
                
                17,443,424MINORITY
                    INTEREST
                
                
                6,144,063
                
                
                11,883,323SHAREHOLDERS'
                    EQUITY:Common
                    stock, $0.001 par value, 250,000,000 shares authorized,71,333,586
                    issued and outstanding, respectively
                
                
                71,334
                
                
                71,334Paid-in-capital
                
                
                8,842,009
                
                
                8,842,009Additional
                    paid-in-capital
                
                
                69,105
                
                
                -Statutory
                    reserves
                
                
                9,420,783
                
                
                9,420,783Retained
                    earnings
                
                
                113,964,778
                
                
                95,371,137Accumulated
                    other comprehensive income
                
                
                13,980,346
                
                
                5,714,988Total
                    shareholders' equity
                
                
                146,348,355
                
                
                119,420,251Total
                    liabilities and shareholders' equity
                
                $
                181,627,637
                
                $
                148,746,998
  F-3
 
 TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007, 2006 and 2005


**2007**
              ****
              **2006**
              ****
              **2005**REVENUE
                  - RELATED PARTIES
              
              $
              54,900,060
              
              $
              66,790,466
              
              $
              68,688,669COST
                  OF SALES - RELATED PARTIES
              
              
              16,526,695
              
              
              18,082,441
              
              
              17,451,605GROSS
                  PROFIT
              
              
              38,373,365
              
              
              48,708,025
              
              
              51,237,064SELLING,
                  GENERAL AND ADMINISTRATIVE EXPENSES
              
              
              14,306,660
              
              
              12,789,810
              
              
              13,413,875INCOME
                  FROM OPERATIONS
              
              
              24,066,705
              
              
              35,918,215
              
              
              37,823,189(Interest
                  expense)
              
              
              (399,773
              )
              
              (532,887
              )
              
              (542,414
              )Interest
                  income
              
              
              3,019,153
              
              
              859,720
              
              
              204,489Other
                  (expense) income, net
              
              
              (1,099,172
              )
              
              (165,742
              )
              
              (301,212
              )OTHER
                  (EXPENSE) INCOME, NET
              
              
              1,520,208
              
              
              161,091
              
              
              (639,137
              )INCOME
                  BEFORE PROVISION FOR INCOME TAXESAND
                  MINORITY INTEREST
              
              
              25,586,913
              
              
              36,079,306
              
              
              37,184,052PROVISION
                  FOR INCOME TAXES
              
              
              2,026,875
              
              
              2,823,899
              
              
              2,984,302INCOME
                  BEFORE MINORITY INTEREST
              
              
              23,560,038
              
              
              33,255,407
              
              
              34,199,750MINORITY
                  INTEREST
              
              
              4,966,397
              
              
              6,963,330
              
              
              7,321,630NET
                  INCOME
              
              
              18,593,641
              
              
              26,292,077
              
              
              26,878,120OTHER
                  COMPREHENSIVE INCOME:Foreign
                  currency translation adjustment
              
              
              8,265,358
              
              
              3,480,775
              
              
              2,246,380COMPREHENSIVE
                  INCOME
              
              $
              26,858,999
              
              $
              29,772,852
              
              $
              29,124,500EARNINGS
                  PER SHARE, BASIC AND DILUTED
              
              $
              0.26
              
              $
              0.37
              
              $
              0.38WEIGHTED
                  AVERAGE NUMBER OF SHARES
              
              
              71,333,586
              
              
              71,333,586
              
              
              71,333,586




F-4


TIENS
        BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY


**Number**
                  **of
                    shares**
                ****
                **Common**
                  **stock**
                ****
                **Paid-in**
                  **capital**
                ****
                **Additional**
                  **Paid-in**
                  **capital**
                ****
                **Statutory**
                  **reserves**
                ****
                **Retained**
                  **earnings**
                ****
                **Accumulated**
                  **other**
                  **comprehensive**
                  **income
                    (loss)**
                ****
                **Totals**BALANCE,
                    December 31, 2004
                
                
                71,333,586
                
                $
                71,334
                
                $
                8,842,009
                
                $
                -
                
                $
                9,420,783
                
                $
                42,200,940
                
                $
                (12,167
                )
                $
                60,522,899Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                26,878,120
                
                
                
                
                
                26,878,120Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,246,380
                
                
                2,246,380BALANCE,
                    December 31, 2005
                
                
                71,333,586
                
                
                71,334
                
                
                8,842,009
                
                
                -
                
                
                9,420,783
                
                
                69,079,060
                
                
                2,234,213
                
                
                89,647,399Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                26,292,077
                
                
                
                
                
                26,292,077Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,480,775
                
                
                3,480,775BALANCE,
                    December 31, 2006
                
                
                71,333,586
                
                
                71,334
                
                
                8,842,009
                
                
                -
                
                
                9,420,783
                
                
                95,371,137
                
                
                5,714,988
                
                
                119,420,251Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                18,593,641
                
                
                
                
                
                18,593,641Foreign
                    currency translation gain
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                8,265,358
                
                
                8,265,358Additional
                    paid-in-capital
                
                
                
                
                
                
                
                
                
                
                
                69,105
                
                
                
                
                
                
                
                
                
                
                
                69,105BALANCE,
                    December 31, 2007
                
                
                71,333,586
                
                $
                71,334
                
                $
                8,842,009
                
                $
                69,105
                
                $
                9,420,783
                
                $
                113,964,778
                
                $
                13,980,346
                
                $
                146,348,355




F-5





TIENS
      BIOTECH GROUP (USA), INC. AND SUBSIDIARIES




CONSOLIDATED
      STATEMENTS OF CASH FLOWS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005


**2007**
              
              **2006**
              
              **2005**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              18,593,641
              
              $
              26,292,077
              
              $
              26,878,120Adjustments
                  to reconcile net income to cashprovided
                  by (used in) operating activities:Provision
                  for doubtful accounts
              
              
              (15,076
              )
              
              (123,302
              )
              
              173,169Minority
                  interest
              
              
              4,966,397
              
              
              6,963,330
              
              
              7,321,630Depreciation
              
              
              2,891,893
              
              
              2,509,261
              
              
              1,701,415Amortization
              
              
              252,492
              
              
              103,694
              
              
              134,070Interest
                  income
              
              
              313,402
              
              
              -
              
              
              -(Gain)
                  loss on sale of assets
              
              
              (145,475
              )
              
              2,550
              
              
              289,632Inventory
                  write off
              
              
              84,521
              
              
              59,832
              
              
              154,525(Increase)
                  decrease in assets:Accounts
                  receivable, trade - related parties
              
              
              (25,662,367
              )
              
              (16,542,297
              )
              
              3,810,415Accounts
                  receivable, trade - third parties
              
              
              (81,673
              )
              
              (17,763
              )
              
              -Other
                  receivables
              
              
              (501,258
              )
              
              (125,232
              )
              
              303,201Other
                  receivables - related parties
              
              
              1,439,387
              
              
              (5,667,880
              )
              
              2,096,269Inventories
              
              
              1,211,822
              
              
              847,005
              
              
              (2,949,054
              )Employee
                  advances
              
              
              52,015
              
              
              38,067
              
              
              (67,007
              )Prepaid
                  expense
              
              
              1,586,652
              
              
              (394,419
              )
              
              (1,081,102
              )Increase
                  (decrease) in liabilities:Accounts
                  payable
              
              
              (313,235
              )
              
              1,305,537
              
              
              850,852Accounts
                  payable - related parties
              
              
              -
              
              
              -
              
              
              (211,274
              )Advances
                  from customers - related parties
              
              
              25,320
              
              
              (565,520
              )
              
              1,366,951Wages
                  and benefits payable
              
              
              185,502
              
              
              (93,942
              )
              
              862,872Other
                  taxes payable
              
              
              142,666
              
              
              (481,080
              )
              
              763,249Other
                  payables
              
              
              576,205
              
              
              153,890
              
              
              70,110Other
                  payables - related parties
              
              
              (107,546
              )
              
              (1,324,779
              )
              
              837,554Net
                  cash provided by operating activities
              
              
              5,495,285
              
              
              12,939,029
              
              
              43,305,597CASH
                  FLOWS FROM INVESTING ACTIVITIES:Payment
                  of deposit on acquisition of Life Resource
              
              
              (19,096,525
              )
              
              -
              
              
              -Increase
                  in loans receivable - related party
              
              
              -
              
              
              (24,992,000
              )
              
              -Increase
                  in long-term prepaid expense
              
              
              (209,087
              )
              
              (3,178,500
              )
              
              -Increase
                  in intangible assets
              
              
              (132,027
              )
              
              (42,273
              )
              
              (113,133
              )Proceeds
                  from sales of properties
              
              
              14,111,723
              
              
              76,596
              
              
              28,581Purchase
                  of equipment and automobiles
              
              
              (2,978,395
              )
              
              (7,769,394
              )
              
              (6,100,936
              )Net
                  cash (used in) provided by investing activities
              
              
              (8,304,311
              )
              
              (35,905,571
              )
              
              (6,185,488
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Increase
                  in other payables-non current
              
              
              516,718
              
              
              -
              
              
              -Payments
                  on long term debt, related party
              
              
              -
              
              
              (2,130,000
              )
              
              (156,984
              )Payments
                  to minority interest shareholder
              
              
              (6,676,102
              )
              
              -
              
              
              (58,136
              )Net
                  cash used in financing activities
              
              
              (6,159,384
              )
              
              (2,130,000
              )
              
              (215,120
              )EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              3,377,290
              
              
              1,820,616
              
              
              1,397,130INCREASE
                  IN CASH
              
              
              (5,591,120
              )
              
              (23,275,926
              )
              
              38,302,119CASH,
                  beginning of year
              
              
              54,270,065
              
              
              77,545,991
              
              
              39,243,872CASH,
                  end of year
              
              $
              48,678,945
              
              $
              54,270,065
              
              $
              77,545,991**Supplemental
                  disclosures of cash flow information**Cash
                  paid during the year for:Interest
                  (net of amount capitalized)
              
              $
              399,773
              
              $
              532,887
              
              $
              515,692Income
                  taxes
              
              $
              2,215,159
              
              $
              2,731,755
              
              $
              2,302,275




F-6


TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 **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, 2.8% by officers
        and
        92.29% 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”) and 99.4% of Tiens Yihai Co. Ltd. (“Tiens
        Yihai”).
 
 ***Acquisition
        of Tianshi Holdings and Biological***
 
 On
        September 9, 2003, pursuant to an Agreement and Plan of Reorganization, dated
        August 22, 2003 (the “Agreement”), among the Company, Tianshi Holdings, and
        Jinyuan Li, Wenjun Jiao and Yupeng Yan, all Chinese nationals who were
        stockholders of Tianshi Holdings (the “Tianshi Stockholders”), the Company
        received from the Tianshi Stockholders all of the issued and outstanding
        common
        stock of Tianshi Holdings in exchange for the issuance by the Company of
        68,495,000 shares of its common stock to the Tianshi Stockholders, representing
        95% of the issued and outstanding common stock of the Company at such time,
        after giving effect to the issuance.
 
 The
        purchase of Tianshi Holdings and the issuance of the Company’s common stock in
        connection with the purchase have been accounted for as a reverse acquisition
        presented as a recapitalization, and no goodwill or other intangible assets
        have
        been recorded. For accounting purposes, the original Tianshi Holdings is
        considered the acquirer in the reverse acquisition. The historical financial
        statements are those of the original Tianshi Holdings.
 
 Tianshi
        Holdings was incorporated on March 24, 2003, in the territory of the British
        Virgin Islands. On June 18, 2003, Tianshi Holdings acquired 80% of Biological
        from Tianshi Hong Kong International Development Co., Ltd. (“Tianshi Hong
        Kong”), which was 100% owned by the Company’s current Chairman, Chief Executive
        Officer and President, Jinyuan Li. Biological is a Chinese-foreign equity
        joint
        venture company established under the laws of the People’s Republic of China
        (the “PRC” or “China”) on March 27, 1998. Biological is subject to the Law on
        Sino Foreign Equity Joint Ventures, its implementation regulations and other
        related rules and regulations. Biological is an independent legal entity
        having
        the legal structure of a limited liability company, similar to a regular
        corporation with limited liability organized under state laws in the United
        States of America. The Articles of Association of Biological provide for
        a
        50-year term with registered capital of $10,000,000. As an approved
        Chinese-foreign equity joint venture, Biological receives special income
        tax
        incentive treatment from both the local (Wuqing County) and central governments
        in China.
  F-7
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 The
        original partners in this joint venture were Tianshi Hong Kong, incorporated
        in
        Hong Kong, which owned 80% of the joint venture, and Tianjin Tianshi Biological
        Engineering Co., Ltd. (“Tianshi Engineering”), which owned the remaining 20% of
        Biological.
 
 Tianshi
        Hong Kong is owned 100% by Jinyuan Li. Tianshi Engineering is 49% owned by
        Baolan Li, the daughter of Jinyuan Li and 51% by Tianjin Tianshi Group Co.,
        Ltd.
        (“Tianshi Group”). In June 2003, Tianshi Engineering transferred its 20%
        interest in Biological for no consideration to Tianjin Tianshi Pharmaceuticals
        Co., Ltd (“ Tianshi
        Pharmaceuticals”) and
        Tianshi Holdings acquired 80% of Biological from Tianshi Hong Kong for no
        consideration. This transfer was made for no consideration, since Jinyuan
        Li is
        president and sole shareholder of both companies.
 
 ***Acquisition
        of Tiens Yihai***
 
 On
        April
        20, 2004, Tianshi Holdings entered a joint venture contract (the “Joint Venture
        Project”) with Tianshi Pharmaceuticals to establish Tiens Yihai. Tiens Yihai is
        located in Shanghai, PRC, and is in the business of research and development,
        production and marketing of healthcare, home care and personal care products.
        Tiens Yihai is a foreign investment joint venture which is incorporated under
        the laws of PRC. Tiens Yihai is classified as a Foreign Investment Enterprise
        (“FIE”) in the PRC and is subject to the FIE laws of the PRC. Tiens Yihai is a
        Chinese registered limited liability company with a legal structure similar
        to a
        regular corporation with limited liability organized under state laws in
        the
        United States of America. The Articles of Association provide for a 50-year
        term
        beginning on May 27, 2004 with registered capital of $200,000,000. Tianshi
        Holdings contributed 99.4% of the registered capital and Tianshi Pharmaceuticals
        contributed the remaining 0.6%.
 
 On
        September 15, 2004, the board of directors of Tianshi Holdings ratified the
        Joint Venture Project. The total amount to be invested in Tiens Yihai was
        to be
        $400 million, of which $200 million was to be registered capital. Tianshi
        Holdings was to contribute $198.8 million, representing approximately 99.4%
        of
        the registered capital of Tiens Yihai, and Tianshi Pharmaceuticals was to
        contribute $1.2 million representing 0.6% of the registered
        capital.
 
 ***Entry
        into agreement to acquire Life Resources***
 
 On
        December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
        with Tianshi International Investment Group Co., Ltd., a British Virgin Islands
        Company (“Tianshi Investment”). Jinyuan Li owns 100% of Tianshi Investment.
        Pursuant to the Sale and Purchase Agreement, Tianshi Holdings agreed to buy
        all
        of the registered share capital of Tianjin Tiens Life Resources Co., Ltd.
        (“Life
        Resources”) for $64.2 million (see Note 10). The closing of the transaction was
        subject to government approval of transfer of all of the share capital of
        Life
        Resources to Tianshi Holdings, which as of December 31, 2007, had not been
        received (see Note 19).
 
 Life
        Resources was incorporated on April 29, 2005 as a FIE in Wuqing, Tianjin,
        PRC,
        with a registered share capital of $30,000,000. The Company is currently
        constructing research and development and manufacturing and logistic facilities,
        as well as administrative offices. Construction on the project began in July
        2006. Upon the closing of this transaction, Tianshi Holdings would own 100%
        of
        Life Resources.
  F-8
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 ***Nature
        of operations***
 
 The
        Company through its subsidiaries is primarily engaged in the manufacturing
        of
        nutritional supplement products, including wellness products, dietary supplement
        products, and personal care products (which were discontinued during 2007).
        In
        the PRC, the Company sells its products to Tianshi Engineering. Tianshi
        Engineering, in turn, sells the products to customers through its branches
        and
        affiliated companies and at chain stores which are owned by individual
        distributors. Outside the PRC, the Company sells its products to overseas
        affiliated companies located in 52 countries who in turn sell them to
        independent direct sales distributors.
 
 **Note
        2 - Summary of significant accounting policies**
 
 ***Basis
        of presentation***
 
 These
        financial statements of the Company and its subsidiaries are prepared in
        accordance with accounting principles generally accepted in the United States
        of
        America (“U.S. GAAP”).
 
 ***The
        reporting entity***
 
 The
        Company’s consolidated financial statements reflect the activities of the
        following Company subsidiaries:
  **Subsidiary**
                
                **Country
                    of Incorporation**
                
                **%
                    Ownership**Tianshi
                    Holdings
                
                British
                    Virgin Islands
                
                100.0%Biological
                
                PRC
                
                80.0%Tiens
                    Yihai
                
                PRC
                
                99.4%
 
 ***Principles
        of consolidation***
 
 The
        consolidated financial statements include the financial statements of the
        Company and its subsidiaries. All significant inter-company transactions
        and
        balances are eliminated in consolidation.
 
 ***Use
        of estimates***
 
 The
        preparation of financial statements in conformity with U.S. GAAP requires
        management to make estimates and assumptions that affect the amounts reported
        in
        the 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.
  F-9
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 ***Foreign
        currency translation***
 
 The
        reporting currency of the Company is the US dollar. Biological’s and Tiens
        Yihai’s financial records are maintained and the statutory financial statements
        are stated in its local currency, Renminbi (RMB), as their functional currency.
        Results of operations and cash 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.
 
 This
        quotation of the exchange rates does not imply free convertibility of RMB
        to
        other foreign currencies. All foreign exchange transactions continue to take
        place either through the People’s Bank of China or other banks authorized to buy
        and sell foreign currencies at the exchange rate quoted by the People’s Bank of
        China. Approval of foreign currency payments by the People’s Bank of China or
        other institutions requires submitting a payment application form together
        with
        invoices, shipping documents and signed contracts.
 
 Translation
        adjustments amounted to $8,265,358, $3,480,775 and 2,246,380 for the years
        ended
        December 31, 2007, 2006 and 2005, respectively. Asset and liability accounts
        at
        December 31, 2007 were translated at RMB7.31 to $1.00 USD compared to RMB7.80
        at
        December 31, 2006. Equity accounts were stated at their historical rate.
        The
        average translation rates applied to income statement accounts for the years
        ended December 31, 2007, 2006 and 2005 were RMB7.62, RMB7.96 and RMB8.18,
        respectively. Cash flows are also translated at average translation rates
        for
        the period. Therefore, amounts reported on the statement of cash flows will
        not
        necessarily agree with changes in the corresponding balances on the balance
        sheet.
 
 Transaction
        gains and losses that arise from exchange rate fluctuations on transactions
        denominated in a currency other than the functional currency are included
        in the
        results of operations as incurred. These amounts are not material to the
        financial statements.
 
 ***Fair
        value of financial instruments***
 
 The
        Company’s financial instruments consist primarily of cash, trade accounts
        receivable, trade payables, advances, other receivables, and debt instruments.
        The carrying amounts of the Company’s financial instruments generally
        approximate their fair values at December 31, 2007 and December 31, 2006,
        except
        for long-term debt, which has a fixed interest rate. The fair value of the
        long-term debt is estimated based on the borrowing rates currently available
        to
        the Company for bank loans with similar terms and average maturities. The
        carrying value and fair value of long-term debt is as follows:
  **December
                    31, 2007**
                
                **December
                    31, 2006****Balance
                    Sheet amount**
                
                **Fair
                    value**
                
                **Balance
                    Sheet amount**
                
                **Fair
                    value**Long-term
                    debt-related party
                
                $
                (6,397,742
                )
                
                (6,443,795
                )
                $
                (8,527,742
                )
                
                (8,527,742
                )
 F-10
 
 TIENS
            BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
  ***Cash***
 
 Cash
        includes cash on hand and demand deposits in accounts maintained with banks
        of
        which no deposits are covered by insurance. The Company has not experienced
        any
        losses in such accounts and believes it is not exposed to any significant
        risks
        on its cash in bank accounts.
 
 ***Accounts
        receivable***
 
 The
        Company’s trade accounts receivable are mainly due from related companies. The
        Company has a general allowance for doubtful debt of 0.5% of the year end
        balance of accounts receivable-related parties. Management reviews its accounts
        receivable on a regular basis to determine if the bad debt allowance is
        adequate, paying particular attention to the age of receivables outstanding.
        At
        December 31, 2007 and December 31, 2006 receivables outstanding more than
        180
        days totaled $2,937,718 and $31,586, 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**
                
                **Provision
                    for**
                  **Doubtful**
                  **Accounts**
                
                **Recovery**
                
                **Balance
                    at**
                  **End
                    of Period**Period
                    ended December 31, 2007Reserves
                    and allowances deducted from assets accounts:Allowance
                    for doubtful accounts:
                
                $
                86,776
                
                $
                71,700
                
                $
                86,776
                
                $
                71,700Year
                    ended December 31, 2006Reserves
                    and allowances deducted from assets accounts:Allowance
                    for doubtful accounts:
                
                $
                206,916
                
                $
                86,776
                
                $
                206,916
                
                $
                86,776
 
 ***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.
  F-11
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 ***Prepaid
        expenses***
 
 Prepaid
        expenses consist of advances to suppliers and short-term prepaid expenses.
        The
        Company reviews its advances to suppliers annually for determining whether
        provisions should be provided. The amount included in prepaid expense is
        net of
        any provisions. Provisions for prepaid expenses amounted to $872,053 and
        $684,371 at December 31, 2007 and December 31, 2006, respectively.
 
 ***Property,
        plant and equipment, net***
 
 Property,
        plant and equipment are stated at cost less accumulated depreciation.
        Depreciation is computed using the straight-line method over the estimated
        useful lives of the assets. Estimated useful lives of the assets are as
        follows:
  Estimated
                    Useful LifeBuildings
                    and improvements
                20
                    yearsMachinery
                    and equipment
                10
                    yearsComputer,
                    office equipment and furniture
                5
                    yearsAutomobiles
                5
                    years
  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.
 
 The
        cost
        and related accumulated depreciation of assets sold or otherwise retired
        are
        eliminated from the accounts and any gain or loss is included in the
        consolidated statements of income and other comprehensive income. Maintenance,
        repairs and minor renewals are charged directly to expenses as incurred.
        Major
        additions and betterment to buildings and equipment are
        capitalized.
 
 ***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.
 
 ***Other
        assets***
 
 Intangible
        assets mainly consist of land use rights. All the land located in the PRC
        is
        owned by the government and cannot be sold to any individual or company.
        However, the government grants “land use rights” 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.
  F-12
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 Long-term
        prepaid expenses mainly consist of a deposit and a related loan made to a
        local
        government agency for the acquisition of land use rights in Shanghai (see
        Note
        9). Originally, the deposit related to the proposed acquisition of land use
        rights for 80 acres of land by Tiens Yihai. However, as of December 31, 2007,
        land use rights for only 50 of the 80 acres had been received. Therefore,
        long-term prepaid expenses are not subject to amortization.
 
 Loans
        receivable-related party represents a loan made by the Company to Tianshi
        Engineering (see Note 12). The loan became interest bearing since January
        1,
        2007, and the interest accrued on the loan during 2007 was included in Loans
        receivable-related party.
 
 Acquisition
        deposit represents the consideration paid by the Company for the acquisition
        of
        Life Resources on December 20, 2007. The acquisition was subject to approval
        by
        the government. As of December 31, 2007, such approval had not been received.
        Therefore, the consideration paid was classified as an acquisition deposit
        (See
        Note 10 and Note 19).
 
 ***Minority
        interest***
 
 Minority
        interest represents the outside shareholder’s 20% ownership of Biological and
        0.6% ownership of Tiens Yihai. The net income shown in Consolidated Statements
        of Cash Flows and Consolidated Statements of Income and Other Comprehensive
        Income is net of minority interest.
 
 ***Revenue
        recognition***
 
 During
        2007, the Company sold both semi-finished products and finished products
        to
        Tianshi Engineering domestically. Revenue from semi-finished products was
        recognized at FOB Tianjin shipping point. Revenue from finished products
        was
        recognized only when the related party Chinese distributors recognized sales
        of
        the Company’s products to unaffiliated third parties. Revenues in both cases are
        net of taxes.
 
 For
        overseas sales, the Company only sells finished products. The Company recognizes
        revenue from international sales (non-Chinese) to both affiliated and
        unaffiliated third parties, net of taxes as goods are shipped and clear review
        by the customs department of the Chinese government.
 
 The
        Company is generally not contractually obligated to accept returns. However,
        on
        a case by case negotiated basis, the Company permits customers to return
        their
        products. In accordance with SFAS No. 48, “Revenue Recognition when the Right of
        Return Exists”, revenue is recorded net of an allowance for estimated returns.
        Such reserves are based upon management’s evaluation of historical experience
        and estimated costs. The amount of the reserves ultimately required could
        differ
        materially in the near term from amounts included in the accompanying
        consolidated financial statements. As the Company did not receive any returns
        of
        products during the past three years, no allowance for estimated returns
        has
        been recorded for the years ended December 31, 2007, 2006 and 2005.
  F-13
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 ***Advertising
        costs***
 
 The
        Company sells all its products to related parties and these related parties
        are
        primarily responsible for marketing. Advertising costs of the Company for
        years
        ended December 31, 2007, 2006 and 2005 amounted to $24,556, $5,651 and $68,499,
        respectively, and were expensed as incurred.
 
 ***Shipping
        and handling***
 
 Shipping
        and handling totaled $550,972, $878,135 and $1,314,645 for the years ended
        December 31, 2007, 2006 and 2005, 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 form customers were included in revenue and the related shipping
        and
        handling costs were included in selling, general and administrative
        expenses.
 
 ***Research
        and development***
 
 Research
        and development expenses include salaries, supplies, and overhead such as
        depreciation, utilities and other costs. These costs are expensed as incurred
        in
        accordance with SFAS No. 2, “Accounting for Research and Development Costs.” The
        Company expensed research and development costs of $720,675, $1,016,102 and
        $557,175 for the years ended December 31, 2007, 2006 and 2005, respectively.
        These costs are included in selling, general and administrative expenses
        in the
        accompanying statements.
 
 ***Income
        taxes***
 
 The
        Company has adopted FASB Interpretation No. 48, Accounting for Uncertainty
        in
        Income Taxes (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty
        in income taxes recognized in an enterprise’s financial statements in accordance
        with FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes
        a recognition threshold and measurement attribute for the financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return.
 
 According
        to FIN No. 48, the evaluation of a tax position is a two-step process. The
        first
        step is recognition: the enterprise determines whether it is more likely
        than
        not that a tax position will be sustained upon examination, including resolution
        of any related appeals or litigation process, based on the technical merits
        of
        the position. The second step is measurement: a tax position that meets the
        more-likely than not recognition threshold is measured to determine the amount
        of benefit to recognize in the financial statement. The tax position is measured
        at the largest amount of benefit that is greater than 50 percent likely of
        being
        realized upon ultimate settlement.
 
 The
        Company has not been subjected to income tax examinations by taxing authorities
        for the years ended December 31, 2007, 2006 and 2005. However, the Company
        incurred expense of $339,299 for additional taxes and penalties to the Chinese
        government during the first quarter in 2005 as the result of a VAT examination
        by the local government. During the years ended December 31, 2007 and 2006,
        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 December
        31,
        2007 and 2006, respectively.
  F-14
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 ***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 periods ended December 31, 2007, 2006 and 2005.
 
 ***Other
        comprehensive income***
 
 Other
        comprehensive income represents foreign currency translation adjustments
        for the
        year. The amounts shown in the Consolidated Statements of Income and Other
        Comprehensive Income and Consolidated Statements of Shareholders’ Equity do not
        include other comprehensive income attributed to minority interest.
 
 ***Recently
        issued accounting pronouncements***
 
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, “Fair Value Measurement” (“SFAS 157”), which provides enhanced guidance for
        using fair value to measure assets and liabilities. This standard also responds
        to investors’ requests for expanded information about the extent to which
        companies measure assets and liabilities at fair value, the information used
        to
        measure fair value, and the effect of fair value measurements on earnings.
        The
        standard applies whenever other standards require (or permit) assets or
        liabilities to be measured at fair value. The standard does not expand the
        use
        of fair value in any new circumstances. SFAS 157 is effective for financial
        statements issued for fiscal years beginning after November 12, 2007, and
        interim periods within those fiscal years. Early adoption is permitted. The
        Company is currently evaluating whether the adoption of SFAS 157 will have
        a
        material effect on its consolidated results of operations and financial
        condition.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities - Including an amendment of FASB
        Statement No. 115” (“SFAS 159”). SFAS 159 permits companies to choose to measure
        many financial instruments and certain other items at fair value that are
        not
        currently required to be measured at fair value. The objective of SFAS 159
        is to
        provide opportunities to mitigate volatility in reported earnings caused
        by
        measuring related assets and liabilities differently, without having to apply
        hedge accounting provisions. SFAS 159 also establishes presentation and
        disclosure requirements designed to facilitate comparisons between companies
        that choose different measurement attributes for similar types of assets
        and
        liabilities. SFAS 159 will be effective in the first quarter of fiscal 2009.
        The
        Company is evaluating the impact that this statement will have on its
        consolidated financial statements.
  F-15
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 In
        December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
        Combination” (“SFAS 141R”). SFAS 141R establishes principles and requirements
        for how the acquirer recognizes and measures in its financial statements
        the
        identifiable assets, the liabilities and any non-controlling interest in
        the
        acquiree, and the goodwill acquired in business combination or a gain from
        a
        bargain purchase. It also determines what information to disclose. The objective
        of SFAS 141R is to improve the relevance, representational faithfulness,
        and
        comparability of the information that a reporting entity provides in its
        financial reports about a business combination and its effects. SFAS 141R
        will
        be effective in the first quarter of fiscal 2009. The Company is evaluating
        the
        impact that this statement will have on its consolidated financial
        statements.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
        Consolidated Financial Statements- and amendment of ABB No. 51” (“SFAS 160”).
        SFAS 160 provide a guide on how to report non-controlling interest in
        consolidated financial statement. The objective of SFAS 160 is to improve
        the
        relevance, comparability, and transparency of the financial information that
        a
        reporting entity provides in its consolidated financial statements. SFAS
        160
        will be effective in the first quarter of fiscal 2009. The Company is evaluating
        the impact that this statement will have on its consolidated financial
        statements.
 
 **Note
        3 - Supplemental disclosure of cash flow information**
 
 Income
        taxes paid for the years ended December 31, 2007, 2006 and 2005 amounted
        to
        $2,215,159, $2,731,755 and $2,302,275, respectively.
 
 Interest
        paid amounted to $399,773, $532,887and $515,692 for the years ended December
        31,
        2007, 2006 and 2005, respectively.
 
 On
        December 20, 2007, the Company signed a Sale and Purchase Agreement with
        Tianshi
        Investment. Based on the valuation conducted by Vigers Appraisal &
Consulting Limited, Tianshi Investment agreed to sell 100% of its shares
        in Life
        Resources to the Company for $64,247,182. Pursuant to the Sale and Purchase
        Agreement, the Company advanced a deposit of $64,247,182 to Tianshi Investment
        on December 20, 2007. This acquisition deposit has been settled as
        follows:
 (a)
                $28,592,743
                      was paid by canceling of a loan from Biological to Tianshi
                      Engineering in
                      the principal amount of RMB200,000,000 together with interest
                      accrued
                      thereon;
 (b)
                $16,557,914
                      was paid by canceling other receivables owed by Tianshi Engineering
                      to
                      Biological; and
 (c)
                $19,096,525
                      was paid by cash.
 The
        right
        of offset existed because:
 
 1.
              Tianshi
                  Engineering had a determinable outstanding debt payable to the
                  Company;
 2.
              The
                  Company had a determinable outstanding debt payable to Tianshi
                  Investment;
 3.
              The
                  Company had the right to offset the two
                  amounts;
 4.
              Both
                  the Company, Tianshi Investment and Tianshi Engineering agreed
                  to offset
                  the amounts; and
 5.
              The
                  agreement to offset is enforceable under Chinese contract
                  law.
  F-16
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 On
        December 21, 2007, the Company, Tianshi Investment and Life Resources entered
        into a Loan Agreement, pursuant to which Tianshi Investment loaned $7.5 million
        to Life Resources without interest. The Company agreed to pay back the $7.5
        million to Tianshi Investment within five days of the date of the government
        approval of the transfer of the shares of Life Resources to Tianshi Holdings
        (see Note 10).
 
 On
        June
        29, 2007, Tianshi Engineering paid $1,276,441 to Tianyuan Capital Development
        Corporation Ltd. (“Tianyuan Capital”) on behalf of the Company, representing one
        installment of the loan and the interest on the remaining loan for the six
        months ended June 30, 2007 (see Note 12). In return, a part of loan made
        to
        Tianshi Engineering by the Company on April 24, 2007 relating to other
        receivables-related parties was offset.
 
 The
        right
        of offset existed because:
 
 1.
              Tianshi
                  Engineering had a determinable outstanding debt payable to the
                  Company;
 2.
              The
                  Company had a determinable outstanding debt payable to Tianyuan
                  Capital;
 3.
              The
                  Company had the right to offset the two
                  amounts;
 4.
              Both
                  the Company and Tianshi Engineering agreed to offset the two amounts;
                  and
 5.
              The
                  agreement to offset is enforceable under Chinese contract
                  law.
 
 On
        September 27, 2007, Tianshi Engineering paid $1,000,000 to Tianshi Holdings
        on
        behalf of Biological, representing a dividend payment by Biological. In return,
        $1,000,000 of Biological’s accounts receivable from Tianshi Engineering was
        offset. The right to offset existed because:
 
 1.
              Tianshi
                  Engineering had a determinable outstanding debt payable to the
                  Company;
 2.
              Biological
                  had a determinable outstanding dividend payable to Tianshi
                  Holdings;
 3.
              The
                  Company had the right to offset the two
                  amounts;
 4.
              Both
                  the Company and Tianshi Engineering agreed to offset the two amounts;
                  and
 5.
              The
                  agreement to offset is enforceable under Chinese contract
                  law.
 
 On
        December 31, 2007, Tianshi Engineering paid $1,253,102 to Tianyuan Capital
        on
        behalf of the Company, representing one installment of the loan and the interest
        on the remaining loan for the six months ended December 31, 2007. In return,
        $1,253,102 of the loan made to Tianshi Engineering by the Company on October
        15,
        2007 relating to other receivables-related parties was offset (see Note
        12).
 
 The
        right
        of offset existed because:
 
 1.
              Tianshi
                  Engineering had a determinable outstanding debt payable to the
                  Company;
 2.
              The
                  Company had a determinable outstanding debt payable to Tianyuan
                  Capital;
 3.
              The
                  Company had the right to offset the two
                  amounts;
 4.
              Both
                  the Company and Tianshi Engineering agreed to offset the two amounts;
                  and
 5.
              The
                  agreement to offset is enforceable under Chinese contract
                  law.
  F-17
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 In
        November 2007, the company sold one used car to a supplier in the amount
        of RMB
        420,000 ($55,138) and two used cars to a supplier of Tianshi Engineering
        in the
        amount of RMB 840, 000 ($110,275) through Tianshi Engineering. The proceeds
        of
        the sale to the supplier of the Company were settled by offsetting accounts
        payable to this supplier.
 
 The
        right
        of offset existed because:
 
 1.
              The
                  Company had a determinable outstanding debt payable to the
                  supplier;
 2.
              The
                  Company had a determinable right to receive the proceeds from the
                  sale to
                  the supplier;
 3.
              The
                  Company had the right to offset the two
                  amounts;
 4.
              Both
                  the Company and the supplier agreed to offset the two amounts;
                  and
 5.
              The
                  agreement to offset is enforceable under Chinese contract
                  law.
 
 The
        proceeds from the sale to the supplier of Tianshi Engineering was recorded
        as
        other receivables from Tianshi Engineering, as both parties agreed that the
        Company transferred its right to receive the proceeds from the sale of the
        cars
        to Tianshi Engineering.
 
 **Note
        4 - Inventories**
 
 Inventories
        consist of the following at December 31, 2007 and 2006:
  **December
                    31,**
                  **2007**
                
                **December
                    31,**
                  **2006**Raw
                    materials
                
                $
                1,842,760
                
                $
                2,106,929Packing
                    materials
                
                
                810,319
                
                
                1,113,360Miscellaneous
                    supplies
                
                
                217,370
                
                
                377,819Work
                    in process
                
                
                571,173
                
                
                688,007Processing
                    materials
                
                
                137,188
                
                
                369,618Finished
                    goods
                
                
                2,371,153
                
                
                2,189,375Total
                
                $
                5,949,963
                
                $
                6,845,108
 
 The
        Company has written off obsolete goods that amounted to $84,521, $59,832
        and
        $154,525 for the years ended December 31, 2007, 2006 and 2005,
        respectively.
 
 **Note
        5 - Employee advances**
 
 Employee
        advances represents 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. Employee
        advances amounted to $64,336 and $111,121 at December 31, 2007 and December
        31,
        2006, respectively.
  F-18
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 **Note
        6 - Prepaid expenses**
 
 Prepaid
        expense consists of advances to suppliers and short-term prepaid expenses.
        The
        details of prepaid expenses at December 31, 2007 and 2006 are as
        follows:
 **December
                    31, 2007**
                
                **December
                    31, 2006**Advance
                    to suppliers
                
                $
                622,275
                
                $
                2,124,613Short-term
                    prepaid expenses
                
                
                1,363
                
                
                11,304Total
                
                $
                623,638
                
                $
                2,135,917
  **Note
        7 - Property, plant and equipment, net**
 
 Property,
        plant and equipment consisted of the following at December 31, 2007 and
        2006:
 **December
                    31,**
                  **2007**
                
                **December
                    31,**
                  **2006**Buildings
                    and improvements
                
                $
                6,923,475
                
                $
                14,829,748Office
                    equipment
                
                
                397,224
                
                
                323,753Computer
                    equipment and software
                
                
                2,644,296
                
                
                1,622,731Machinery
                    and equipment
                
                
                11,333,473
                
                
                9,329,628Automobiles
                
                
                5,188,650
                
                
                5,187,572Construction
                    in progress
                
                
                2,287,807
                
                
                7,629,623Total
                
                
                28,774,925
                
                
                38,923,055Less:
                    accumulated depreciation
                
                
                (10,452,306
                )
                
                (8,411,736
                )Property,
                    plant and equipment, net
                
                $
                18,322,619
                
                $
                30,511,319
 
 Depreciation
        expense for the years ended December 31, 2007, 2006 and 2005 amounted to
        $2,891,
        893, $2,509,261 and $1,701,415, respectively.
 
 See
        Note
        11 regarding related party sale of property.
  F-19
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 **Note
        8 - Intangible assets**
 
 Intangible
        assets consisted of the following at December 31, 2007 and 2006:
 **December
                    31, 2007**
                
                **December
                    31, 2006**Land
                    use rights
                
                $
                2,530,644
                
                $
                673,627Other
                    intangible assets
                
                
                328,873
                
                
                267,815Less
                    accumulated amortization
                
                
                (256,433
                )
                
                (431,259
                )Intangible
                    assets, net
                
                $
                2,603,084
                
                $
                510,183
  Amortization
        expense for the year ended December 31, 2007, 2006 and 2005 amounted to
        $252,492, $103,694 and $134,070, respectively. As of December 31, 2007, $52,226
        was amortized for the land use rights of Tiens Yihai. The estimated amortization
        expense for the next five years is as follows:
 **Estimated
                    amortization expense for**
                  **the
                    year ending December 31,**
                
                **Amount**2008
                
                $
                74,
                    1762009
                
                $
                73,
                    8162010
                
                $
                73,
                    4552011
                
                $
                67,
                    3692012
                
                $
                67,
                    369
 
 
 All
        the
        land located in the PRC is owned by the government and cannot be sold to
        any
        individual or company. However, the government grants “land use rights” for a
        specified period of time. The Company’s subsidiary, Tiens Yihai, acquired land
        use rights in Shanghai, PRC for approximately 50 acres for fifty years from
        November 30, 2006 for $2,530,644. The costs are being amortized over fifty
        years
        from December 2006, using the straight-line method.
 
 The
        Company recorded impairment losses in the amount of $82,356 on two production
        technologies for the year ended December 31, 2007. The Company bought Ants
        Wine
        production technology and Aolan Shampoo production technology in October
        2004
        and June 2005 for $51,954 and $68,360, respectively, and began amortizing
        them
        over 10 years. Due to a change of strategy, the Company subsequently determined
        that it did not have a use for these two production technologies and could
        not
        sell them to any third party. As a result, the remaining carrying value of
        these
        two production technologies of $82,356 was written off as selling, general
        and
        administrative expense in 2007.
 
 **Note
        9 - Long-term prepaid expenses**
 
 In
        October 2004, the Company paid a 10% deposit totaling of RMB 29,700,000 (or
        US
        $4,060,584) to Zhu Jia Jiao Industrial Park Economic Development Ltd
        (representative of the local government, “Local Government”) to acquire the land
        use rights for approximately 263 acres of land located in Shanghai. However,
        in
        2005, the Chinese central government issued its “Adjustment of Macro-Economic
        Policy”. This policy implemented a new system of investment and use of
        state-owned assets, including land. Pursuant to this policy, local government
        organizations readjusted and re-allocated projects, including investment,
        construction and reconstruction of state-owned resources. As a result, projects
        and enterprises that had been affected, including Tiens Yihai, were required
        to
        wait for decisions by state and local government before proceeding with
        development.
  F-20
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 On
        November 10, 2006, Tianshi Holdings and the Local Government entered into
        the
        Supplemental Agreement pursuant to which the parties agreed to the acquisition
        of land use rights by Tiens Yihai of a reduced 80 acre parcel of land. At
        that
        time, it was not clear whether the remaining approximately 183 acres would
        be
        available for purchase in the future. Therefore, the Local Government agreed
        to
        refund to Tiens RMB 12,176,000 (or US $1,664,703) of the original RMB 29,700,000
        (or US $4,060,584) deposit at the time of receiving a construction license
        for
        the development. In order to proceed with the purchase of the property by
        Tiens
        Yihai, Tianshi Holdings was also required to provide a loan of RMB 50,000,000
        (or US $6,836,000) to the Local Government for relocation costs for people
        living on the property. The loan was to be funded in two
        installments:
 
 ·
              The
                  first installment of RMB 25,000,000 (or US $3,418,000) was paid
                  on
                  November 27, 2006.
 ·
              The
                  second installment of RMB 25,000,000 (or US $3,418,000) was to
                  be paid
                  after Tiens Yihai obtains a construction engineering license to
                  develop
                  the property. The parties have agreed to allow Tiens to reduce
                  this second
                  installment by the amount of the RMB 12,176,000 (or US $1,664,703)
                  refund
                  due to it.
 
 In
        return
        for the loan, Tiens Yihai was also to receive a tax credit equal to the amount
        of the loan, plus interest. The loan accrues interest at a fixed rate of 6.12%,
        which was the interest rate stipulated by the People’s Bank of China for a loan
        of the same level on November 27, 2006.
 
 For
        the
        year ended December 31, 2007, the Company accrued $209,182 of interest
        receivable which was added to the loan and included in long-term prepaid
        expense. In addition, Tianshi Group, a related party, agreed to provide a
        guarantee on behalf of the Local Government for an additional loan from a
        commercial bank of RMB 50,000,000 (or US $6,836,000). As of December 31 2007,
        the Company was considering alternative uses for the land, including a possible
        sale. Based on initial negotiations between the Company and local government
        agency, it is not probable that the guarantee will be utilized.
 
 As
        of
        December 31, 2007, Tiens Yihai had obtained the land use rights for
        approximately 50 acres. Therefore, the Company reclassified $2,395,881 to
        intangible assets from long-term prepaid expenses. Due to the decrease in
        the
        size of the property for which Tiens Yihai has received land use rights and
        continued uncertainty relating to the Tiens Yihai project, the Company has
        decided to suspend the development of the property as an industrial park
        and is
        currently considering alternative commercial uses. The Company is currently
        reviewing alternative commercial uses for the Tiens Yihai site, as well as
        the
        possibility of selling the land use rights to a third party. If Tiens Yihai
        does
        not proceed with construction on the Tiens Yihai site or is not able to sell
        the
        land use rights to a third party, it is not clear whether the Local Government
        will return the $1.7 million it previously agreed to refund or the initial
        loan
        of $3.5 million made in November 2006. Based on a current appraisal, the
        fair
        value of the land use rights exceed all of acquisition costs incurred plus
        the
        $1.7 million agreed upon refund and $3.5 million loan. No valuation allowance
        has been made on the related land use rights and Long-term prepaid
        expenses.
  F-21
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 A
        total
        of 15%, or approximately $30,000,000, of the registered capital was required
        to
        be contributed by the joint venture partners, within three months of when
        the
        business license was issued. Tianshi Holdings made its required capital
        contribution in the amount of $29,861,853. The remaining registered capital
        was
        required to be contributed by each joint venture partner by May 27, 2007.
        Because of the significant reduction by the Local Government in the number
        of
        acres approved for the Tiens Yihai project, the Company did not make the
        additional capital contribution of $170 million to Tiens Yihai by May 27,
        2007.
        After negotiating with the local government in Shanghai, the deadline of
        the
        payment was extended for one year.
 
 On
        April
        18, 2007, the Company entered into the Association of Chinese Industry
        Development and prepaid RMB 1 million (or US $136,720) for five years membership
        fee from year 2007 to year 2011. At December 31, 2007, RMB 800,000 (or US
        $109,376) of unamortized prepaid membership fee was included in the long-term
        prepaid expenses also.
 
 **Note
        10 - Related party purchase**
 
 On
        December 20, 2007, the Company entered into a Sale and Purchase Agreement
        with
        Tianshi Investment. Pursuant to the Sale and Purchase Agreement, the Company
        agreed to buy all of the registered share capital of Life Resources for $64.2
        million. The closing of the transaction was subject to government approval
        of
        transfer of all of the share capital of Life Resources to Tianshi Holdings,
        which as of December 31, 2007, had not been received.
 
 On
        December 21, 2007, Tianshi Holdings, Tianshi Investment and Life Resources
        entered into a Loan Agreement pursuant to which Tianshi Investment loaned
        $7.5
        million to Life Resources without interest. The Company agreed to pay back
        the
        $7.5 million to Tianshi Investment within five days of the date that the
        Chinese
        government approves the transfer of all of the shares of Life Resources to
        the
        Company. This $7.5 million is to be used to increase the registered capital
        of
        Life Resources. However, if the Chinese government were not to approve the
        transfer, then the Company would no obligation to repay the loan. The increase
        of the registered capital of Life Resources also had to be approved by the
        Chinese government. As of December 31, 2007, such approval had not been received
        (see Note 19).
 
 It
        is
        probable that the approval of the acquisition of Life Resources and the increase
        in the registered capital will be received. Therefore the Company characterized
        the $7.5 million as an investment deposit in Life Resources. The total amount
        of
        $71.7 million associated with the acquisition paid by the Company to date
        has
        been treated as an acquisition deposit.
  F-22
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 Life
        Resources was incorporated on April 29, 2005 as a FIE in Wuqing, Tianjin,
        PRC,
        with a registered share capital of $30,000,000. Life Resources is constructing
        research and development, manufacturing and logistic facilities, as well
        as
        administrative offices on its land. Construction on the project began in
        July
        2006.
 
 Pursuant
        to the Sale and Purchase Agreement, the Company advanced a deposit of
        $64,247,182 to Tianshi Investment on December 20, 2007. This acquisition
        deposit
        has been settled as follows:
 (a)
                $28,592,743
                      was paid by canceling a loan in the principal amount of RMB200,000,000
                      to
                      Tianshi Engineering owned by Biological together with interest
                      accrued;
 (b)
                $16,557,914
                      was paid by canceling of other receivable owned by Tianshi
                      Engineering to
                      Biological; and
 (c)
                $19,096,525
                      was paid by cash.
  The
          right
          of offset existed because:
 
 1.
              Tianshi
                  Engineering had a determinable outstanding debt payable to the
                  Company;
 2.
              The
                  Company had a determinable outstanding debt payable to Tianshi
                  Investment;
 3.
              The
                  Company had the right to offset the two
                  amounts;
 4.
              Both
                  the Company, Tianshi Investment and Tianshi Engineering agreed
                  to offset
                  the amounts; and
 5.
              The
                  agreement to offset is enforceable under Chinese contract
                  law.
 
 The
        consolidated financial statements of the Company for the year ended December
        31,
        2007 do not include the financial statements of Life Resources, and the
        consideration paid by the Company for the acquisition and the $7.5 million
        loan
        to date have been characterized as an acquisition deposit.
 
 **Note
        11 - Related party sale of property**
 
 On
        December 14, 2007, Biological entered into a Real Property Transfer Agreement
        (the “Transfer Agreement”) with Tianshi Group. Under the Transfer Agreement,
        Biological transferred to Tianshi Group title buildings consisting of
        approximately 34,377 square meters total of office, workshop, conference
        and
        exhibition space, located at No. 6 Yuanquan Road, Wuqing Development Area,
        Tianjin New-Tech Industry Park, China, and land use rights on the underlying
        land, which are 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 property. Biological also assigned certain
        contracts with third parties related to the servicing and upkeep of the
        buildings being transferred (collectively, the “Third Party
        Contracts”).
 
 In
        consideration for the transfer of the buildings and land-use rights, Tianshi
        Group paid Biological RMB 113,011,852 (or US $15,316,496), plus RMB 23,516,000
        (or US $3,187,123) to cover pre-payments previously made by Biological under
        the
        Third Party Contracts, and entered a lease agreement with Biological, as
        further
        described below. The carrying value of property transferred is RMB 106,579,374
        (or US $14,444,703). The Company paid a business tax related to the sale
        of
        property of RMB 5,650,593 (or US $ 765,825) and income tax of RMB 144,525
        (or US
        $19,587) on the transaction that resulted a gain of RMB 637,360 (or US $86,381)
        from the disposal. 80% of the gain, or $69,105, was attributed to the Company.
        As both the Company and Tianshi Group were under common control by Jinyuan
        Li,
        the gain from the disposal was classified as additional paid in
        capital.
  F-23
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 On
        December 14, 2007, Biological and Tianshi Group also entered a Lease Agreement
        pursuant to which Biological will have the right to use and occupy the office
        and workshop spaces being transferred under the 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 Biological acquires use of alternate facilities or the land
        use
        rights on the underlying property expire.
 
 **Note
        12 - Other related party transactions and balances**
 
 During
        the years 2007, 2006 and 2005, 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.
 
 Our
        related party transactions are required to be reviewed and approved or ratified
        by 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 your understanding of the
        transactions and outstanding balances between those related parties and the
        Company during 2007 and 2006.
 **December
                    31, 2007**
                
                **December
                    31,**
                  **2006**Revenue-related
                    parties
                
                $
                54,900,060
                
                $
                66,790,466Accounts
                    receivable, trade - related
                    parties, net of allowance for doubtful accounts of $71,700, $86,776
                    and
                    $206,916 as of December 31, 2007, 2006 and 2005,
                    respectively
                
                $
                14,268,229
                
                $
                12,926,670Other
                    receivables - related parties
                
                $
                13,070,907
                
                $
                8,397,227Loans
                    receivable - related party
                
                $
                -
                
                $
                25,640,000Advances
                    from customers - related parties
                
                $
                1,700,838
                
                $
                1,570,120Other
                    payables - related parties
                
                $
                7,938,205
                
                $
                522,105Current
                    portion of long-term debt - related party
                
                $
                2,130,000
                
                $
                2,130,000Long
                    term debt - related party
                
                $
                4,267,742
                
                $
                6,397,742
  F-24
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  ***Revenue
        -related parties***
 
 The
        details of revenue-related parties are as follows:
 **2007**
                
                **2006**
                
                **2005**Tianshi
                    Engineering
                
                $
                22,476,135
                
                $
                27,074,979
                
                $
                38,181,090Overseas
                    Related Companies
                
                
                32,423,925
                
                
                39,715,487
                
                
                30,507,579Total
                
                $
                54,900,060
                
                $
                66,790,466
                
                $
                68,688,669
  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 in 2007, 2006 and
        2005 were to related parties.
 
 The
        Company sells products to Tianshi Engineering, a related party through common
        ownership. Tianshi Engineering, in turn, markets and sells the products to
        customers through its branches and affiliated companies and at chain stores
        which are owned by individual distributors. Tianshi Engineering is solely
        responsible for all marketing and payments of sales commissions to independent
        distributors.
 
 The
        Company has a sales contract with Tianshi Engineering which requires Tianshi
        Engineering to purchase all of the Company’s products to be sold in China. The
        Company sells its 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 the Company acquired Tianshi Holdings.
        The
        price of semi-finished goods sold to Tianshi Engineering was originally set
        at
        the beginning of 2006 to provide the Company with a 75% gross profit margin.
        However, based on fluctuations in the cost of raw materials and quantities
        produced, the gross profit margin percentage varies. The goal of this new
        pricing policy was to try to maintain the Company’s gross margins on
        semi-finished goods at a similar level to historical gross margins for finished
        goods. All of Tianshi Engineering’s Chinese affiliated companies are owned in
        whole or in part by Jinyuan Li’s immediate family members.
 
 Internationally,
        the Company sells its products directly to our overseas affiliates. These
        overseas related companies market and sell the Company’s products to overseas
        independent distributors or end users of the products. Due to the common
        ownership, there are no formal sales or administrative agreements among
        Biological and those overseas related companies. The business operations
        among
        these related entities are regulated through internal ordinances.
  F-25
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 ***Accounts
        receivable, trade -related parties***
 
 The
        details of accounts receivable, trade-related parties are as
        follows:
  **December
                    31, 2007**
                ****
                **December
                    31, 2006**Tianshi
                    Engineering
                
                $
                2,062,333
                
                $
                7,827,372Overseas
                    Related Companies
                
                
                12,277,596
                
                
                5,186,074Allowance
                    for Doubtful Accounts
                
                
                (71,700
                )
                
                (86,776
                )Total
                
                $
                14,268,229
                
                $
                12,926,670
 
 ***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:
 **December
                    31, 2007**
                
                **December
                    31, 2006**Tianshi
                    Engineering
                
                $
                9,460,811
                
                $
                5,592,772Shengshi
                    Real Estate Development
                
                
                2,238
                
                
                1,039Tianjin
                    Tianshi Technical School
                
                
                -
                
                
                46,589JinMao
                    (Group) Holding
                
                
                -
                
                
                104,466Shanghai
                    Tianshi Jinquan Investment Co.
                
                
                874
                
                
                2,129Tianshi
                    Group
                
                
                2,334,493
                
                
                2,650,232Tianshi
                    Pharmaceuticals
                
                
                5,065
                
                
                -Life
                    Resources
                
                
                1,259,528
                
                
                -Beijin
                    Xingda Travel Co., Ltd
                
                
                5,959
                
                
                -Tianjin
                    Xingda Travel Co., Ltd
                
                
                1,939
                
                
                -Total
                
                $
                13,070,907
                
                $
                8,397,227
 
 Historically,
        Tianshi Engineering remitted payment to the Company upon sales to third party
        customers. However, in order to support Tianshi Engineering’s marketing efforts
        in anticipation of receiving a direct selling license in China, the Company
        agreed to allow Tianshi Engineering to defer payment to the Company. The
        credit
        terms provide an interest-free credit term of three months. Balances not
        remitted to the Company within 90 days are converted to other receivables
        -
        related parties. Beginning January 1, 2007, the other receivables - related
        parties became interest bearing. The stated interest rate is the interest
        rate
        for the same level of loan stipulated by the People’s Bank of
        China.
 
 On
        January 1, 2007, the Company entered into a loan agreement with Tianshi
        Engineering. Pursuant to that agreement, beginning on January 1, 2007,
        $4,507,908 of other receivables-related parties, which originated from Tianshi
        Engineering as accounts receivable, became interest bearing. The loan was
        due on
        March 31, 2007 and the stated interest rate was 6.3%. Both of the principal
        of
        $4,507,908 and interest on the loan of $41,876 were paid off on February
        28,
        2007.
  F-26
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 On
        April
        24, 2007, the Company entered into a loan agreement with Tianshi Engineering.
        Pursuant to that agreement, beginning on April 1, 2007, $5,109,083 of other
        receivables - related parties, which originated from Tianshi Engineering
        as
        accounts receivable, became interest bearing. The loan was due on April 30,
        2007
        and the stated interest rate was 5.67%, the interest rate for a loan of the
        same
        principal amount stipulated by the People’s Bank of China as of the date the
        loan was made. Both of the principal of $5,109,083 and interest on the loan
        of
        $65,882 were paid off on June 30, 2007.
 
 On
        July
        23, 2007, the Company entered into a loan agreement with Tianshi Engineering.
        Pursuant to that agreement, beginning on July 1, 2007, $8,835,779 of other
        receivables - related parties, which originated from Tianshi Engineering
        as
        accounts receivable, became interest bearing. The loan was due on September
        30,
        2007 and the stated interest rate was 5.85%, the interest rate for a loan
        of the
        same principal amount stipulated by the People’s Bank of China as of the date
        the loan was made. On September 30, 2007, $1 million of the loan was paid
        off.
 
 On
        October 15, 2007, the Company entered into a loan agreement with Tianshi
        Engineering. Pursuant to that agreement, beginning on October 1, 2007,
        $6,458,907 of other receivables - related parties, which originated from
        Tianshi
        Engineering as accounts receivable, became interest bearing. The loan was
        due on
        December 31, 2007 and the stated interest rate was 6.48%, the interest rate
        for
        a loan of the same principal amount stipulated by the People’s Bank of China as
        of the date the loan was made. On December 20, 2007, the remaining loan of
        $14,294,686 and the accrued interest of $306,360 were paid off by canceling
        part
        of the consideration for the acquisition of Life Resources (see Note
        10).
 
 During
        the years ended December 31, 2007 and 2006, we and Tianshi Group used common
        meters at our headquarters for electricity and water, and also used the same
        employee insurance account. When making payments to these outside parties,
        we
        usually pay the fees first and then are reimbursed by Tianshi Group. These
        pro-rated amounts relating to Tianshi Group are categorized as other receivables
        - related parties. In addition, during 2006 we were owed other
        receivables-related parties in the amount of RMB 7,560,000 ($1,033,603) from
        Tianjin Juchao Commercial and Trading Co., Ltd (“Juchao”), a related party owned
        by Jinyuan Li. On March 31, 2006, Juchao declared termination of its operations,
        and all of its rights and liabilities were transferred to Tianshi Group.
        This
        amount was also included in other receivables - related parties.
 
 In
        June
        2007, Biological signed four agreements with equipment suppliers in Europe
        and
        Australia, pursuant to which Biological agreed to purchase four production
        lines
        for use at its headquarters in Tianjin, China. At that time Biological paid
        $996,711, one-third of the total consideration, to those equipment suppliers.
        But, due to a government investment limitation policy, Biological could not
        clear the equipment with Chinese customs without having to pay a large import
        duty. However, no such import duty would need to be paid if Life Resources
        imported the production lines. Therefore, on August 16, 2007, Biological,
        Life
        Resources and the equipment suppliers entered into a new agreement. In this
        new
        agreement, Life Resources agreed: (i) to replace Biological as the purchaser
        of
        the equipment, (ii) to pay $996,711 to Biological, and (iii) to pay the
        remaining balance of the consideration to the equipment suppliers. As of
        December 31, 2007, Life Resources had paid the consideration due to the
        equipment suppliers and received the equipment, and the amount of $996,711
        due
        to Biological had not been paid.
  F-27
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 As
        Life
        Resources is still in the construction process and all of the construction
        is
        outsourced to third party contractors, it currently has no employees. All
        of the
        administrative work relating to the construction has been performed by employees
        of the construction department of Biological. In December 2007, Biological
        charged Life Resources $262,817 for this administrative work. At December
        31,
        2007 and 2006, amounts due from Life Resources were $1,259,528 and $0
        respectively.
 
 ***Loans
        Receivable-related party***
 
 On
        October 1, 2005, Biological loaned Tianshi Engineering RMB 200,000,000
        ($25,640,000). The loan was non-interest bearing, matured on December 31,
        2005
        and was repaid upon maturity. The purpose of the loan was to enable Tianshi
        Engineering to strengthen its sales network in China. On January 1, 2006,
        this
        amount was loaned to Tianshi Engineering again, with a maturity date of December
        31, 2006. In order to continue support of Tianshi Engineering’s efforts in
        China, on December 22, 2006, the loan was extended to June 30, 2007 and was
        converted to an interest-bearing loan. The interest rate for the loan is
        based
        on the interest rate stipulated by the People’s Bank of China for a loan of the
        same amount plus 22 basis points or 5.8% at January 1, 2007. On June 28,
        2007,
        the loan was further extended to September 30, 2007. On September 30, 2007,
        this
        loan was extended again to December 31, 2007. On December 20, 2007, this
        loan,
        together with accrued interest of $1,461,248 was paid back by canceling part
        of
        the consideration for the acquisition of Life Resources (see Note
        10).
 
 ***Advances
        from Customers-related parties***
 
 These
        advances represented prepayments made to the Company to insure that overseas
        related companies could obtain enough of the Company’s products to meet their
        market demands.
  F-28
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 ***Other
        Payables-related parties***
 
 The
        details of other payable-related parties are as follows:
 **December
                    31, 2007**
                
                **December
                    31, 2006**Tianshi
                    Investment
                
                $
                7,490,136
                
                $
                -Tianshi
                    Engineering
                
                
                244,980
                
                
                -Tianshi
                    Germany Co., Ltd
                
                
                109,233
                
                
                98,581Beijin
                    Xingda Travel Co., Ltd
                
                
                -
                
                
                255Shenzhen
                    Logistics Co., Ltd
                
                
                -
                
                
                295,333Tianshi
                      Administrative Committee of Industrial Park
                
                
                13
                
                
                13Tianyuan
                      Capital Development Co. Ltd.
                
                
                84,359
                
                
                84,359Tianshi
                    Pharmaceuticals
                
                
                9,308
                
                
                8,728Tianshi
                    Shanghai Co., Ltd
                
                
                176
                
                
                165Director
                    -Jinyuan Li
                
                
                -
                
                
                34,671Total
                
                $
                7,938,205
                
                $
                522,105
  These
        amounts arose primarily from previous cash advances from related parties
        such as
        management fees due to related parties and various non-operational transactions
        incurred with related parties.
 
 On
        December 21, 2007 the Company, Tianshi Investment and Life Resources entered
        into a Loan Agreement, pursuant to which Tianshi Investment loaned $7.5 million
        to Life Resources without interest. The Company agreed to pay back the $7.5
        million to Tianshi Investment within 5 days of the date of the government
        approval of the transfer of the shares of Life Resources to Tianshi Holdings.
        As
        of December 31, 2007 such approval had not been received (See Note
        19).
 
 ***Long
        term debt - related party***
 
 On
        September 10, 2004, Tianshi Holdings entered into 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 will be paid in ten consecutive semi-annual installments
        of $1,065,000 on the last day of June and December, commencing June 2006
        and
        ending June 31, 2011. The first interest payment was to be paid on December
        31,
        2004 at an annual interest rate of 5%. Interest of $399,543, $532,887 and
        $697,863 was paid for the years ended December 31, 2007, 2006 and 2005,
        respectively, and four installment payments had been made by the end of December
        2007.
  F-29
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 The
        loan
        balance at December 31, 2007 and 2006 consisted of the following:
 **December
                    31, 2007**
                
                **December
                    31, 2006**Note
                    payable to Tianyuan Capital Development Corp. Ltd., related
                    party
                
                $
                6,397,742
                
                $
                8,527,742Less
                    current portion of long term debt
                
                
                (2,130,000
                )
                
                (2,130,000
                )Total
                
                $
                4,267,742
                
                $
                6,397,742


Total
        principal payments for the next four years on all long-term debt are as
        follows:
 **Year
                    Ending****December
                    31,**
                
                **Amount**2008
                
                $
                2,130,0002009
                
                $
                2,130,0002010
                
                $
                2,130,0002011
                
                $
                7,742
 
 ***Other
        transactions with Tianshi Engineering***
 
 On
        December 31, 2005, Biological entered into four lease agreements with Tianshi
        Engineering which enabled Tianshi Engineering to share the use of certain
        of
        Biological’s product production workshops and equipment to manufacture products
        which Tianshi Engineering owns, or jointly owns with Biological for one year
        beginning January 1, 2006. These four lease agreements were renewed in December
        2006 for the 2007 fiscal year and October 2007 for the 2008 fiscal year.
        Rent
        revenue from these leases amounted to $379,083, $295,588 and $0 for the years
        ended 2007, 2006 and 2005, respectively.
 
 ***Other
        transactions with Tianshi Group***
 
 On
        June
        30, 2002, the Company entered into an office and facilities lease agreement
        with
        Tianshi Group, a company owned 90% by Jinyuan Li and 10% by Baolan Li. Under
        the
        terms of the five year agreement, the Company’s annual rent is equal to 1% of
        gross revenues. In addition, the Company is obligated to pay insurance,
        maintenance and other expenses related to the premises. Rent expense totaled
        $522,318, $662,082 and $667,990 for the year ended December 31, 2007, 2006
        and
        2005, respectively. This agreement expired on December 31, 2007. The company
        entered into a new one-year lease agreement with Tianshi Group, effective
        January 1, 2008 covering the same facilities and having identical rent terms.
 
 On
        November 10, 2006, Tianshi Holdings signed an agreement with the local
        government relating to Tiens Yihai (see Note 9). Tianshi Group also entered
        into
        the agreement and agreed to provide a guarantee on behalf of the local
        government for a loan from a commercial bank of RMB 50,000,000.
  F-30
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 **Note
        13 - Minority interest and distribution**
 
 The
        roll
        forward of Minority Interest balance in the balance sheet is shown
        below:
 **Biological**
                  **USD**
                
                **Biological**
                  **Minority**
                  **Owners**
                  **(20****%)**
                
                **Tiens
                    Yihai**
                  **USD**
                
                **Yihai**
                  **Minority**
                  **Owners**
                  **(0.60****%)**
                
                **Total**
                  **Minority**
                  **Interest**December
                    31, 2004
                
                $
                36,659,269
                
                $
                7,331,854
                
                $
                30,033,868
                
                $
                180,203
                
                $
                7,512,057Net
                    income (loss)
                
                
                36,633,220
                
                
                7,326,644
                
                
                -835,705
                
                
                -5,014
                
                
                7,321,630Other
                    comprehensive Income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Dividend
                    distribution
                
                
                -14,523,235
                
                
                -2,904,647
                
                
                -
                
                
                -
                
                
                -2,904,647December
                    31, 2005
                
                $
                58,769,254
                
                $
                11,753,851
                
                $
                29,198,163
                
                $
                175,189
                
                $
                11,929,040Net
                    income (loss)
                
                
                34,828,089
                
                
                6,965,617
                
                
                (381,238
                )
                
                (2,287
                )
                
                6,963,330Other
                    comprehensive Income
                
                
                2,636,342
                
                
                527,269
                
                
                1,738,121
                
                
                10,429
                
                
                537,698Dividend
                    distribution
                
                
                (37,733,723
                )
                
                (7,546,745
                )
                
                -
                
                
                -
                
                
                (7,546,745
                )December
                    31, 2006
                
                $
                58,499,962
                
                $
                11,699,992
                
                $
                30,555,046
                
                $
                183,331
                
                $
                11,883,323Net
                    income (loss)
                
                
                24,840,180
                
                
                4,968,036
                
                
                -273,217
                
                
                -1,639
                
                
                4,966,397Other
                    comprehensive Income
                
                
                2,947,667
                
                
                589,533
                
                
                2,019,327
                
                
                12,116
                
                
                601,649Additional
                    paid-in-capital
                
                
                86,381
                
                
                17,276
                
                
                -
                
                
                -
                
                
                17,276Dividend
                    distribution
                
                
                (56,622,912
                )
                
                (11,324,582
                )
                
                -
                
                
                -
                
                
                (11,324,582
                )December
                    31, 2007
                
                $
                29,751,278
                
                $
                5,950,255
                
                $
                32,301,156
                
                $
                193,808
                
                $
                6,144,063
  Dividends
        declared by Biological are split pro rata between the shareholders according
        to
        their ownership interest. The payment of the dividends to the shareholders
        may
        occur at different times, resulting in distributions which do not appear
        to be
        reflective of the minority ownership percentages. The table below shows the
        outstanding dividends payable of Biological, as well as the allocation of
        dividends between Tianshi Holdings and the minority shareholder.
 
 As
        Biological declares dividends in RMB, and the RMB has appreciated against
        the
        dollar since 2005, dividends outstanding generated comprehensive income to
        Tianshi Holdings and the minority shareholder. Comprehensive income to Tianshi
        Holdings for the years ended December 31, 2007, 2006 and 2005 amounted to
        $3,900,013, $1,463,775 and $728,420 respectively. Because most of the dividends
        payable to the minority shareholder have been distributed, after they were
        declared, Comprehensive income to minority shareholders for the year ended
        December 31, 2007, 2006 and 2005 amounted to $15,838, $0 and $0,
        respectively.
  F-31
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  **Date**
                
                **Tianshi**
                  **Holdings**
                
                **Minority**
                  **Shareholder**
                
                **Totals**Dividends
                    outstanding, December 31, 2004 Balance
                
                $
                9,743,635
                
                $
                -
                
                $
                9,743,635Dividends
                    declared
                
                
                11,618,588
                
                
                2,904,647
                
                
                14,523,235Dividends
                    paid
                
                
                (6,204,800
                )
                
                (2,904,647
                )
                
                (9,109,447
                )Accumulated
                    Other Comprehensive Income (loss)
                
                
                728,420
                
                
                -
                
                
                728,420Dividends
                    outstanding, December 31, 2005 Balance
                
                
                15,885,843
                
                
                -
                
                
                15,885,843Dividends
                    declared
                
                
                30,186,978
                
                
                7,546,745
                
                
                37,733,723Dividends
                    paid
                
                
                (1,557,742
                )
                
                (7,308,434
                )
                
                (8,866,176
                )Accumulated
                    Other Comprehensive Income (loss)
                
                
                1,463,775
                
                
                -
                
                
                1,463,775Dividends
                    outstanding, December 31, 2006 Balance
                
                
                45,978,854
                
                
                238,311
                
                
                46,217,165Dividends
                    declared
                
                
                45,298,330
                
                
                11,324,582
                
                
                56,622,912Dividends
                    paid
                
                
                (86,747,565
                )
                
                (6,676,102
                )
                
                (93,423,667
                )Accumulated
                    Other Comprehensive Income (loss)
                
                
                3,900,013
                
                
                15,838
                
                
                3,915,851Dividends
                    outstanding, December 31, 2007 Balance
                
                $
                8,429,632
                
                $
                4,902,629
                
                $
                13,332,261
  F-32
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  **Note
        14 - Accumulated other comprehensive income (loss)**
 **Biological**
                
                **Tiens
                    Yi Hai**
                
                **Tianshi
                    Holdings**
                
                **Total**Balance
                    as of December 31, 2004
                
                $
                -
                
                $
                -
                
                $
                (12,167
                )
                $
                (12,167
                )Increase
                    during the year
                
                
                1,088,433
                
                
                732,331
                
                
                425,616
                
                
                2,246,380Balance
                    as of December 31, 2005
                
                
                1,088,433
                
                
                732,331
                
                
                413,449
                
                
                2,234,213Increase
                    during the year
                
                
                1,020,640
                
                
                995,361
                
                
                1,464,774
                
                
                3,480,775Balance
                    as of December 31, 2006
                
                
                2,109,073
                
                
                1,727,692
                
                
                1,878,223
                
                
                5,714,988Increase
                    during the year
                
                
                2,358,134
                
                
                2,007,211
                
                
                3,900,013
                
                
                8,265,358Balance
                    as of December 31, 2007
                
                $
                4,467,207
                
                $
                3,734,903
                
                $
                5,778,236
                
                $
                13,980,346
  Accumulated
        other comprehensive Income was recorded in Biological and Tiens Yihai was
        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.
 
 **Note
        15 - Statutory reserves**
 
 The
        laws
        and regulations of the People’s Republic of China require that before a
        Sino-foreign cooperative joint venture enterprise distributes profits to
        its
        partners, it must first satisfy all tax liabilities, provide for losses in
        previous years, and make allocations, in proportions determined at the
        discretion of the board of directors, after the statutory reserve. The statutory
        reserves include the surplus reserve fund, the common welfare fund, and the
        enterprise fund.
 
 ***Statutory
        reserve fund***
 
 The
        Company is required to transfer 10% of its net income, as determined in
        accordance with the PRC accounting rules and regulations, to a statutory
        surplus
        reserve fund until such reserve balance reaches 50% of the Company’s registered
        capital. As of December 31, 2005, the Company’s statutory reserve fund had
        reached 50% of the Company’s registered capital, therefore, no statutory reserve
        is required thereafter.
 
 The
        transfer to this reserve must be made before distribution of any dividend
        to
        shareholders. For the years ended December 31, 2007, 2006 and 2005, the Company
        did not transfer any net income to this reserve and the amount of this reserve
        remained at $ 2,455,269.
  F-33
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 The
        surplus reserve fund is non-distributable other than during liquidation and
        can
        be used to fund previous years’ losses, if any, and may be utilized for business
        expansion or converted into share capital by issuing new shares to existing
        shareholders in proportion to their shareholding or by increasing the par
        value
        of the shares currently held by them, provided that the remaining reserve
        balance after such issue is not less than 25% of the registered
        capital.
 
 ***Common
        welfare fund***
 
 The
        Company is required to transfer 5% to 10% of its net income, as determined
        in
        accordance with the PRC accounting rules and regulations, to the statutory
        common welfare fund. This fund can only be utilized on capital items for
        the
        collective benefit of the Company’s employees, such as construction of
        dormitories, cafeteria facilities, and other staff welfare facilities. This
        fund
        is non-distributable other than upon liquidation. The transfer to this fund
        must
        be made before distribution of any dividend to shareholders. For the years
        ended
        December 31, 2007, 2006 and 2005, the directors authorized, subject to
        shareholders’ approval, that no funds be transferred to this reserve. The amount
        of the statutory common welfare fund reserve at December 31, 2007 was
        $4,709,499.
 
 ***Enterprise
        fund***
 
 The
        enterprise fund may be used to acquire fixed assets or to increase the working
        capital to expend on production and operation of the business. No minimum
        contribution is required. For the years ended December 31, 2007, 2006 and
        2005,
        the board of directors determined, subject to shareholders’ approval, that no
        funds be transferred to this reserve. The amount of the enterprise fund reserve
        at December 31, 2007 was $2,256,015.
 
 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 distributions of these
        amounts
        can be returned to the shareholders.
 
 **Note
        16 - Additional product sales information**
 
 The
        Company has a single operating segment. All of the Company’s revenues were
        generated from related parties for the years ended December 31, 2007, 2006
        and
        2005. 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:
 Revenue
                
                **2007**
                
                **2006**
                
                **2005**China
                
                $
                22,476,135
                
                $
                27,074,979
                
                $
                38,181,090Indonesia
                
                
                9,084,438
                
                
                13,426,537
                
                
                4,738,415Russia
                
                
                4,611,258
                
                
                7,007,799
                
                
                8,173,242Ukraine
                
                
                3,782,073
                
                
                4,022,351
                
                
                2,981,110Other
                    international countries
                
                
                14,946,156
                
                
                15,258,800
                
                
                14,614,812Total
                
                $
                54,900,060
                
                $
                66,790,466
                
                $
                68,688,669
  F-34
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
  Revenue
        by Product Group:
 **2007**
                
                **2006**
                
                **2005**Wellness
                    products
                
                $
                49,609,410
                
                $
                58,845,597
                
                $
                58,884,556Dietary
                    supplement products
                
                
                4,928,181
                
                
                5,255,277
                
                
                4,360,795Personal
                    care products
                
                
                362,469
                
                
                2,689,592
                
                
                5,443,318Total
                
                $
                54,900,060
                
                $
                66,790,466
                
                $
                68,688,669
 
 **Note
        17 - 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 and Tiens Yihai, are Sino-Foreign Joint
        Ventures incorporated in the PRC. Pursuant to the income tax laws of the
        PRC
        concerning Foreign Investment Enterprises and Foreign Enterprises and various
        local income tax laws (the “Income Tax Law”), Sino-foreign joint venture
        enterprises generally are subject to income tax at an effective rate of 33%
        (30%
        state income taxes plus 3% local income taxes) on income as reported in their
        statutory financial statements unless the enterprise is located in
        specially-designated regions or cities for which more favorable effective
        rates
        apply.
 
 Biological
        is located in Tianjin Wuqing Development Area, a national new technology
        development zone, and is subject to the special reduced income tax rate of
        15%.
        Pursuant to the approval of the relevant PRC tax authorities, Biological
        is
        fully exempt from PRC income taxes for two years starting from the year profits
        are first made, followed by a 7.5% reduced tax rate for the next three
        years.
 
 Prior
        to
        the year ended December 31, 2002, Biological suffered operating losses.
        Biological started generating taxable profits in the year ended December
        31,
        2003. Effective January 1, 2005, the two-year 100% exemption for income taxes
        expired for Biological and it became subject to income tax at a reduced rate
        of
        7.5%.
  F-35
 TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 Tiens
        Yihai is located in a Special Industry Zone and is subject to a special reduced
        income tax rate of 15%. Pursuant to the approval of the relevant local Chinese
        tax authorities, Tiens Yihai is fully exempt from PRC income taxes for two
        years
        starting from the first year profits are made, followed by a 7.5% reduced
        tax
        rate for the next three years. In addition, in order to encourage Tiens Yihai
        to
        do business in the Special Industry Zone, the local Chinese tax authorities
        agreed to refund 50% of the total income tax after the five-year tax break.
        As
        of December 31, 2007, Tiens Yihai was in the developmental stage of its
        organization and did not have any operating income.
 
 Beginning
        January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
        existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
        (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently
        applicable to both DES and FIEs. The two years tax exemption, three years
        50%
        tax reduction tax holiday for production-oriented FIEs will be eliminated.
        According to the new EIT, high-tech companies could be subject to a special
        reduced tax rate of 15%. The qualification of a high-tech company is to be
        reviewed annually. Biological currently qualifies as a high-tech company.
        However, as there is no detailed regulation regarding the implementation
        of new
        EIT, in the first quarter of 2008, the Company was required by local tax
        authority to prepay income tax at a tax rate of 25%. The Company is currently
        evaluating the effect of the new EIT law will have on its financial
        position.
 
 Provisions
        for income taxes were all current income tax expenses and for the years ended
        December, 2007, 2006 and 2005 were $2,026,875, $2,823,899 and $2,984,302,
        respectively.
 
 The
        following table reconciles the U.S. statutory rates to the Company’s effective
        tax rate:
 **2007**
                
                **2006**
                
                **2005**U.S.
                    Statutory rate
                
                
                34.0%
                
                
                34.0%
                
                
                34.0%Foreign
                    income not recognized in USA
                
                
                (34.0)
                
                
                (34.0)
                
                
                (34.0)China
                    income taxes
                
                
                33.0
                
                
                33.0
                
                
                33.0Effect
                    of reduced tax rate
                
                
                (25.5)
                
                
                (25.5)
                
                
                (25.5)Total
                    provision for income taxes
                
                
                7.5%
                
                
                7.5%
                
                
                7.5%
  The
        estimated tax savings due to the reduced tax rate for the years ended December
        31, 2007, 2006 and 2005 amounted to $6,851,099,$9,601,257 and $10,146,627
        respectively. The net effect on earnings per share if the income tax had
        been
        applied would decrease earnings per share for the years ended December 31,
        2007,
        2006 and 2005 by $0.08, $0.11, and $0.11, respectively.
 
 **Note
        18 - Retirement plan**
 
 Regulations
        in the PRC require the Company to contribute to a defined contribution
        retirement plan for all employees. All Biological employees are entitled
        to a
        retirement pension amount calculated based upon their salary at their date
        of
        retirement and their length of service in accordance with a government managed
        pension plan. The PRC government is responsible for the pension liability
        to the
        retired staff.
  F-36
  TIENS
          BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 Biological
        is required to make contributions to the state retirement plan at 20% of
        the
        employees’ monthly salary. Employees are required to contribute 8% of their
        salary to the plan. Total pension expense incurred by the Company amounted
        to
        $604,067, $475,331 and $434,363 for the years ended December 31, 2007, 2006
        and
        2005, 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 $60,478, $45,871 and $41,860 for the years
        ended
        December 31, 2007, 2006 and 2005, respectively. All contributions are paid
        to a
        PRC insurance company, which in turn, is responsible for the unemployment
        liability. On January 1, 2002, the Company introduced a basic medical insurance
        plan for its employees. Pursuant to that medical insurance plan, the Company
        is
        required to pay an amount equal to 10% of its employees’ salary to a PRC
        insurance company, which amounted to $329,203, $259,315, and $181,597 for
        the
        years ended December 31, 2007, 2006 and 2005, respectively.
 
 **Note
        19 - Subsequent events**
 
 On
        January 14, 2008, Tianshi Holdings entered into a Loan Agreement with Tianshi
        Investment pursuant to which it loaned Tianshi Investment $4,100,000. Tianshi
        Investment was required to use the money to increase the registered capital
        of
        Life Resources. There was no interest on the loan, and the maturity date
        was
        March 31, 2008. If Tianshi Holdings’ acquisition of Life Resources closed prior
        to March 31, 2008, the loan would be cancelled.
 
 On
        March
        13, 2008, the Chinese government approved the transfer of the shares of Life
        Resources (see Note 10) from Tianshi Investment to Tianshi Holdings, and
        the
        increase of registered capital of Life Resources from $30,000,000 to
        $50,000,000. Tianshi Holdings closed its acquisition of Life Resources from
        Tianshi Investment on the same date. The $7.5 million was paid back by canceling
        $7.5 million of accounts receivable owed to the Company by Tianshi Engineering.
        The right to offset existed because:
 
 1.
              Tianshi
                  Engineering had a determinable outstanding debt payable to the
                  Company;
 2.
              The
                  Company had a determinable outstanding payable to Tianshi
                  Investment;
 3.
              The
                  Company had the right to offset the two
                  amounts;
 4.
              Both
                  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
        March
        13, 2008, the $4,100,000 loan to Tianshi Investment was cancelled as a result
        of
        the closing of Tianshi Holdings’ acquisition of Life Resources. Tianshi
        Investment used the proceeds of the loan to increase the registered capital
        of
        Life Resources, and the cancelled loan became accounted for as an additional
        investment in registered capital of Life Resources after the approval of
        acquisition.




F-37