UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
one)




x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
fiscal year ended December 31, 2009


or


 ̈ 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) 86-22-8213-7914




Securities
registered pursuant to Section 12(b) of the Exchange Act:





Title of Each Class
                Name of Each Exchange on which
      RegisteredCommon
      Stock, par value $0.001
                NYSE
      Amex




Securities
registered pursuant to Section 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  ̈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  ̈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 xNo
 ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes oNo  ̈




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


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




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




Based
upon the closing sale price of $2.21 per share of Common Stock on NYSE Amex on
June 30, 2009, the aggregate market value of the 3,503,586 shares of voting
stock held by non-affiliates of the registrant was approximately
$7,742,925.




There
were 71,333,586 shares of the registrant’s common stock outstanding on April 1,
2010.




DOCUMENTS
INCORPORATED BY REFERENCE – None.







TABLE  OF
CONTENTS





PART
      I
                                      2ITEM
      1. BUSINESS
                                      2ITEM
      1A. RISK FACTORS
                                      8ITEM
      1B. UNRESOLVED STAFF COMMENTS
                                      8ITEM
      2. PROPERTIES
                                      8ITEM
      3. LEGAL PROCEEDINGS
                                      9ITEM
      4. (REMOVED AND RESERVED)
                                      9PART
      II
                                      9ITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASERS OF EQUITY SECURITIES
                                      9ITEM
      6. SELECTED FINANCIAL DATA
                                      11ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
                                      11ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                                      16ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                                      16ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
                                      16ITEM
      9A (T). CONTROLS AND PROCEDURES
                                      16ITEM
      9B OTHER INFORMATION
                                      17PART
      III
                                      17ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                      17ITEM
      11. EXECUTIVE COMPENSATION
                                      20ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS
                                      23ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE
                                      24ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES
                                      30PART
      IV
                                      31ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                                      31SIGNATURES
                                      35


1


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 our
future financial performance. We have 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 may cause our 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 we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Our
expectations are as of the date this Form 10-K is filed, and we do 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.




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” and  “renminbi”  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”), and our wholly-owned subsidiary, Tianjin
Tiens Life Resources Co., Ltd. (“Life Resources”). 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 54 countries that in turn sell them to
independent direct sales distributors.




Corporate
History and Organization




Tiens USA
is a Delaware corporation.  We own 100% of Tianshi International
Holdings Group Ltd., a British Virgin Islands company (“Tianshi Holdings”) which
owns all of the registered share capital of Tianjin Tiens Life Resources Co.,
Ltd., a Chinese Foreign Investment Enterprise (“Life Resources”) and 80% of
Biological’s outstanding shares.  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.




Tianjin
Tianshi Biological Engineering Co., Ltd. (“Tianshi Engineering”), a Chinese
company, owns the remaining 20% of Biological. Tianshi Engineering is 100% owned
by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”), a Chinese company. Tianshi
Group is 90% owned by Jinyuan Li, our Chairman, Chief Executive Officer and
President and owner of 95.1% of our outstanding stock, and 10% owned by Baolan
Li, Jinyuan Li’s daughter. Tianshi Engineering acquired its 20% interest in
Biological from Tianjin Tianshi Pharmaceuticals Co., Ltd. (“Tianshi
Pharmaceuticals”) on February 28, 2008.   Tianshi Pharmaceuticals
is wholly owned by Tianshi Group.




Tianshi
Holdings acquired all of the registered share capital of Life Resources from
Tianshi International Investment Group Co., Ltd., a British Virgin Islands
company (“Tianshi Investment”), on March 13, 2008 for $64.2
million.  Jinyuan Li owns 100% of Tianshi Investment. Life Resources
is currently constructing research and development, manufacturing and logistic
facilities, as well as administrative offices in Tianjin, China totaling
approximately 420,000 square meters.  We intend to move our
headquarters to these new facilities once they are completed.


2




On
November 15, 2009, Tianshi Holdings and Tianshi Investment entered a Contract
for the Transfer of Equity Interest (the “Transfer Contract”), pursuant to which
Tianshi Holdings agreed to sell all of the registered share capital of Tiens
Yihai Co. Ltd. (“Tiens Yihai”) it owned to Tianshi Investment for $37.0
million.  Tiens Yihai holds land use rights for 50 acres of land
located in Shanghai, China. Tiens Yihai was originally established to build a
new research and development facility, but the Company suspended the proposed
development in March 2007. Tianshi Holdings held 96% of the equity interest in
Tiens Yihai.  Tianjin Tianshi Pharmaceuticals Co., Ltd. owned the
remaining 4% of Tiens Yihai’s share capital. The sale closed on November 15,
2009. Pursuant to the Transfer Contract, $3,700,000 of the purchase price was
paid during the first quarter of 2010, and the remaining $33,300,000 is payable
by November 14, 2010.




The
following chart shows the ownership interests in our operating
subsidiaries.








3


Products
and Manufacturing




We have
developed and produce 37 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 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 of
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 2008 and 2009, 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.




Our
products are manufactured at our facilities 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 *Bone
      Treasure Tablets (b)
                    
                    Tianshi
      Barley Green Tablets (b)Chewable
      Calcium Tablets (b)
                    
                    Tianshi
      Breast Beauty CapsulesChewable
      Calcium Tablets with multi-flavor (b)
                    
                    Tianshi
      Calcium-Treasure Tablets (b)Grape
      Extract Capsules (a) (b)
                    
                    Tianshi
      Double-cellulose Tablets (a) (b)Tianshi
      Beauty Face Capsules (b) (c)
                    
                    Tianshi
      Eel Oil  CapsulesTianshi
      Cell Rejuvenation Capsules (a) (b)
                    
                    Tianshi
      Hemp Seed Oil SoftgelsTianshi
      Chitosan Capsules (a) (b)
                    
                    Tianshi
      Lycopene Tablets (a) (b)Tianshi
      Cordyceps Capsules (a) (b)
                    
                    Tianshi
      Multi-Vit-Mine Coffee (b)Tianshi
      Lipid Metabolic Management Tea (a) (b) (c)
                    
                    Tianshi
      Natto Capsules (b)Tianshi
      Metabolic Balance Capsules (a) (b) (c)
                    
                    Tianshi
      Perilla Oil Softgels (b)Tianshi
      Nutrient Super Calcium Powder (a) (b)
                    
                    Tianshi
      Pine Pollen Powder CapsulesTianshi
      PressureCare Tea (b)
                    
                    Tianshi
      Propeptide Polypeptide Albumen Powder (b)Tianshi
      Slimming Tea (a) (b) (c)
                    
                    Tianshi
      Rich Selenium Green TeaTianshi
      Spirulina Capsules (a) (b)
                    
                    Tianshi
      Sea Buckthorn Oil Softgels (a) (b)Tianshi
      Super Calcium Powder with Metabolic Factors (a) (b)
                    
                    Tianshi
      Super Calcium Milk Powder (b)Tianshi
      Super Calcium Powder for Children (a) (b)
                    
                    Tianshi
      Tibet-Garlic Capsules (b)Tianshi
      Super Calcium Capsules with Lecithin (a) (b)Tianshi
      Sweet Dreams Granules (a) (b)Tianshi
      Vitality  Softgels (a) (b)Tianshi
      Throat Care Granules (b)Tianshi
      Zinc Capsules (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.


4




For the
years ended December 31, 2009 and 2008, almost 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 two fiscal years.  In 2009 and 2008,
our Tianshi Cordyceps Capsules accounted for 10.6% and 15.4% of our
revenue, respectively, and our Tianshi Nutrient Super Calcium Powder accounted
for 19.0% and 16.8% 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 the 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.




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. The following table
lists our principal suppliers:





SUPPLIER
                  
                  PRODUCTTianjin
      Xinhengyang Import and Export Trade Co.,Ltd
                  
                  Whole
      and de-fatted milk powderTianjin
      Xingsheng Import and Export Trade Co.,Ltd
                  
                  Cordyceps
      mycelium powderShanghai
      Guangdeli Capsule Co.,Ltd
                  
                  CapsulesQinghai
      Kangpu Biological Techonology Development Co.,Ltd
                  
                  Seabuckthorn
      seed oilTianjin
      Tangchao Food Industry Co.,Ltd
                  
                  Extraction
      of grape seedTianjin
      Xindayutong Trade Co., Ltd
                  
                  GelatinShanxi
      Guangsheng Capsule Co., Ltd
                  
                  CapsulesTianjin
      Runya Techonology Development Co., Ltd
                  
                  Spirulina
      powder, wheat germ oilSuzhou
      Capsule Co.,Ltd
                  
                  CapsulesShandong
      Aokang Biological Techonology Co.,Ltd
                  
                  Chitosan




Research
and Development




We
incurred research and development expenses of $1.3million and $1.5 million
in 2009 and 2008, respectively. As of December 31, 2009, we employed 79 staff
members in research and development, which accounts for a reduction of 40
employees in our research and development team during 2009.




Marketing
and Distribution




In China,
we sell our products to Tianshi Engineering, an affiliated Chinese company,
through our subsidiaries Biological and Life Resources.  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 2009 Tianshi Engineering closed six of its less
profitable branches in China.  As of December 31, 2009, Tianshi
Engineering had 92 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. We used
this pricing formula in 2009, and currently continue to use the same pricing
formula.




At the
beginning of 2006, Biological 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, Biological 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 our gross margins on semi-finished goods at a similar
level to historical gross margins for finished goods.


5




As of
June 2008, Life Resources replaced Biological in the production of semi-finished
products and began to produce and sell semi-finished products to Tianshi
Engineering on the same pricing terms as Biological’s previous sales. Biological
currently only sells finished goods to Tianshi Engineering. Starting in October
2009, Life Resources transferred part of its production and sale of
semi-finished products to Biological.




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 54 countries who in turn re-package the products to meet
the needs of the local markets and sell them to independent direct sales
distributors. During 2009, we increased the number of countries where we sell
directly to overseas affiliates from 46 to 54.  Our CEO, Jinyuan Li,
owns or controls these overseas related companies. Due to the common ownership,
there are no formal sales or administrative agreements among us and those
overseas related parties. The business operations among these related entities
have historically been, and continue to be, regulated through internal policies.
In 2009 our highest sales outside of China were to the following eleven
countries, in descending order:  Indonesia, Russia, Peru, South
Africa, Vietnam, Portugal, Ukraine, Romania,  Bengal, Nigeria, and
Kenya.




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 for similar
products in Chinese market, 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%.




Competition




Internationally,
we engage in the direct selling industry and compete with other direct selling
organizations. Some of them 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 certain parts of China pursuant to
China’s regulations governing direct selling. In other cites and/or provinces of
China, the selling models of Avon and Alticor (Amway) are similar to the model
utilized by our company, therefore Avon and Alticor (Amway) are our main
competitors in our Chinese operations. 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.




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 classified as nutrition supplement
products, which include 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:




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




·
            The
      appointed research institute conducts clinical 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


6




·
            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 approval process generally takes nine to twelve
months.  Dietary supplement products are not subject to SFDA
regulation.




Sales
and Marketing Regulations




In most
countries, sales of our products are usually considered 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 aim to expand our market share through the branches, chain stores, and
affiliated companies of Tianshi Engineering, our affiliate who sells our
products 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.




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 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.




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. During 2009, we did not incur any costs to comply with
environmental laws.




Employees




As of
December 31, 2009, we had 1,455 full-time employees. We have no part-time
employees. We believe that our relations with our employees are
satisfactory.




Reports
to Security Holders




We
deliver annual reports on Form 10-K, which include our financial statements, to
our shareholders.  We file 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 100 F Street, NE,
Washington, D.C. 20549, on official business days during the hours of 10:00 am
to 3:00 pm. 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 us and other companies that file
materials with the SEC electronically. You may also obtain copies of our reports
filed with the SEC, free of charge, on our website at http://www.tiens-bio.com.


7




ITEM
1A. RISK FACTORS.




Not
applicable.




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.




Since
2003, Biological has leased office space and manufacturing facilities from
Tianshi Group.  The lease expired at the end of 2007 and the annual
rent was equal to 1% of our total gross revenues.  The rent was
negotiated by the parties before we acquired Tianshi Holdings, and we believe
that it is a reasonable rent for the facilities. In addition, we are obligated
to pay insurance, maintenance and other expenses related to the premises. This
lease has been renewed annually since 2008 on the same economic terms. The
current lease covers the following real properties:




·
            one
      office buildings with an area of 1,350 square meters;
  and




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




In 2009
we paid $458,382 to Tianshi Group under the lease.




On
December 14, 2007, Biological entered 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 our 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 (the “2007 Lease
Agreement”) pursuant to which Biological has the right to use and occupy the
office and workshop spaces 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.




On
December 25, 2008, Biological and Tianshi Group entered a Property Transfer
Agreement (the “Property Transfer Agreement”). Under the Property Transfer
Agreement, Biological transferred to Tianshi Group four buildings consisting of
9,974.31 square meters including three workshops and a canteen located at our
headquarters in Tianjin, China. Pursuant to the Property Transfer Agreement,
Tianshi Group will pay Biological RMB 32,800,000 ($4,797,328) over several
installments. In 2009, Tianshi Group has paid an aggregate of RMB 15,000,000 (
or US$2,193,900) to Biological under the Property Transfer Agreement. The
remaining RMB 17,800,000 (or US$2,603,428) will be paid in 2010.




On
January 1, 2009, the 2007 Lease Agreement was terminated and each of Biological
and Life Resources entered a Lease Agreement with Tianshi Group pursuant to
which Biological and Life Resources will have the right to use and occupy the
workshop spaces being transferred under the 2007 Transfer Agreement and the 2008
Transfer Agreement. The leases are rent-free, except that, Biological and Life
Resources are required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The leases continue until the earlier of the date
Biological and Life Resources acquire use of alternate facilities or the land
use rights on the underlying property expire. For the year ended December 31,
2009,  Biological and Life Resources recorded $303,056 of the rent
expense, which is not paid to Tianshi Group, but recorded as paid in capital
based upon market price.


8




Life
Resources Property




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 seven kilometers from our current headquarters in Tianjin,
China.




As of
December 31, 2009, the majority of the main structures of the Life Resources
facility construction project had been completed. Interior decoration of the
warehouses, work plants, power center, boiler room and dormitories are near
completion. Interior decoration of the office buildings, product exhibition
center, quality control center, and washhouse is underway. The interior
decoration of the product exhibition center and wash house is expected be
completed in the first half of 2010, and the office building and quality control
center are expected to be completed in the second half of 2010.  As of
the end of 2009, the cost of the completed work of these facilities was
$139,090,047 (based on an exchange rate of $1 = RMB 6.8371 as of December 31,
2009), which includes amounts paid for the underlying land use
right.  We expect that all construction work and equipment
installation will be completed in 2010 and that the Life Resources facility is
estimated to begin operation by June 2010.  We have provided for an
amount of up to $36,461,613 (based on an exchange rate of $1 = RMB 6.8291 as of
January 1, 2010) in our 2010 budget for capital expenditures on the Life
Resources facility. 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. (REMOVED AND RESERVED)




PART
II




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




Market
Prices of Common Stock




Our
common stock is listed on NYSE Amex under the symbol “TBV”. The following table
sets forth the range of high and low sales prices for our common stock reported
by NYSE Amex in each fiscal quarter from January 1, 2008 to December 31,
2009.





High
                  
                  
                  Low2008Quarter
      Ended March 31
                  
                  $
                  2.42
                  
                  
                  $
                  2.00Quarter
      Ended June 30
                  
                  $
                  2.15
                  
                  
                  $
                  1.42Quarter
      ended September 30
                  
                  $
                  1.60
                  
                  
                  $
                  0.92Quarter
      ended December 31
                  
                  $
                  2.20
                  
                  
                  $
                  0.762009Quarter
      Ended March 31
                  
                  $
                  4.45
                  
                  
                  $
                  1.11Quarter
      Ended June 30
                  
                  $
                  3.02
                  
                  
                  $
                  1.67Quarter
      ended September 30
                  
                  $
                  5.57
                  
                  
                  $
                  2.26Quarter
      ended December 31
                  
                  $
                  5.35
                  
                  
                  $
                  2.45


9




Stockholders




As
of April 1, 2010, there were a total of 71,333,586 shares of our common
stock outstanding, held by approximately 935 stockholders of
record.




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.  If we
ever determine to pay a dividend, we may experience difficulties in completing
the administrative procedures necessary to obtain and remit foreign currency
from the PRC for the payment of such dividends from the profits of Biological
and Life Resources.  Please see additional discussion under Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition, Liquidity and Capital Resources.”




Securities
Authorized for Issuance Under Equity Compensation Plans




None.


10




ITEM
6. SELECTED FINANCIAL DATA.




Not
applicable.




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.




Overview




Tiens USA
researches, develops, manufactures, and markets 37 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 and through our wholly-owned subsidiary, Life
Resources.  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.




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 re-package the products to meet the needs of the local
markets and sell to independent distributors who use the products themselves
and/or resell them to other distributors or consumers.


11




Results
of Operations




Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008





Year
      ended December 31,2009
                                        
                                        
                                        2008
                                        
                                        
                                        ChangeREVENUE
                                        
                                        $
                                        61,976,069
                                        
                                        
                                        $
                                        77,247,898
                                        
                                        
                                        -19.8%COST
      OF SALES
                                        
                                        
                                        20,167,492
                                        
                                        
                                        
                                        24,870,178
                                        
                                        
                                        -18.9%GROSS
      PROFIT
                                        
                                        
                                        41,808,577
                                        
                                        
                                        
                                        52,377,720
                                        
                                        
                                        -20.2%SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                                        
                                        
                                        16,009,382
                                        
                                        
                                        
                                        18,574,719
                                        
                                        
                                        -13.8%INCOME
      FROM OPERATIONS
                                        
                                        
                                        25,799,195
                                        
                                        
                                        
                                        33,803,001
                                        
                                        
                                        -23.7%(Interest
      expense)
                                        
                                        
                                        (186,543
                                        )
                                        
                                        
                                        (266,273
                                        )
                                        
                                        -29.9%Interest
      income
                                        
                                        
                                        301,709
                                        
                                        
                                        
                                        881,070
                                        
                                        
                                        -65.8%Other
      (expense) income
                                        
                                        
                                        (176,757
                                        )
                                        
                                        
                                        (2,099,913
                                        )
                                        
                                        -91.6%OTHER
      (EXPENSE) INCOME, NET
                                        
                                        
                                        (61,591
                                        )
                                        
                                        
                                        (1,485,116
                                        )
                                        
                                        -95.9%INCOME
      BEFORE PROVISION FOR INCOME TAXES
                                        
                                        
                                        25,737,604
                                        
                                        
                                        
                                        32,317,885
                                        
                                        
                                        -20.4%PROVISION
      FOR INCOME TAXES
                                        
                                        
                                        930,703
                                        
                                        
                                        
                                        2,345,474
                                        
                                        
                                        -60.3%NET
      INCOME
                                        
                                        
                                        24,806,901
                                        
                                        
                                        
                                        29,972,411
                                        
                                        
                                        -17.2%LESS:
      Net income attributable to the noncontrolling interest
                                        
                                        
                                        (965,557
                                        )
                                        
                                        
                                        (2,315,215
                                        )
                                        
                                        -58.3%NET
      INCOME ATTRIBUTABLE TO TIENS BIOTECH GROUP
                                        
                                        $
                                        23,841,344
                                        
                                        
                                        $
                                        27,657,196
                                        
                                        
                                        -13.8%WEIGHTED
      AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                                        
                                        
                                        71,333,586
                                        
                                        
                                        
                                        71,333,586EARNINGS
      PER SHARE, BASIC AND DILUTED
                                        
                                        $
                                        0.33
                                        
                                        
                                        $
                                        0.39




Revenue.In 2009 revenue was
$62.0 million, compared to $77.2 million in 2008, a decreaseof 19.8%.  Revenue
for 2009 consisted of $60.0 million in revenue from related parties and $1.9
million in revenue from third parties, while revenue for 2008 was entirely from
related parties.The breakdown of revenue between Chinese and
international sales is as follows:




Chinese
and International Revenue




Revenue
                  
                  2009
                  
                  
                  2008
                  
                  
                  %
      ChangeChina
                  
                  $
                  27,241,333
                  
                  
                  $
                  33,711,474
                  
                  
                  -19.2%International
                  
                  $
                  34,734,736
                  
                  
                  $
                  43,536,424
                  
                  
                  -20.2%




For 2009,
revenue in China was $27.2 million, a decrease of 19.2% compared to $33.7
million for 2008. During the third quarter of 2008, Tianshi Engineering
announced plans to increase the prices of its products beginning in October
2008.  We believe this announcement prompted customers to stock up on
certain products during 2008. Consumer demand for our products decreased in the
first and third quarters of 2009, offset by some increases in sales that we
experienced during the second and fourth quarters of 2009 as a result of
marketing efforts.




Management
believes the decrease in international revenue was primarily due to declining
customer demand for our products in 2009 as a result of the global economic
crisis. During 2008, China’s Administration of Quality Supervision, Inspection
and Quarantine (“AQSIQ”) carried out a national campaign against unsafe food and
substandard products, which brought on a general slow-down and backlog of export
clearances for Chinese food products. Upon the lifting of the regulation,
overseas affiliated companies began to purchase more products during the first
two quarters of 2009. However, management believes that the impact of the global
economic crisis was reflected in the third and forth quarters of 2009. The
decreased international revenue reflects a sharp decline in sales to
Asia-Pacific and Europe-Asia during 2009.


12




Tianshi
Engineering’s application 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.




Cost of sales. Cost of sales
were $20.2 million in 2009 compared to $24.9 million in 2008, a decrease of
18.9%. Cost of
sales for 2009 consisted of $18.8 million in cost of sales to related parties
and $1.4 million in cost of sales to third parties, while cost of sales for 2008
was entirely to related parties.This decrease was primarily due to the
corresponding decrease in sales. Cost of sales decreased at a lower rate than
revenue, primarily due to fixed costs, which do not increase or decrease in line
with sales.




Gross profit. Gross profit
decreased by 20.2% to $41.8 million in 2009, compared to $52.4million in 2008.
The gross profit margin for 2009 was 67.5% compared to 67.8% in 2008.




Selling, general and administrative
expenses. Selling, general and administrative expenses decreasedby 13.8% to $16.0
million in 2009, compared to $18.6 million in 2008. The decrease was primarily
due to decreases in allowance for bad debt ($0.6 million), salaries expenses
($0.5 million), advertising expenses ($0.4 million), and Research &
Development Expenses ($0.3 million). Selling, general and administrative
expenses as a percentage of sales increased primarily due to fixed costs, which
do not increase or decrease in line with sales.




Other (expense) income, net.
Other income, net was $0.1 million of expense in 2009, compared to expense of
$1.5 million in 2008. The difference was primarily due to the $1.2 million
donation we made towards the Sichuan earthquake relief efforts and the
$0.14 million donation we made for road building for a village of
Cangzhou City, in the Hebei Province of China, each of which was
made during 2008.




Net income. For the above
stated reasons, net income in 2009 was $23.8 million compared to $27.7 million
in 2008, a decrease of 13.8%.




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 $43.9 million in 2009, compared to
$18.8million in 2008. The increaseprimarily reflects the
fact that in 2009 Tianshi Engineering and overseas affiliated companies paid us
for products timely, while in 2008 Tianshi Engineering offset part of the
amounts owed to us in purchase liabilities and other liabilities we owed Tianshi
Investment.




As of
December 31, 2009, we had positive working capital of $35.2
million.  Cash was $1.8 million as of December 31, 2009, compared to
$44.9 million as of December 31, 2008.





Net cash
used in investing activities was $83.0 million in 2009 compared to $37.3 million
in 2008.  In 2009, Life Resources paid $11.8 million in connection
with purchasing large machinery and equipment.




Accounts
receivable-related parties decreased to $15.4 million as of December 31, 2009
from $23.9 million as of December 31, 2008, mainly due to the decrease in sales
in the last two quarters of 2009 compared to those of 2008. Other
receivables-related parties increased to $44.6 million as of December 31, 2009
from $15.7 million as of December 31, 2008. On November 15, 2009, Tianshi
Holdings and Tianshi Investment entered the Transfer Contract, pursuant to which
Tianshi Holdings agreed to sell all of the registered share capital of Tiens
Yihai it owned to Tianshi Investment for $37.0 million.  Tiens Yihai
holds land use rights for 50 acres of land located in Shanghai, China. Tiens
Yihai was originally established to build a new research and development
facility, but the Company suspended the proposed development in March 2007. The
sale closed on November 15, 2009. Pursuant to the Transfer Contract, $3.7
million of the purchase price was paid during the first quarter of 2010, and the
remaining $33.3 million is payable by November 14, 2010.


13




Going
forward, our primary requirements for cash consist of:




·
            completion
      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.




As of
December 31, 2009, the majority of the main structures of the Life Resources
facility construction project had been completed. Interior decoration of the
warehouses, work plants, power center, boiler room and dormitories are near
completion. Interior decoration of the office buildings, product exhibition
center, quality control center, wash house is underway.  The interior
decoration of the product exhibition center and wash house is expected be
completed in the first half of 2010, and the office building and quality control
center are expected to be completed in the second half of 2010.  As of
the end of 2009, the cost of the completed work of these facilities was $139.1
million (based on an exchange rate of $1 = RMB 6.8371 as of December 31, 2009),
which includes amounts paid for the underlying land use right. We expect that
all construction work and equipment installation will be completed in 2010 and
that the Life Resources facility is estimated to begin operation by June 2010.
We have provided for an amount of up to $36.5 million (based on an exchange rate
of $1 = RMB 6.8291 as of January 1, 2010) in our 2010 budget for capital
expenditures on the Life Resources facility. We intend to move our headquarters
to these new facilities upon its completion.




The
Wholly Foreign Owned Enterprise Law (1986), as amended, and The Wholly Foreign
Owned Enterprise Law Implementing Rules (1990), as amended, contain the
principal regulations governing dividend distributions by wholly foreign owned
enterprises. Under these regulations, wholly foreign owned enterprises, such as
Life Resources, may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations.
Additionally, Life Resources are required to set aside a certain amount of any
accumulated profits each year (a minimum of 10%, and up to an aggregate amount
equal to half of its registered capital), to fund certain reserve funds. These
reserves are not distributable as cash dividends, except in the event of
liquidation, and cannot be used for working capital purposes. The PRC government
also imposes controls on the conversion of RMB into foreign currencies and the
remittance of currencies out of the PRC.  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. If we ever determine to pay a
dividend, we may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency for the payment of
such dividends from the profits of Biological and Life Resources.




We
anticipate that our current operating activities will enable us to meet our
anticipated cash requirements for 2010.




Off-Balance
Sheet Arrangements




We have
no off-balance sheet arrangements.




Critical
Accounting Estimates




Management’s
discussion and analysis of its financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
(“GAAP”). 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.


14




Revenue
Recognition




During
2009, we sold both semi-finished products and finished products to Tianshi
Engineering domestically. Revenue from semi-finished products was recognized at
delivery point. Revenue from finished products was recognized only when the
related party Chinese distributors recognized sales of our products to
unaffiliated third parties. Revenues in both cases are net of
taxes.




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




We are
generally not contractually obligated to accept returns. However, on a case by
case negotiated basis, we permit customers to return products. 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, 2009, Tianshi Engineering, an affiliated company, owned all of
the related party distributors that sell our products in China.




Allowance
for Doubtful Accounts




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




Inventories




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




Recent
Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued a
pronouncement establishing principles and requirements for how the acquirer
recognizes and measures in its financial statements the identifiable assets, the
liabilities and any non-controlling interest in the acquiree, and the goodwill
acquired in a business combination or a gain from a bargain purchase. It also
determines what information to disclose. The objective of the pronouncement 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. This pronouncement became effective
in the first quarter of 2009. The Company adopted it beginning January 1, 2009
and had no effect on the Company’s consolidated financial
statements..





In
December 2007, the FASB issued a pronouncement providing guidance on how to
report a non-controlling interest in consolidated financial statements. The
objective of the pronouncement is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements. This pronouncement became effective
in the first quarter of 2009, and should be applied retrospectively for all
periods presented. As a result of the adoption of the pronouncement from January
1, 2009, the Company reclassified minority interest of $9.8 million and
$9.0 million to noncontrolling interest as a component of equity on the
Company’s Consolidated Balance Sheet for the years ended December 31, 2009 and
2008, respectively.





In March
2008, the FASB issued a pronouncement requiring enhanced disclosure about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. The objective of the pronouncement is to provide
adequate information about how derivative and hedging activities affect an
entity’s financial position, financial performance, and cash flows. This
pronouncement became effective in the first quarter of 2009, and its
adoption from January 1, 2009 had no effect on the Company’s consolidated
financial statements.


15





In April
2008, the FASB issued a pronouncement amending the factors to be considered
in determining the useful life of intangible assets accounted for pursuant to
previous topic guidance. Its intent is to improve the consistency between
the useful life of an intangible asset and the period of expected cash flows
used to measure its fair value. This pronouncement is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years, and its adoption had no effect on the
Company’s consolidated financial statements.





In May
2008, the FASB issued a pronouncement requiring that an insurance enterprise
recognize a claim liability prior to an event of default (insured event) when
there is evidence that credit deteriorations have occurred in an insured
financial obligation. This pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and its
adoption had no effect on the Company’s consolidated financial
statements.





In
October 2008, the FASB issued a pronouncement amending previous guidance to
clarify the application of fair value in inactive markets and allows for the use
of management’s interior assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist. The objective of the pronouncement has not changed and continues to be
the determination of the price that would be received in an orderly transaction
that is not a forced liquidation or distressed sale at the measurement date. The
adoption of the pronouncement did not have an effect on the Company’s
consolidated financial statements.





In June
2009, the FASB issued a pronouncement to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement, if any, in transferred
financial assets. This pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2009 and interim periods
within those fiscal years. The Company is evaluating the impact that this
Statement will have on the Company’s consolidated financial
statements.





In June
2009, the FASB issued a pronouncement amending previous topic guidance, and
changes how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. The determination whether a company is required to consolidate an
entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly
impact the entity’s economic performance. This pronouncement is effective for
financial statements issued for fiscal years beginning after December 15, 2009
and interim periods within those fiscal years. The Company is evaluating
the impact that this pronouncement will have on the Company’s consolidated
financial statements.




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




Not
applicable.




ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.




The
financial statements required by this item can be found following the signature
page of this Annual Report.




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




Not
applicable.




ITEM
9A(T). CONTROLS AND PROCEDURES.




Disclosure
Controls and Procedures




Our
management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness, as of the end of the
period covered by this report, of our disclosure controls and procedures, as
such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation,
our principal executive officer and principal financial officer concluded that,
as of such date, the Company’s disclosure controls and procedures were
effective.


16




Disclosure
controls and procedures are designed to ensure that information required to be
disclosed by us in our Exchange Act reports is recorded, processed, summarized,
and reported, within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.




Management’s
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f).Our management conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and concluded that as of the end of the
period covered by this report, our internal controls over financial reporting
were effective.




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 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




ITEM
9B OTHER INFORMATION.




Not
applicable.





PART
III




ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE.




Set forth
below are the names of our directors and executive officers as of March 29,
2010. Jinyuan Li has served on the Board since September 2003. Manbo He was
appointed to the Board in June 2009. All other directors have served on the
Board since January 2004.





NAME
              
              AGE
              
              POSITIONJinyuan
      Li
              
              52
              
              Chairman,  Chief
      Executive Officer, President and DirectorManbo
      He
              
              40
              
              Chief
      Financial Officer and DirectorYupeng
      Yan
              
              47
              
              Executive
      Vice President and DirectorSocorro
      Quintero
              
              58
              
              DirectorHoward
      Balloch
              
              59
              
              DirectorGilbert
      Raker
              
              66
              
              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.


17




Jinyuan
Li




Jinyuan
Li has served as the Chairman of the Board and a Director since September 2003.
Jinyuan Li is also the President and founder of Tianshi Group and has held the
position of President 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 Standing Committee Member
of  Tianjin Political Consultative Conference; Vice-chairman of China
Enterprise Confederation & China Enterprise; Executive of All-China
Federation of Industry & Commerce; Vice Chairman of China Association for
the Promotion of Industrial Development; and Vice President of Chinese
Healthcare Association, etc. 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.




Manbo
He




Mr. He
has served as our Chief Financial Officer since June 2009. Prior to that, 
Mr. He served as Advisor to Holley Group Co. Ltd. from October 2008 to April
2009 and as Chief Operating Officer of Holley Group Co. Ltd. from April 2006 to
October 2008.  During that time he was also appointed as an Executive
Director of the Board of Directors at Holley Technology Co., Ltd.  Mr. He
served as Vice President of Calston Investment Co., Ltd. from February 2003 to
April 2006.  Mr. He is a Canadian certified general accountant and has
received his Bachelor of Business Administration from Beijing Institute of
Business in China and a Master of Business Administration from Thunderbird
School of Global Management in United States.




Yupeng
Yan




Mr. Yan
has served as our Executive Vice-President since September 2003. Mr. Yan has
also served as Vice-President of Tianshi Group since March 1997, acting as
general manager of its Global Information Technology Center from July 2007 to
January 2009 and as head of its Global Marketing Center from June 2004 to June
2007. Since November 2008 Mr. Yan has served as the Vice General Manager of
Global Marketing Center and Vice President of Tianshi Group’s China
Region.  Mr. Yan currently holds a number of leadership positions
including Vice-Dean of Tianshi College (formerly 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 our director. 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 was an Assistant Professor of Finance at the University of South
Florida. Dr. Quintero has extensive work experience in various industrial
engineering capacities and management while working for Atlantic Steel Company,
Abbott Laboratories and Levi Strauss & Co. She received a B.S. in Physics
from the University of the Philippines, an M.S. in Industrial Engineering from
the Georgia Institute of Technology, and a Ph.D. in Finance from the University
of Texas at Austin.




Gilbert
Raker




Mr. Raker
serves as our director and is currently the Vice Chairman and a Director of
Electro-Comp Services Inc., a private company primarily engaged in the testing
and verification of the functionality of electronic components as well as the
brokering of said components located in Clearwater, FL.  From January 2009
to February 2010 he worked with a niche investment bank in New York that focused
on financing middle market companies. From November 1988 to January 2009 he was
the President, Chief Executive Officer and Chairman of the Board of SEMX
Corporation, a multi-national company that manufactured materials and components
used in microelectronic circuitry on a worldwide basis for the automotive,
consumer electronics, defense, medical and aerospace industries.  Prior to
November 1988, Mr. Raker worked at two private equity investment firms, was
employed as the Chief Financial Officer and in one case as the Chief Operating
Officer of two New York Stock Exchange listed companies and served in a variety
of capacities in numerous private and public companies.  He began his
career as a Management Consultant for Touche Ross.  Mr. Raker received his
B.S. in Chemistry from Eastern University, his MBA in Production Management from
Syracuse University and completed all of the course work for a PhD in Finance
and Economics at Syracuse University. Early in his career he taught Accounting
and Production Management at Eastern University and Syracuse University,
respectively.


18




Howard
Balloch




Mr.
Balloch serves as our director 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: 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),
and Maple Leaf Education Holding. Mr. Balloch is also the Vice-Chairman of the
Canada China Business Council.  Mr. Balloch received his B.A. and M.A.
degrees from McGill University.




Board
Leadership Structure




The Board
of Directors believes that Mr. Li’s service as both Chairman of the Board, Chief
Executive Officer and President is in the best interest of the Company and its
stockholders. Mr. Li possesses detailed and in-depth knowledge of the issues,
opportunities and challenges facing the Company and its business and is thus
best positioned to develop agendas that ensure that the Board’s time and
attention are focused on the most critical matters. His combined role enables
decisive leadership, ensures clear accountability, and enhances the Company’s
ability to communicate its message and strategy clearly and consistently to the
Company’s shareholders, employees and customers.




Nominations
by Stockholders




There
have been no changes to the procedures by which the stockholders of our company
may recommend nominees to the Board of Directors since the filing of the
Company’s Definitive Proxy Statement on April 27, 2009 for its Annual Meeting of
Stockholders, which was held on May 28, 2009.




Audit
Committee




The Board
of Directors has established an audit committee in accordance with Section
3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Socorro
Quintero, Chairperson, Howard Balloch and Gilbert Raker, each of whom is
independent as defined under Section 121(A) of NYSE Amex listing standards
currently in effect. None of the Audit Committee members is a current officer or
employee of our company or any of its affiliates.




The Board
of Directors has determined that Socorro Quintero and Gilbert Raker each
qualifies as an “audit committee financial expert” under Item 407(d) of
Regulation S-K.




Code
of Ethics




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




The Code
of Ethics was filed as an exhibit to our Annual Report on Form 10-KSB for the
year ended December 31, 2004. A written copy of the Code of Ethics will be
provided upon request at no charge by writing to our corporate secretary,
Charles Lv, 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, 4 and 5 and amendments to these forms furnished
to us, 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
2009.


19




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
Jinyuan Li owns more than 50% of our voting stock, we are a “controlled company”
pursuant to Rule 801(a) of NYSE Amex Rules (“NYSE Amex
Rules”).  Therefore, we are exempt from NYSE 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 our 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 our 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. The
CEO also takes in to consideration the relatively low salaries 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’s salary for 2009 was fixed
pursuant to employment agreements with Tianjin Tianshi Biological Development
Co. Ltd. (“Biological”) entered into in 2005. Zheng Wan was our principal
financial officer from November 12, 2008 to June 1, 2009 and his salary was
fixed pursuant to an employment agreement dated November 3, 2008. Manbo He has
been our principal financial officer since June 1, 2009 and his salary for 2009
was fixed pursuant to an employment agreement with Biological, dated June 1,
2009, which provides for a term through April 9, 2014.  Their base
salaries were based on our CEO’s subjective perceptions of salaries paid by
comparable companies for comparable positions. Our executive officers did not
receive any bonuses for 2009.  Due to the fact that we do not
currently and did not in 2009 give bonuses to any of our named executive
officers, Jinyuan Li did not identify any individual or corporate goals when
setting the remuneration of Messrs. Wan and He for 2009.




Our
strategy is to maintain compensation for employees at levels that are equal to
or in excess of those offered by companies of comparable size, consistent with
the individual employees’ capabilities and responsibilities. We do not currently
have a stock option plan, but may consider adopting one in the future to further
incentivize its employees.




Why
we chose to pay each element.




We have
entered into long-term employment agreements with Messrs. Li, Wan and He
providing for base salaries.




The
employment agreements with Messrs. Li and He 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.”


20




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 the
executive officers’ 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 NYSE 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
salaries provided to executive officers by companies in China compared to public
companies in the United States.




Compensation
Committee Interlocks and Insider Participation




During
2009, the members of the Compensation Committee were Gilbert Raker and Yupeng
Yan. The Compensation Committee did not deliberate on executive compensation for
fiscal 2009.  Yupeng Yan was an employee and officer of our company
during 2009. No member of the Compensation Committee has a relationship that
would constitute an interlocking relationship with Executive Officers or
Directors of our company or another entity.




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 our Annual Report on Form 10-K for
2009.




The
Compensation Committee




Gilbert
Raker, Chairman




Yupeng
Yan




Summary
Compensation Table




The table
below summarizes the total compensation paid or earned by each of the named
executive officers for the fiscal years ended December 31, 2009 and
2008.


21





Name and
                                    Principal Position (1)
                                  
                                  Year
                                  
                                  Salary
                                    ($)
                                  
                                  
                                  Total
                                    ($)Jinyuan
      Li
                                  
                                  2009
                                  
                                  $
                                  166,660
                                  
                                  
                                  $
                                  166,660Chairman,
      Chief Executive
                                  
                                  2008
                                  
                                  $
                                  166,660
                                  
                                  
                                  $
                                  166,660Manbo
      He
                                  
                                  2009
                                  
                                  $
                                  23,333
                                  
                                  
                                  $
                                  23,333Chief
      Financial Officer (2)Zheng
      Wan
                                  
                                  2009
                                  
                                  $
                                  25,464
                                  
                                  
                                  $
                                  25,464Former
      Chief Financial Officer (3)
                                  
                                  2008
                                  
                                  $
                                  8,618
                                  
                                  
                                  $
                                  8,618





(1)  Yupeng
Yan was an employee Director of our company during 2009 but did not qualify as a
“named executive officer” because his total compensation was less than
$100,000.





(2)  Manbo
He became Chief Financial Officer and Director on June 1, 2009 and was not an
executive officer of our company prior to that.





(3)  Zheng
Wan resigned as our Chief Financial Officer and Director on June 1, 2009. Mr.
Wan became Chief Financial Officer and Director on November 12, 2008 and was not
an executive officer of our company prior to that.




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




We do 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 a statutory employment agreement with
each of the named executive officers of our company. Jinyuan Li’s contract is
dated June 1, 2005 and has an indefinite period. Zhen Wan’s contract was dated
November 3, 2008 and provided for a term through December 31, 2013. The
employment contract for Yupeng Yan is dated April 1, 2004 and provided for a
term through March 31, 2009. On April 1, 2009, Yupeng Yan’s employment contract
was renewed and had an indefinite period. Manbo He also has an employment
contract with Biological, dated June 1, 2009 which provides for a term through
April 9, 2014.




Under
each of these employment contracts, the employee receives vacation time and
social insurance according to Chinese government regulations.  The
employment agreements can be renewed within 15 days of the expiration of each
agreement with the mutual consent of the parties.  Biological may
rescind each agreement without notice if, among other events, the employee
materially violates Biological’s rules and regulations or the employee grossly
neglects his or her duties and discloses our confidential business information
that harms us.  Biological may rescind each agreement on 30 days’
notice and provide economic compensation if, among other events, the employee
suffers from a disease or non-work related injury and after a recovery period is
unable to work, or due to material changes, the performance of the agreement has
become unpractical.  Pursuant to the terms of each of the employment
agreements, the employee may rescind his contract on 30 days’ written
notice.


22




For 2009,
we paid a salary of $166,660 to Jinyuan Li and $77,000 to Yupeng Yan. Mr. Wan’s
contract provided for an annual salary of $80,000. Mr. He’s contract provides
for an annual salary of $40,000.




Potential
Payments upon Termination




The
employment contracts of Messrs. Li and He each provided for a one-time lump sum
payment equal to six months of the employee’s then current salary if we
terminate his 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 or He were terminated for one of the above-stated reason, Mr. Li
would receive $83,330,and Mr. He would receive
$20,000.  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 Wan.




Director
Compensation




For the
fiscal year ended December 31, 2009, 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, 2009.





Name(1)
                      
                      Fees Earned or
                        PaidinCash
                        ($)
                      
                      
                      Total
                        ($)Howard
      Balloch
                      
                      $
                      30,000
                      
                      
                      $
                      30,000Gilbert
      Raker
                      
                      $
                      30,000
                      
                      
                      $
                      30,000Socorro
      Quintero
                      
                      $
                      30,000
                      
                      
                      $
                      30,000Yupeng
      Yan (2)
                      
                      $
                      0
                      
                      
                      $
                      0




(1)
            Jinyuan
      Li, Zheng Wan  and Manbo He are not included in this table as
      they were our employees during 2009 and received no compensation for their
      services as Directors.   Their compensation is disclosed in
      the table in the “Summary Compensation
Table”.




(2)
            Yupeng
      Yan was an employee Director of our company during 2009 and received no
      additional compensation for his services as Director.  He is not
      a named executive officer and is excluded from the “Summary Compensation
      Table”.




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 29, 2010 by each person or entity who is
known by us to beneficially own five percent or more of our common stock; each
director and executive officer of our company; and all directors and executive
officers of our company as a group.


23





Name of Beneficial Owner (1)
                  
                  Number of Shares
                  
                  Percent of ClassJinyuan
      Li
                  
                  67,830,000
                  
                  95.1%Manbo
      He
                  
                  —
                  
                  —Yupeng
      Yan
                  
                  —
                  
                  —Socorro
      Quintero
                  
                  —
                  
                  —Howard
      Balloch
                  
                  —
                  
                  —Gilbert
      Raker
                  
                  —
                  
                  —All
      Directors and Executive Officers as a Group (6 persons)
                  
                  67,830,000
                  
                  95.1%TIENS
      (USA) Investment Holdings Group Overseas Limited (2)
                  
                  67,830,000
                  
                  95.1%








(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.


(2) The
shares are owned by TIENS (USA) Investment Holding Group Overseas Limited
(“TIH”). As sole director of TIH, Jinyuan Li has voting and dispositive power
over the shares. The business address of TIH is c/o Tiens Biotech Group (USA),
Inc., No. 6, Yuanquan Road, Wuqing New-Tech Industrial Park, Tianjin, China
301700.




Unless
otherwise indicated, we believe 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.




Changes
in Control




There
were no arrangements, known to the Company, including any pledge by any person
of securities of the Company the operation of which may at a subsequent date
result in a change in control of the Company.




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




Director
Independence




The Board
has determined that directors Howard Balloch, Socorro Quintero and Gilbert Raker
are “independent” under Section 803(A) of the listing standards of NYSE Amex.
The remaining members of the Board do not satisfy these “independence”
definitions. The ownership by Jinyuan Li, the Company’s President and Chief
Executive Officer, of more than 50% of the Company’s voting stock makes it a
“controlled company” to which NYSE Amex rules requiring a majority of the
directors to be independent and relating to executive compensation and Board
nominations need not apply.  The Board has an Audit Committee and a
Compensation Committee.  The Board’s Compensation Committee members
are Messrs. Gilbert Raker and Yupeng Yan.  Mr. Gilbert Raker, as a
member of the Board’s Compensation Committee, is independent as defined under
Section 803(A) of NYSE Amex listing standards currently in effect. The Audit
Committee members are Ms. Socorro Quintero, Chairperson, and Messrs. Howard
Balloch and Gilbert Raker, each of whom is independent as defined under Section
803(A) of NYSE Amex listing standards currently in effect.  The Board
does not have a Nominating Committee. The entire Board assumes the duties that
would be delegated to a Nominating Committee.




Transactions
with Related Parties




We market
our products through various domestic and international business entities that
are related to us through common ownership. As a result, most of our total
consolidated sales in 2009 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 retail 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 our gross margins on semi-finished goods at a similar level to
historical gross margins for finished goods.  All of Tianshi
Engineering’s Chinese affiliated companies are owned in whole or in part by
Jinyuan Li’s immediate family members.


24




Internationally,
we sell our products to overseas related companies located in 54 countries who
in turn re-package and sell them to independent direct sales distributors. Our
CEO, Jinyuan Li, owns or controls these overseas related companies. Due to the
common ownership, there are no formal sales or administrative agreements among
us and those overseas related parties. The business operations among these
related entities are regulated through internal policies.




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%.




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 2009 and 2008.





December 31,
                          2009
                        
                        
                        December 31,
                          2008Accounts
      receivable, trade – related parties, net of allowance for doubtful
      accounts of$1,419,178
      and $1,108,789 as of December 31, 2009 and 2008,
    respectively
                        
                        $
                        15,379,312
                        
                        
                        $
                        23,941,431Other
      receivables – related parties
                        
                        $
                        44,561,626
                        
                        
                        $
                        15,729,076Advances
      from customers – related parties
                        
                        $
                        4,426,751
                        
                        
                        $
                        3,239,650Other
      payables – related parties
                        
                        $
                        3,326,110
                        
                        
                        $
                        6,373,900Current
      portion of long-term debt - related party
                        
                        $
                        -
                        
                        
                        $
                        2,130,000Long
      term debt – related party
                        
                        $
                        -
                        
                        
                        $
                        2,137,742




Revenue-related
Parties




The
details of revenue-related parties are as follows:





2009
                  
                  
                  2008Tianshi
      Engineering
                  
                  $
                  25,298,232
                  
                  
                  $
                  33,711,474Overseas
      Related Companies
                  
                  
                  34,734,736
                  
                  
                  
                  43,536,424Total
                  
                  $
                  60,032,968
                  
                  
                  $
                  77,247,898




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 re-package the products to meet the needs of the local markets and sell
to independent distributors who use the products themselves and/or resell them
to other distributors or consumers.




Accounts
Receivable-related Parties





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


25





December 31, 2009
                        
                        
                        December 31, 2008Tianshi
      Engineering
                        
                        $
                        5,035,320
                        
                        
                        $
                        4,362,355Overseas
      Related Companies
                        
                        
                        11,763,170
                        
                        
                        
                        20,687,865Allowance
      for Doubtful Accounts
                        
                        
                        (1,419,178
                        )
                        
                        
                        (1,108,789
                        )Total
                        
                        $
                        15,379,312
                        
                        
                        $
                        23,941,431




Other
Receivables-related Parties





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





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





December 31,
                  
                  
                  December 31,2009
                  
                  
                  2008Tianshi
      Investment
                  
                  $
                  37,000,000
                  
                  
                  $
                  -Tianshi
      Engineering
                  
                  
                  5,688,926
                  
                  
                  
                  11,636,208Tianshi
      Group
                  
                  
                  1,613,168
                  
                  
                  
                  4,018,078Sego
      Property service (Tianjin) Co.,Ltd.
                  
                  
                  77,612
                  
                  
                  
                  -Tiens
      SmartFlow Logistics (International) Group Ltd.
                  
                  
                  74,651
                  
                  
                  
                  -Tianjin
      Tianshi Life Science Co., Ltd.
                  
                  
                  55,878
                  
                  
                  
                  -Tianshi
      Yinshi Hotel
                  
                  
                  36,566
                  
                  
                  
                  36,475Tianshi
      Indonesia Logistic & Trade Co., Ltd.
                  
                  
                  9,873
                  
                  
                  
                  -Sego
      Hotel management Co.,Ltd.
                  
                  
                  2,730
                  
                  
                  
                  -Tianshi
      Pharmaceuticals
                  
                  
                  1,588
                  
                  
                  
                  5,922Shengshi
      Real Estate Development
                  
                  
                  634
                  
                  
                  
                  1,657Tianjin
      Xingda Travel Co., Ltd
                  
                  
                  -
                  
                  
                  
                  12,932Shanghai
      Tianshi Jinquan Investment Co.
                  
                  
                  -
                  
                  
                  
                  1,846Beijin
      Xingda Travel Co., Ltd
                  
                  
                  -
                  
                  
                  
                  1,195Others
                  
                  
                  -
                  
                  
                  
                  14,763Total
                  
                  $
                  44,561,626
                  
                  
                  $
                  15,729,076




Historically,
Tianshi Engineering remitted payment to us upon sales to third party
customers.  However, in order to support Tianshi Engineering’s
marketing efforts in anticipation of receiving a direct selling license in
China, we have agreed to allow Tianshi Engineering to defer payment to us. The
credit terms provide an interest-free credit term of three months. 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 became 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.


26




On April
21, 2009, the Company entered into a loan agreement with Tianshi Engineering.
Pursuant to that agreement, effective as of April 1, 2009, $2,562,017 of
other receivables-related parties, which originated from Tianshi Engineering as
accounts receivable, became interest bearing. The loan was due on June 30, 2009
and the stated interest rate was 4.86%. Both the principal of $2,562,017 and
interest on the loan of $12,624 were paid off on May 7, 2009. For the year
ended December 31, 2009 and 2008, the interest income from the other receivables
- related parties amounted to $12,624 and $0, respectively.




During
the years ended December 31, 2009 and 2008, Tianshi Group and our company 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.




On
December 31, 2008, Biological entered into a Property Transfer Agreement with
Tianshi Group, pursuant to which Biological transferred four buildings at the
price of RMB 32,800,000 ($4,797,328).  As of December 31, 2009, the
remaining balance due from Tianshi Group for the purchase of the four buildings
amounted to RMB 17,800,000 (or US $2,603,428).




As the
renminbi has been increasing in value against the dollar over the past several
years, beginning in 2007, we have exchanged cash held in dollars into renminbi
through Tianjin Xiongshi Construction and Decoration Co., Ltd (“Xiongshi
Construction”), a related party construction company, which is 100% owned by the
Company’s current Chairman, Chief Executive Officer and President, Jinyuan Li.
For the years ended December 31, 2009 and 2008, the amounts transferred to
Xiongshi and changed to renminbi were $0 and $12,500,000,
respectively.




On
November 15, 2009, Tianshi Holdings and Tianshi Investment entered the Transfer
Contract, pursuant to which Tianshi Holdings agreed to sell all of the
registered share capital of Tiens Yihai it owned to Tianshi Investment for $37.0
million.  Tiens Yihai holds land use rights for 50 acres of land
located in Shanghai, China. Tiens Yihai was originally established to build a
new research and development facility, but the Company suspended the proposed
development in March 2007. Tianshi Holdings held 96% of the equity interest in
Tiens Yihai.  Tianjin Tianshi Pharmaceuticals Co., Ltd. owned the
remaining 4% of Tiens Yihai’s share capital. The sale closed on November 15,
2009. Pursuant to the Transfer Contract, $3,700,000 of the purchase price was
paid during the first quarter of 2010, and the remaining $33,300,000 is payable
by November 14, 2010.




Advances
from Customers-related Parties




Advances
from related party customers were $4.4 million and $3.2 million as of December
31, 2009 and 2008, respectively.  These advances represented
prepayments made to us to insure that overseas customers could obtain enough of
our products to meet their market demands.




Other
Payables-related Parties




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





December 31, 2009
                  
                  
                  December 31, 2008Fuhong
      Development Co.Ltd.
                  
                  $
                  3,000,000
                  
                  
                  $
                  0Tianshi
      Germany Co., Ltd.
                  
                  
                  107,326
                  
                  
                  
                  105,553Tianjin
      Tianshi Global International Trade Co., Ltd.
                  
                  
                  93,606
                  
                  
                  
                  23,344Tianyuan
      Capital Development Co. Ltd.
                  
                  
                  84,359
                  
                  
                  
                  84,359Tianshi
      Engineering
                  
                  
                  40,805
                  
                  
                  
                  0Tianshi
      Administrative Committee of Industrial Park
                  
                  
                  14
                  
                  
                  
                  14Tianshi
      Investment
                  
                  
                  0
                  
                  
                  
                  6,080,385Beijin
      Xingda Travel Co., Ltd.
                  
                  
                  0
                  
                  
                  
                  80,245Total
                  
                  $
                  3,326,110
                  
                  
                  $
                  6,373,900




27





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




On June
5, 2009, Biological, Tianshi Holdings, Tianshi Investment and Tianshi Group
entered into an agreement pursuant to which Biological agreed to pay $3.9
million to Tianshi Group on behalf of Tianshi Investment, Tianshi Investment
agreed to cancel a $3.9 million loan owed by Tianshi Holdings, and Tianshi
Holdings agreed to cancel a $3.9 million dividend owed by Biological. ( See
note 3 to our consolidated financial statements.)




On
November 10, 2009, Tianshi Holdings borrowed $3,000,000 from Fuhong Development
Co., Ltd, a British Virgin Islands company, which is 100% owned by Jinyuan Li,
to fund its capital contribution to Life Resources. On the February 10, 2010,
the loan was paid in full by cancelling the same amount Tianshi Investment owned
to us.




Long
Term Debt-related Party




On
September 10, 2004, Tianshi Holdings entered a term loan agreement with Tianyuan
Capital Development Co. Ltd. (“Tianyuan Capital”), pursuant to which Tianyuan
Capital agreed to lend $10.65 million in 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. Pursuant to this agreement, 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 to fund its capital contribution to Tiens Yihai. Mr. Jinyuan Li
owns 100% of Tianyuan Capital. Interest of $186,543 and $266,273 was paid for
the years ended December 31, 2009 and 2008, respectively, and the loan was paid
in full by us on December 31, 2009.




Transactions
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. This lease has been renewed annually since 2008 on the
same economic terms.  The total amount paid on this lease amounted to
$545,192 for the 12 months ended December 31, 2008.




On
December 25, 2008, Biological and Tianshi Group entered into a Property Transfer
Agreement (the “Property Transfer Agreement”). Under the Property Transfer
Agreement, Biological transferred to Tianshi Group four buildings consisting of
9,974.31 square meters, including three workshops and a canteen, located at our
headquarters in Tianjin China. Pursuant to the Property Transfer Agreement,
Tianshi Group will pay Biological RMB 32,800,000 ($4,797,328). This transaction
resulted in a loss of RMB 1,912,983 ($274,762) for Biological. We bore 80% of
the loss, or $ 219,810.




On
January 1, 2009, each of Biological and Life Resources entered a Lease Agreement
with Tianshi Group pursuant to which Biological and Life Resources will have the
right to use and occupy the workshop spaces being transferred under the Property
Transfer Agreement. The leases are rent-free, except that Biological and Life
Resources are required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The leases continues until the earlier of the date that
Biological and Life Resources acquire use of alternate facilities or the land
use rights on the underlying property expire. For the year ended December 31,
2009,  Biological and Life Resources recorded $303,056 of the rent
expense, which is not paid to Tianshi Group, but recorded as paid in capital
based upon market price.




Transactions
with Tianshi Engineering




On
October 31, 2007, Biological entered into four lease agreements with Tianshi
Engineering that 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 was effective as of
January 1, 2008 and expired on December 31, 2009. On December 31, 2007,
Biological entered into two supplemental agreements, which added fourteen pieces
of personal care products production equipment to, and removed two health
products production workshops from, two of the lease agreements Biological
entered into on October 31, 2007. Following is a summary of the monthly rent
payable to Biological under the four leases Biological entered into on October
31, 2007 (as amended by the two supplemental agreements entered into on December
31, 2007):


28





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




The
Property Transfer Agreement, described under Item 2 of this annual report,
included all the workshops covered by the above listed lease
agreements.  Consequently, the Lease Agreement for Heath Products
Production Workshops and the Lease Agreement for Personal Care Production
Workshops expired at the end of 2008.




Rent
revenue accrued from these leases amounted to $219,605 and $326,956 for the year
ended December 31, 2009 and 2008, respectively.




On
November 20, 2009, Lease Agreement for Health Products Production Equipment and
Personal Care Product Production Equipment were renewed by Biological and
Tianshi Engineering. Each of the two agreements is effective as of January 1,
2010 and expires on December 31, 2010.




Transactions
with Tianshi Pharmaceuticals




In April
2004, Tianshi Holdings entered a joint venture contract with Tianshi
Pharmaceuticals to establish Tiens Yihai. Tiens Yihai was initially 99.4% owned
by Tianshi Holdings and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai is
located in Shanghai, China, and was established to build a new research and
development facility in Shanghai, China. In March 2007, we decided to suspend
the proposed development by Tiens Yihai.




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




Tianshi
Pharmaceuticals, Tianshi Holdings, Tianshi Pharmaceuticals and Tianshi Group
entered into a letter of intent on December 31, 2008.,pursuant to which, Tianshi
Holdings intended to sell its 96% share of Tiens Yiahi to Tianshi
Pharmaceuticals with Tianshi Group guaranteeing payment, However, this
transaction was abandoned.




On
December 15, 2009, the Company entered into a one-year lease agreement with
Tianshi Pharmaceutical. Under the terms of the lease agreement, the Company
leased equipment for the fee of $3,711 per month. In addition, the Company is
obligated to pay insurance, maintenance and other expenses related  on
the equipments. This agreement is effective from January 1, 2010 and expired on
December 31, 2010.




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 RMB
474,674,415, or $64,247,182. The closing of the transaction was subject to
government approval of the transfer of Life Resources to Tianshi
Holdings.  On March 13, 2008, the government approved the
transfer.




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




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


·
            $16,557,914
      was paid by canceling other receivables due to Biological from Tianshi
      Engineering; and


29


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




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.




Transactions
with Life Sciences




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




Transactions
with Baofeng




On
September 4, 2008, we entered into a one-year storage services agreement (the
“Baofeng Agreement”) with Tianjin Baofeng Construction & Engineering Co.,
Ltd., a third party company. Under the Baofeng Agreement, Biological leased a
warehouse of 6,745.28 square meters located in Wuqing New-tech Industrial Park,
Tianjin, China at the lease fees of RMB 87,688.64 per month. The agreement
terminated on September 9, 2009.  The total amounts paid in 2009 and
2008 under this lease were $115,365 and $37,784, respectively.




ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES.




On
January 13, 2009, the Board appointed Crowe Horwath LLP (“Crowe”) as independent
auditors to audit our financial statements for the fiscal year ended December
31, 2008 and 2009.  From September 26, 2007 to January 13, 2009
Grobstein, Horwath & Company LLP (GH&C”) served as our independent
auditors.  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





Grobstein, Horwath & Company LLP2008Audit
      Fees
                
                $
                294,000Audit
      Related Fees
                
                $
                0Tax
      Fees
                
                $
                5,000All
      Other Fees
                
                $
                0




Audit
fees were for professional services rendered by GH&C during the 2008 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 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, 2008 for assurance and related services in connection with the
audit or review of our financial statements. Tax fees involved preparation of
our consolidated tax returns.





Crowe Horwath LLP2009Audit
      Fees
                
                $
                248,000Audit
      Related Fees
                
                $
                2,800Tax
      Fees
                
                $
                0All
      Other Fees
                
                $
                0




30




Audit
fees were for professional services rendered by Crowe during the 2009 fiscal
year for the audit of our annual financial statements and the review of the
financial statements included in our quarterly reports on Form 10-Q, and
services that are normally provided by Crowe in connection with statutory and
regulatory filings or engagements for that fiscal year. Audit related fees
include discussions with management and SEC legal counsel regarding sale of
Yihai.




Pre-approval
of Services




The Audit
Committee has adopted pre-approval policies for all services, including both
audit and non-audit services, provided by our 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 2008 and 2009.




PART
IV




ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES





(a)           The
following are filed with this report:





(1)  The
financial statements listed on the Financial Statements Table of
Contents.





(2)  Not
applicable.





(3)  The
exhibits referred to below, which include the following managerial contracts or
compensatory plans or arrangements:





·
            Form
      of Labor Contract.





·
            Labor
      Contract dated November 3, 2008 between Tianjin Tianshi Biological
      Development Co., Ltd. and Zheng
Wan.





·
            Labor
      Contract dated June 1, 2009 between Tianjin Tianshi Biological Development
      Co., Ltd. and Manbo He.





(b)           The
exhibits listed on the Exhibit Index are filed as part of this
report.





(c)           Not
applicable.


31




EXHIBIT
INDEX





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 Tiens Biotech Group (USA), Inc., as amended
      (11)3.2
                  
                  By-laws
      of Tiens Biotech Group (USA), Inc. (2)4.1
                  
                  Specimen
      Stock Certificate (2)10.1
                  
                  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)10.2
                  
                  Term
      Loan Agreement, dated March 29, 2007 by and between Tianjin Tianshi
      Biological Development Co., Ltd. and Tianjin Tianshi Biological
      Engineering Co., Ltd. (4)10.3
                  
                  Term
      Loan Agreement, dated April 24, 2007 by and between Tianjin Tianshi
      Biological Development Co., Ltd. and Tianjin Tianshi Biological
      Engineering Co., Ltd. (5)10.4
                  
                  Term
      Loan Extension Agreement, dated June 28, 2007 by and between Tianjin
      Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological
      Engineering Co., Ltd. (5)10.5
                  
                  Term
      Loan Agreement, dated July 23, 2007 by and between Tianjin Tianshi
      Biological Development Co., Ltd. and Tianjin Tianshi Biological
      Engineering Co., Ltd. (11)10.6
                  
                  Term
      Loan Extension Agreement, dated September 27, 2007 by and between Tianjin
      Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Biological
      Engineering Co., Ltd. (6)10.7
                  
                  Term
      Loan Agreement, dated October 15, 2007 by and between Tianjin Tianshi
      Biological Development Co., Ltd. and Tianjin Tianshi Biological
      Engineering Co., Ltd. (11)10.8
                  
                  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. (11)10.9
                  
                  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. (11)10.10
                  
                  Health
      Products Production Equipment Lease Agreement, dated October 31, 2007 by
      and between Tianjin Tianshi Biological Engineering Co., Ltd.. and Tianjin
      Tianshi Biological Development Co., Ltd. (11)10.11
                  
                  Personal
      Care Products Production Equipment Lease Agreement, dated October 31, 2007
      by and between Tianjin Tianshi Biological Engineering Co., Ltd. and
      Tianjin Tianshi Biological Development Co., Ltd. (11)10.12
                  
                  Real
      Property Transfer Agreement, dated December 14, 2007, by and between
      Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi Group
      Co. Ltd. (11)10.13
                  
                  Lease
      Agreement, dated December 14, 2007, by and between Tianjin Tianshi
      Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
      (11)10.14
                  
                  Sale
      and Purchase Agreement dated December 20, 2007 by 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. (11)10.15
                  
                  Capital
      Contribution Agreement dated December 21, 2007 by and between Tianshi
      International Holdings Group Co., Ltd. and Tianshi International
      Investment Group  Co. Ltd. (11)10.16
                  
                  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. (11)10.17
                  
                  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. (11)10.18
                  
                  Loan
      Agreement dated January 14, 2008 by and between Tianshi International
      Holdings Group Co., Ltd. and Tianshi International Investment
      Group  Co. Ltd. (11)10.19
                  
                  Lease
      Agreement, dated January 17, 2008, by and between Tianjin Tianshi
      Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
      (11)10.20
                  
                  Form
      of Labor Contract (3)10.21
                  
                  Loan
      Agreement dated January 14, 2008 by and between Tianshi International
      Holdings Group Limited and Tianshi International Investment Group Co.,
      Ltd. (7)




32


10.22
                                                                                                            
                                                                                                            Loan
      Agreement dated January 21, 2008 by and between Tianshi International
      Investment Group Co., Ltd. and Tianjin Tiens Life Resources Co., Ltd.
      (7)10.23
                                                                                                            
                                                                                                            Agreement
      dated April 9, 2008 by and between Tianshi International Holdings Group
      Limited, Tianshi International Investment Group Co., Ltd., Tianjin Tianshi
      Biological Development Co., Ltd, and Tianjin Tianshi Biological
      Engineering Co., Ltd. (8)10.24
                                                                                                            
                                                                                                            Loan
      Agreement Amendment dated June 30, 2008 by and between Tianshi
      International Investment Group Co., Ltd. and Tianjin Tiens Life Resources
      Co., Ltd. (8)10.25
                                                                                                            
                                                                                                            Supplementary
      Agreement for Grant Contract of State-Owned Land Use Right dated August
      25, 2008 by and among Tianjin Tiens Life Resources Co., Ltd., Wuqing
      Branch Bureau of Tianjin Municipal Land and Resources and Administrative
      Bureau and Tianjin Tiens Life Science Co., Ltd. (9)10.26
                                                                                                            
                                                                                                            Labor
      Contract dated November 3, 2008 between Tianjin Tianshi Biological
      Development Co., Ltd. and Zheng Wan (12)10.27
                                                                                                            
                                                                                                            Property
      Transfer Agreement dated December 25, 2008 between Tianjin Tianshi
      Biological Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
      (12)10.28
                                                                                                            
                                                                                                            Lease
      Agreement dated January 1, 2009 between Tianjin Tianshi Biological
      Development Co., Ltd. and Tianjin Tianshi Group Co. Ltd.
    (12)10.29
                                                                                                            
                                                                                                            Equipment
      Lease Agreement dated January 1, 2009 between Tianjin Tiens Life Resources
      Co., Ltd. and Tianjin Tianshi Group Co. Ltd. (12)10.30
                                                                                                            
                                                                                                            Storage
      Service Agreement dated September 4, 2008 between Tianjin Tianshi
      Biological Development Co., Ltd.  and Tianjin Baofeng
      Construction & Engineering Co., Ltd. (12)10.31
                                                                                                            
                                                                                                            Loan
      Agreement Amendment dated December 31, 2008between
      Tianjin Tiens Life Resources Co., Ltd. and Tianshi International
      Investment Group Co., Ltd. (12)10.32
                                                                                                            
                                                                                                            Supplemental
      Agreement of Lease Agreement for Health Products Production Workshops
      dated December 31, 2007 between Tianjin Tianshi Biological Development
      Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd.
      (12)10.33
                                                                                                            
                                                                                                            Supplemental
      Agreement of Lease Agreement for Personal Care Products Production
      Equipment dated December 31, 2007 between Tianjin Tianshi Biological
      Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd.
      (12)10.34
                                                                                                            
                                                                                                            Term
      Loan Agreement, dated April 21, 2009 by and between Tianjin Tiens Life
      Resources Co., Ltd. and Tianjin Tianshi Biological Engineering Co, Ltd.
      (13)10.35
                                                                                                            
                                                                                                            Labor
      Contract dated June 1, 2009 between Tianjin Tianshi Biological Development
      Co., Ltd. and Manbo He. (14)10.36
                                                                                                            
                                                                                                            Agreement,
      dated June 5, 2009 by and among Tianjin Tianshi Biological Development Co,
      Ltd., Tianshi International Holdings Group Limited, Tianshi International
      Investment Group Co., Ltd. and Tianjin Tianshi Group Co., Ltd.
      (15)10.37
                                                                                                            
                                                                                                            Agreement
      on Debt Transfer and Offset, dated as of June 30, 2009, by and among
      Tianshi International Holdings Group Limited, Tianyuan Capital Development
      Co., and Tianjin Tianshi Biological Engineering Co., Ltd.
    (15)10.38
                                                                                                            
                                                                                                            Contract
      for the Transfer of Equity Interest, dated November 15, 2009, by and
      between Tianshi International Holdings Group Ltd. and Tianshi
      International Investment Group Co., Ltd. (16)10.36*
                                                                                                            
                                                                                                            Health
      Products Production Equipment Lease Agreement, dated November 20, 2009 by
      and between Tianjin Tianshi Biological Engineering Co., Ltd.. and Tianjin
      Tianshi Biological Development Co., Ltd.10.37*
                                                                                                            
                                                                                                            Household
      Chemical Products Production Equipment Lease Agreement, dated November 20,
      2009 by and between Tianjin Tianshi Biological Engineering Co., Ltd. and
      Tianjin Tianshi Biological Development Co., Ltd.10.38*
                                                                                                            
                                                                                                            Equipment
      Lease Agreement dated December 15, 2009 between Tianjin Tiens Life
      Resources Co., Ltd. and Tianjin Tianshi Pharmaceuticals Co.,
      Ltd.10.39*
                                                                                                            
                                                                                                            Agreement
      on Debt Transfer and Offset, dated as of December 31, 2009, by and among
      Tianyuan Capital Development Co., Tianshi International Holdings Group
      Limited and Tianjin Tianshi Biological Engineering Co.,
    Ltd.10.40*
                                                                                                            
                                                                                                            Agreement
      on Debt Transfer and Offset, dated as of February 10, 2010, by and among
      Xianggang Fuhong Development Co., Ltd., Tianshi International Holdings
      Group Co., Ltd. and Tianshi International Investment Group Co.,
      Ltd.14.1
                                                                                                            
                                                                                                            Code
      of Ethics (10)21.1*
                                                                                                            
                                                                                                            Subsidiaries
  33
 
 31.1*
                        
                        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-Q filed with the Securities and
Exchange Commission on May 15, 2007.
 (5) Filed
as an exhibit to the Registrant’s Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2007.
 (6) Filed
as an exhibit to the Registrant’s Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2007.
 (7) Filed
as an exhibit to the Registrant’s Form 10-Q filed with the Securities and
Exchange Commission on May 15, 2008.
 (8) Filed
as an exhibit to the Registrant’s Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2008.
 (9) Filed
as an exhibit to the Registrant’s Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2008.
 (10)
Filed as an exhibit to the Registrant’s Form 10-KSB filed with the Securities
and Exchange Commission on March 31, 2005.
 (11)
Filed as an exhibit to the Registrant’s Form 10-K filed with the Securities and
Exchange Commission on March 31, 2008.
 (12)
Filed as an exhibit to the Registrant’s Form 10-K filed with the Securities and
Exchange Commission on March 31, 2009.
 (13)
Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and
Exchange Commission on May 15, 2009.
 (14)
Filed as an exhibit to the Registrant’s Form 8-K filed with the Securities and
Exchange Commission on June 4, 2009.
 (15)
Filed as an exhibit to the Registrant’s Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2009.
 (16)
Filed as an exhibit to the Registrant’s Form 8-K filed with the Securities and
Exchange Commission on November 19, 2009.
  34
  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:  April
      2, 2010/s/ Jinyuan LiJinyuan
      LiChief
      Executive Officer and President(Principal
      Executive Officer)Date:  April
      2, 2010/s/ Manbo HeManbo
      HeChief
      Financial Officer(Principal
      Financial and Accounting
Officer)
  35
  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
                    
                    Chairman
      of the Board, Chief Executive
                    
                    April
      2, 2010Jinyuan
      Li
                    
                    Officer
      and President (Principal ExecutiveOfficer)/s/ Manbo He
                    
                    Chief
      Financial Officer (Principal Financial
                    
                    April
      2, 2010Manbo
      He
                    
                    and
      Accounting Officer) and Director/s/ Yupeng Yan
                    
                    Executive
      Vice President and Director
                    
                    April
      2, 2010Yupeng
      Yan/s/ Gilbert Raker
                    
                    Director
                    
                    April
      2, 2010Gilbert
      Raker/s/ Howard Balloch
                    
                    Director
                    
                    April
      2, 2010Howard
      Balloch/s/ Socorro Quintero
                    
                    Director
                    
                    April
      2, 2010Socorro
      Quintero
  36
  TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  CONSOLIDATED
FINANCIAL STATEMENTS
  DECEMBER
31, 2009
 
 TABLE
OF CONTENTS
  Report
      of Independent Registered Public Accounting Firm
                  F-1Consolidated
      Balance Sheets
                  F-2Consolidated
      Statements of Income and Other Comprehensive Income
                  F-3Consolidated
      Statements of Shareholders’ Equity
                  F-4Consolidated
      Statements of Cash Flows
                  F-5Notes
      to Consolidated Financial Statements
                  F-6
  
  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 sheets of Tiens Biotech Group
(USA), Inc. (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of income and other comprehensive income, shareholders’
equity, and cash flows for each of the two years in the period ended December
31, 2009.  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 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 includes examining, on a test basis, evidence supporting the amounts and
disclosures in the 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 consolidated financial position of the Company as
of December 31, 2009 and 2008, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended December 31,
2009, in conformity with U.S. generally accepted accounting
principles.
 
 As
discussed in Note 2 to the consolidated financial statements, in 2009 the
Company changed the manner in which it accounts for noncontrolling interests in
subsidiaries.
 
 As
discussed in Notes 1, 3, 4, 10, 11, 12 and 13 to the consolidated financial
statements, the Company has had numerous significant transactions with entities
that are under common control, including that all of the Company’s sales are
currently and have historically been made to related parties controlled by the
majority shareholder of the Company.
 
 /s/ Crowe
Horwath LLP
 Sherman
Oaks, California
 April 2,
2010
  F-1
  TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 AS OF
DECEMBER 31, 2009 AND DECEMBER 31, 2008
 
 December
      31,
                        
                        
                        December
      31,2009
                        
                        
                        2008ASSETSCURRENT
      ASSETS:Cash
                        
                        $
                        1,848,328
                        
                        
                        $
                        20,992,573Cash
      related to assets held for sale
                        
                        
                        -
                        
                        
                        
                        23,861,938Total
      cash
                        
                        
                        1,848,328
                        
                        
                        
                        44,854,511Accounts
      receivable, trade - related parties, net of allowance for doubtful
      accounts of $1,419,178 and $1,108,789 as of December 31, 2009 and
      December 31, 2008 , respectively
                        
                        
                        15,379,312
                        
                        
                        
                        23,941,431Inventories
                        
                        
                        5,328,052
                        
                        
                        
                        8,365,607Other
      receivables
                        
                        
                        995,657
                        
                        
                        
                        813,591Other
      receivables - related parties
                        
                        
                        44,561,626
                        
                        
                        
                        15,729,076Employee
      advances
                        
                        
                        115,673
                        
                        
                        
                        112,591Prepaid
      expenses
                        
                        
                        658,193
                        
                        
                        
                        301,898Prepaid
      taxes
                        
                        
                        407,534
                        
                        
                        
                        1,531,207Other
      assets held for sale
                        
                        
                        -
                        
                        
                        
                        10,904,842Total
      current assets
                        
                        
                        69,294,375
                        
                        
                        
                        106,554,754PROPERTY,
      PLANT AND EQUIPMENT, net
                        
                        
                        10,124,483
                        
                        
                        
                        10,274,643OTHER
      ASSETS:Construction
      in progress
                        
                        
                        125,572,621
                        
                        
                        
                        72,300,104Construction
      deposits
                        
                        
                        1,405,997
                        
                        
                        
                        2,586,302Intangible
      assets, net
                        
                        
                        12,864,295
                        
                        
                        
                        13,137,195Other
      assets
                        
                        
                        11,847,937
                        
                        
                        
                        87,541Total
      other assets
                        
                        
                        151,690,850
                        
                        
                        
                        88,111,142Total
      assets
                        
                        $
                        231,109,708
                        
                        
                        $
                        204,940,539LIABILITIESAND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                        
                        $
                        5,012,157
                        
                        
                        $
                        6,283,849Advances
      from customers - related parties
                        
                        
                        4,426,751
                        
                        
                        
                        3,239,650Wages
      and benefits payable
                        
                        
                        1,484,852
                        
                        
                        
                        1,449,146Other
      taxes payable
                        
                        
                        -
                        
                        
                        
                        117,818Contractor
      deposits
                        
                        
                        183,395
                        
                        
                        
                        163,248Contractor
      payables
                        
                        
                        18,513,216
                        
                        
                        
                        11,871,456Other
      payables
                        
                        
                        1,151,551
                        
                        
                        
                        1,933,743Other
      payables - related parties
                        
                        
                        3,326,110
                        
                        
                        
                        6,373,900Current
      portion of long term debt, related party
                        
                        
                        -
                        
                        
                        
                        2,130,000Liabilities
      directly associated with assets classified as held for
sale
                        
                        
                        -
                        
                        
                        
                        122,047Total
      current liabilities
                        
                        
                        34,098,032
                        
                        
                        
                        33,684,857NON-CURRENT
      LIABILITIESLong
      term debt, net of current portion, related party
                        
                        
                        -
                        
                        
                        
                        2,137,742Deferred
      income
                        
                        
                        11,236,501
                        
                        
                        
                        11,208,844Total
      non current liabilities
                        
                        
                        11,236,501
                        
                        
                        
                        13,346,586Total
      liabilities
                        
                        
                        45,334,533
                        
                        
                        
                        47,031,443Commitments
      and ContingenciesEQUITY:Shareholders'
      equity of the Company:Common
      stock, $0.001 par value, 250,000,000 shares authorized, 71,333,586
      issued and outstanding, respectively
                        
                        
                        71,334
                        
                        
                        
                        71,334Paid-in-capital
                        
                        
                        18,042,189
                        
                        
                        
                        9,234,123Statutory
      reserves
                        
                        
                        13,217,217
                        
                        
                        
                        9,420,783Retained
      earnings
                        
                        
                        126,370,263
                        
                        
                        
                        106,325,356Accumulated
      other comprehensive income
                        
                        
                        18,262,123
                        
                        
                        
                        23,851,062Total
      shareholders' equity of the Company
                        
                        
                        175,963,126
                        
                        
                        
                        148,902,658Noncontrolling
      interest
                        
                        
                        9,812,049
                        
                        
                        
                        9,006,438Total
      equity
                        
                        
                        185,775,175
                        
                        
                        
                        157,909,096Total
      liabilities and equity
                        
                        $
                        231,109,708
                        
                        
                        $
                        204,940,539
 
 The
accompanying notes are an integral part of this statement.
  F-2
 
 TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR THE
YEARS ENDED DECEMBER 31, 2009 and 2008
 
 2009
                  
                  
                  2008REVENUE
      - RELATED PARTIES
                  
                  $
                  60,032,968
                  
                  
                  $
                  77,247,898REVENUE
      - THIRD PARTIES
                  
                  
                  1,943,101
                  
                  
                  
                  -COST
      OF SALES - RELATED PARTIES
                  
                  
                  18,754,680
                  
                  
                  
                  24,870,178COST
      OF SALES - THIRD PARTIES
                  
                  
                  1,412,812
                  
                  
                  
                  -GROSS
      PROFIT
                  
                  
                  41,808,577
                  
                  
                  
                  52,377,720SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                  
                  
                  16,009,382
                  
                  
                  
                  18,574,719INCOME
      FROM OPERATIONS
                  
                  
                  25,799,195
                  
                  
                  
                  33,803,001Interest
      expense
                  
                  
                  (186,543
                  )
                  
                  
                  (266,273
                  )Interest
      income
                  
                  
                  301,709
                  
                  
                  
                  881,070Other
      expense
                  
                  
                  (176,757
                  )
                  
                  
                  (2,099,913
                  )OTHER
      (EXPENSE) INCOME, NET
                  
                  
                  (61,591
                  )
                  
                  
                  (1,485,116
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  25,737,604
                  
                  
                  
                  32,317,885INCOME
      TAXES
                  
                  
                  930,703
                  
                  
                  
                  2,345,474NET
      INCOME
                  
                  
                  24,806,901
                  
                  
                  
                  29,972,411LESS:
      Net income attributable to the noncontrolling interest
                  
                  
                  (965,557
                  )
                  
                  
                  (2,315,215
                  )NET
      INCOME ATTRIBUTABLE TO THE COMPANY
                  
                  
                  23,841,344
                  
                  
                  
                  27,657,196OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                  
                  
                  441,140
                  
                  
                  
                  7,891,018Gain
      from the release of exchange reserves
                  
                  
                  (6,030,079
                  )
                  
                  
                  -COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE COMPANY
                  
                  
                  18,252,405
                  
                  
                  
                  35,548,214COMPREHENSIVE
      INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
                  
                  
                  993,504
                  
                  
                  
                  2,764,347COMPREHENSIVE
      INCOME
                  
                  $
                  19,245,909
                  
                  
                  $
                  38,312,561EARNINGS
      PER SHARE, BASIC AND DILUTED
                  
                  $
                  0.33
                  
                  
                  $
                  0.39WEIGHTED
      AVERAGE NUMBER OF SHARES, BASIC AND DILUTED
                  
                  
                  71,333,586
                  
                  
                  
                  71,333,586
 
 The
accompanying notes are an integral part of this statement.
  F-3
  TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 
 AccumulatedotherNumber
                            
                            
                            Common
                            
                            
                            Paid-in
                            
                            
                            Statutory
                            
                            
                            Retained
                            
                            
                            comprehensive
                            
                            
                            Noncontrollingof
      shares
                            
                            
                            stock
                            
                            
                            capital
                            
                            
                            reserves
                            
                            
                            earnings
                            
                            
                            income
                            
                            
                            interest
                            
                            
                            TotalsBALANCE,
      January 1, 2008
                            
                            
                            71,333,586
                            
                            
                            $
                            71,334
                            
                            
                            $
                            8,842,009
                            
                            
                            $
                            9,420,783
                            
                            
                            $
                            78,668,160
                            
                            
                            $
                            15,960,044
                            
                            
                            $
                            6,144,063
                            
                            
                            $
                            119,106,393Net
      Income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            27,657,196
                            
                            
                            
                            
                            
                            
                            
                            2,315,215
                            
                            
                            
                            29,972,411Foreign
      currency translation gain
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            7,891,018
                            
                            
                            
                            449,132
                            
                            
                            
                            8,340,150Paid-in-capital
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            392,114
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            98,028
                            
                            
                            
                            490,142BALANCE,
      December 31, 2008
                            
                            
                            71,333,586
                            
                            
                            $
                            71,334
                            
                            
                            $
                            9,234,123
                            
                            
                            $
                            9,420,783
                            
                            
                            $
                            106,325,356
                            
                            
                            $
                            23,851,062
                            
                            
                            $
                            9,006,438
                            
                            
                            $
                            157,909,096Net
      Income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3,796,434
                            
                            
                            
                            20,044,907
                            
                            
                            
                            
                            
                            
                            
                            965,560
                            
                            
                            
                            24,806,901Foreign
      currency translation gain
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            441,140
                            
                            
                            
                            27,947
                            
                            
                            
                            469,087Free
      rent provided by related party
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            303,056
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            23,699
                            
                            
                            
                            326,755Effect
      from sale of Yihai
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,474,931
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (211,595
                            )
                            
                            
                            2,263,336Realization
      of foreign currency translation gain relating to the sale of
      Yihai
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            6,030,079
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (6,030,079
                            )BALANCE,
      December 31, 2009
                            
                            
                            71,333,586
                            
                            
                            $
                            71,334
                            
                            
                            $
                            18,042,189
                            
                            
                            $
                            13,217,217
                            
                            
                            $
                            126,370,263
                            
                            
                            $
                            18,262,123
                            
                            
                            $
                            9,812,049
                            
                            
                            $
                            185,775,175
 
 The
accompanying notes are an integral part of this statement.
  F-4
 
 TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008
 
 2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  24,806,901
                  
                  
                  $
                  29,972,411Adjustments
      to reconcile net income to cash provided by (used in) operating
      activities:Provision
      for doubtful accounts
                  
                  
                  406,795
                  
                  
                  
                  1,037,089Provision
      for obsolete inventory
                  
                  
                  309,343
                  
                  
                  
                  293,648Depreciation
                  
                  
                  2,173,251
                  
                  
                  
                  2,681,167Amortization
                  
                  
                  381,742
                  
                  
                  
                  323,276Interest
      income
                  
                  
                  4,761
                  
                  
                  
                  55,641Gain
      on sale of assets
                  
                  
                  47,054
                  
                  
                  
                  39,208loss
      on assets written off
                  
                  
                  5,876
                  
                  
                  
                  192,833Rental
      expense borne by a related party
                  
                  
                  326,774
                  
                  
                  
                  -(Increase)
      decrease in assets:Accounts
      receivable, trade - related parties
                  
                  
                  8,308,993
                  
                  
                  
                  (17,917,994
                  )Accounts
      receivable, trade - third parties
                  
                  
                  -
                  
                  
                  
                  109,674Other
      receivables
                  
                  
                  (184,540
                  )
                  
                  
                  314,367Other
      receivables - related parties
                  
                  
                  1,668,812
                  
                  
                  
                  2,538,775Inventories
                  
                  
                  2,761,335
                  
                  
                  
                  (2,167,255
                  )Employee
      advances
                  
                  
                  (38,359
                  )
                  
                  
                  (42,928
                  )Prepaid
      expense
                  
                  
                  (419,419
                  )
                  
                  
                  356,136Increase
      (decrease) in liabilities:Accounts
      payable
                  
                  
                  (1,249,152
                  )
                  
                  
                  2,007,985Advances
      from customers - related parties
                  
                  
                  1,178,463
                  
                  
                  
                  1,402,445Wages
      and benefits payable
                  
                  
                  (43,279
                  )
                  
                  
                  195,555Other
      taxes payable
                  
                  
                  968,294
                  
                  
                  
                  (2,654,720
                  )Other
      payables
                  
                  
                  (650,296
                  )
                  
                  
                  459,357Other
      payables - related parties
                  
                  
                  3,107,699
                  
                  
                  
                  (390,158
                  )Net
      cash provided by operating activities
                  
                  
                  43,871,048
                  
                  
                  
                  18,806,512CASH
      FLOWS FROM INVESTING ACTIVITIES:Cash
      outflow arising from disposal of a subsidiary
                  
                  
                  (23,975,473
                  )
                  
                  
                  -Collections
      from loans to local government
                  
                  
                  105,229
                  
                  
                  
                  457,329Acquisition
      of intangible assets
                  
                  
                  -
                  
                  
                  
                  (6,068,759
                  )Construction
      deposits
                  
                  
                  (2,664,741
                  )
                  
                  
                  (4,391,560
                  )Contractor
      deposits
                  
                  
                  19,734
                  
                  
                  
                  (464,499
                  )Addition
      to construction in progress
                  
                  
                  (42,734,161
                  )
                  
                  
                  (25,714,095
                  )Equipment
      deposits
                  
                  
                  (11,782,984
                  )
                  
                  
                  -Proceeds
      from sales  of properties
                  
                  
                  29,131
                  
                  
                  
                  426,288Purchase
      of equipment and automobiles
                  
                  
                  (2,009,536
                  )
                  
                  
                  (1,531,589
                  )Net
      cash used in investing activities
                  
                  
                  (83,012,801
                  )
                  
                  
                  (37,286,885
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Loan
      from (repayment to) related parties
                  
                  
                  (3,946,860
                  )
                  
                  
                  6,080,385Payment
      on other payables-non current
                  
                  
                  -
                  
                  
                  
                  (282,664
                  )Payments
      on long term debt, related party
                  
                  
                  -
                  
                  
                  
                  (1,197,662
                  )Payments
      to minority interest shareholder
                  
                  
                  -
                  
                  
                  
                  (5,150,414
                  )Increase
      in paid in capital
                  
                  
                  -
                  
                  
                  
                  482,516Increase
      in deferred income
                  
                  
                  -
                  
                  
                  
                  5,891,999Net
      cash provided by (used in) financing activities
                  
                  
                  (3,946,860
                  )
                  
                  
                  5,824,160EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                  
                  
                  82,430
                  
                  
                  
                  3,428,876DECREASE
      IN CASH
                  
                  
                  (43,006,183
                  )
                  
                  
                  (9,227,337
                  )CASH,
      beginning of period
                  
                  
                  44,854,511
                  
                  
                  
                  54,081,848CASH,
      end of period
                  
                  $
                  1,848,328
                  
                  
                  $
                  44,854,511Supplemental
      disclosures of cash flow informationCash
      paid during the period for:Interest
                  
                  $
                  105,817
                  
                  
                  $
                  266,273Income
      taxes
                  
                  $
                  3,287,531
                  
                  
                  $
                  3,877,420
 
 The
accompanying notes are an integral part of this statement.
  F-5
 
 Note
1 - Background
 
 Tiens
Biotech Group (USA), Inc. (the "Company" or "Tiens") was incorporated on July
13, 1990 as Super Shops, Inc. in the State of Michigan. In October 2000, Super
Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition
Corp., and subsequently to Strategika, Inc. in February 2002. On December 31,
2003, the Company changed its name from Strategika, Inc. to Tiens Biotech Group
(USA), Inc.
 
 The
Company is currently owned 4.91% by public stockholders and 95.09% by Jinyuan
Li, the Company’s current Chairman, CEO and President. The Company owns 100% of
Tianshi International Holdings Group Limited ("Tianshi Holdings"). Tianshi
Holdings owns 80% of Tianjin Tianshi Biological Development Co., Ltd.
("Biological") and 100% of Tianjin Tiens Life Resources Co., Ltd. (“Life
Resources”).
 
 Acquisition of Tianshi
Holdings and Biological
 
 On
September 9, 2003, the Company received all of the issued and outstanding common
stock of Tianshi Holdings in exchange for the issuance by the Company of
68,495,000 shares of its common stock to the original stockholders of Tianshi
Holdings, representing 95.09% of the issued and outstanding common stock of the
Company at such time, after giving effect to the issuance.
 
 On June
18, 2003, Tianshi Holdings acquired 80% of Biological from Tianshi Hong Kong
International Development Co., Ltd. ("Tianshi Hong Kong"), which was 100% owned
by the Company's current Chairman, Chief Executive Officer and President,
Jinyuan Li. Tianjin Tianshi Biological Engineering Co., Ltd. (“Tianshi
Engineering”) owned the remaining 20% of Biological.
 
 Tianshi
Engineering is 49% owned by Baolan Li, the daughter of Jinyuan Li and 51% by
Tianjin Tianshi Group Co., Ltd. ("Tianshi Group"). In June 2003, Tianshi
Engineering transferred its 20% interest in Biological for no consideration to
Tianjin Tianshi Pharmaceuticals Co., Ltd (“Tianshi Pharmaceuticals”) and Tianshi
Holdings acquired 80% of Biological from Tianshi Hong Kong for no consideration.
On February 25, 2008, Tianshi Pharmaceuticals, which is 100% owned by Tianshi
Group, transferred its 20% interest in Biological to Tianshi
Engineering.
 
 Acquisition and sale of
Tiens Yihai
 
 In April
2004, Tianshi Holdings entered into a joint venture contract with Tianshi
Pharmaceuticals to establish Tiens Yihai Co. Ltd., a Chinese-Foreign Equity
Joint Venture (“Tiens Yihai”). Tiens Yihai was 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.
 
 In
anticipation of this sale, the registered capital requirement of Tiens Yihai was
decreased from $200 million to $29,989,361, equal to its then-current paid
in, registered capital. This reduction was approved by the local government
on October 14, 2008. Pursuant to the change of the registered capital
requirement and the capital contributions from both investors, the equity
interest held by Tianshi Holdings was decreased from 99.4% to 96% and the
equity interest held by Tianshi Pharmaceuticals was increased from 0.6% to 4%.
Tianshi Holdings, Tianshi Pharmaceuticals and Tianjin Tianshi Group Co., Ltd.
(“Tianshi Group”) entered into a letter of intent on December 31, 2008, pursuant
to which Tianshi Pharmaceuticals agreed to purchase the 96% equity
interest in Tiens Yihai held by Tianshi Holdings, but this transaction was
abandoned.
 
 On
November 15, 2009, Tianshi Holdings entered a Contract for the Transfer 96% of
the Equity Interests of Tiens Yihai it owned to 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 sell its 96% equity interest in Tiens
Yihai for $37.0 million and settle the payment in two installments. The first
payment of $3,700,000 was settled during the first quarter of 2010, and the
second and final payment of $33,300,000 is due on November 14,
2010.
 
 Acquisition of Life
Resources
 
 On
December 20, 2007, Tianshi Holdings entered a Sale and Purchase Agreement with
Tianshi Investment. Pursuant to the Sale and Purchase Agreement, Tianshi
Holdings agreed to buy all of the registered share capital of Life Resources for
$64.2 million. On March 13, 2008, the Chinese government approved the transfer
and the Company became the 100% shareholder of Life Resources.
 
 Life
Resources was incorporated on April 29, 2005 as a Foreign Investment Enterprise
(“FIE”) in Wuqing, Tianjin, PRC, with a registered share capital of $30,000,000.
The Company is currently constructing research and development and manufacturing
and logistic facilities, as well as administrative offices. Construction on the
project began in July 2006. On March 13, 2008 and Jun 24, 2009, the Chinese
government approved the increase of registered capital of Life Resources from
$30,000,000 to $50,000,000 and from $50,000,000 to $65,000,000,
respectively.
 
 Nature of
operations
 
 The
Company through its subsidiaries is primarily engaged in the manufacturing of
nutritional supplement products, including wellness products and dietary
supplement products. 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 54 countries who in turn
re-package them and sell to independent direct sales distributors.
 
 Note
2 – Summary of significant accounting policies
  BASIS
OF PRESENTATION
 
 These
consolidated 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”).
  F-6
  The reporting
entity
 
 The
Company’s consolidated financial statements reflect the activities of the
following Company subsidiaries:
 
 Subsidiary
                                    
                                    Jurisdiction
                                    
                                    % OwnershipTianshi
      Holding
                                    
                                    British
      Virgin Islands
                                    
                                    
                                    100.0%Biological
                                    
                                    P.R.C.
                                    
                                    
                                    80.0%Life
      Resources
                                    
                                    P.R.C.
                                    
                                    
                                    100.0%
 
 Principles of
consolidation
 
 The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions and
balances are eliminated in consolidation.
 
 Use of
estimates
 
 In
preparing financial statements in conformity with U.S. GAAP, the Company makes
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and sales and expenses
during the reported periods.   Significant estimates include
useful life of long lived asset, provision for bad debt and allowance for sales
return.  Management bases its estimates on historical experience and
on various other assumptions that they believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results could differ from those
estimates.
 
 Foreign currency
translation
 
 The
reporting currency of the Company is the US dollar. Biological and Life
Resources’ financial records are maintained and the statutory financial
statements are stated in its local currency, Renminbi (RMB), as their functional
currency. Results of operations and cash flows are translated at average
exchange rates during the period, and assets and liabilities are translated at
the unified exchange rate as quoted by the People's Bank of China at the end of
each reporting period. Translation adjustments resulting from this process are
included in other comprehensive income in the statement of income and other
comprehensive income.
 
 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 $441,140 and $7,891,018 for the years ended December 31,
2009 and 2008, respectively. Asset and liability accounts at December 31, 2009
were translated at RMB6.84 to $1.00 USD compared to RMB6.85 at December 31,
2008. Equity accounts were stated at their historical rate. The average
translation rates applied to income statement accounts for the years ended
December 31, 2009 and 2008 were RMB6.84 and RMB6.96, 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.
 
 Translation
adjustments are reported under comprehensive income as a component of
stockholders’ equity.
 
 Fair value of financial
instruments
 
 Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants at the
measurement date. Fair value hierarchy, prioritizes the inputs used in measuring
fair value into three broad levels as follows:
 
 • Level
one — Quoted market prices in active markets for identical  assets or
liabilities;
 
 • Level
two — Inputs other than level one inputs that are either directly or indirectly
observable; and
 
 • Level
three — Unobservable inputs developed using estimates and assumptions, which are
developed by the reporting entity and reflect those assumptions that a market
participant would use.
 
 Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company's financial instruments consist primarily of
cash, trade accounts receivable, trade payables, advances, other receivables,
and debt instruments. The carrying amounts of the Company's financial
instruments generally approximate their fair values at December 31, 2009 and
December 31, 2008, except for long-term debt, which has a fixed interest rate.
The fair value of the long-term debt is estimated based on the borrowing rates
currently available to the Company for bank loans with similar terms and average
maturities. The carrying value and fair value of long-term debt is as
follows:
  F-7
 
 December 31, 2009
                    
                    
                    December 31, 2008Balance
      sheet amount
                    
                    
                    Fair
      value
                    
                    
                    Balance
      sheet
                      amount
                    
                    
                    Fair
      valueLong-term
      debt - related party
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,267,742
                    
                    
                    $
                    4,244,098
 
 Cash
 
 Cash
includes cash on hand and demand deposits in accounts maintained with banks of
which no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant risks
on its cash in bank accounts.
 
 Accounts
receivable
 
 The
Company's trade accounts receivable are mainly due from related companies. The
Company has made full provision for accounts receivable-related parties aged
over one year based upon the related parties ability to collect their
receivables and a general allowance for doubtful debt of 0.5% of the remaining
accounts receivable-related parties. Management reviews its accounts receivable
on a regular basis to determine if the provision for doubtful debts is adequate,
paying particular attention to the age of receivables outstanding. At December
31, 2009 and December 31, 2008 receivables outstanding more than 180 days
totaled $5,089,510 and $3,316,115, respectively. The Company did not charge-off
any receivables for the periods reported. The following table represents the
changes in the allowance for doubtful accounts:
 
 Balance at
                      Beginning of
                      Period
                    
                    
                    Increase of provision for
                      Doubtful Accounts
                    
                    
                    Balance at End of
                      PeriodTwelve
      month period ended December 31, 2009Reserves
      and allowances deducted from assets accounts:Allowance
      for doubtful accounts:
                    
                    $
                    1,108,789
                    
                    
                    $
                    310,389
                    
                    
                    $
                    1,419,178Twelve
      month period ended December 31, 2008Reserves
      and allowances deducted from assets accounts:Allowance
      for doubtful accounts:
                    
                    $
                    71,700
                    
                    
                    $
                    1,037,089
                    
                    
                    $
                    1,108,789
 
 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.
 
 Prepaid
expenses
 
 Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
Company reviews its advances to suppliers annually to determine whether
provisions should be adjusted. The amount included in prepaid expense is net of
any provisions. Provisions for prepaid expenses are as follows:.
 
 Balance at
                      Beginning of
                      Period
                    
                    
                    Increase of provision for
                      Doubtful Accounts
                    
                    
                    Balance at End of
                      PeriodTwelve
      month period ended December 31, 2009Reserves
      and provisions deducted from assets accounts:Provision
      for prepaid expenses:
                    
                    $
                    952,071
                    
                    
                    $
                    66,403
                    
                    
                    $
                    1,018,474Twelve
      month period ended December 31, 2008Reserves
      and provisions deducted from assets accounts:Provision
      for prepaid expenses:
                    
                    $
                    872,053
                    
                    
                    $
                    80,018
                    
                    
                    $
                    952,071
  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:
  F-8
 
 Estimated Useful LifeBuildings
      and improvements
                  
                  20
      yearsMachinery
      and equipment
                  
                  10
      yearsComputer,
      office equipment and furniture
                  
                  5
      yearsAutomobiles
                  
                  5
      years
 
 The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts, and any gain or loss is included in the
consolidated statements of income and other comprehensive income. Maintenance,
repairs and minor renewals are charged directly to expenses as incurred. Major
additions and betterment to buildings and equipment are
capitalized.
 
 Construction in
progress
 
 Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company's plant facilities. No depreciation is
provided for construction in progress until such time as the relevant assets are
completed and are ready for their intended use.
 
 Construction
deposits
 
 Construction
deposits represent advances paid by the Company to contractors.
 
 Intangible
assets
 
 Intangible
assets mainly consist of land use rights. All land located in the PRC is owned
by the government and cannot be sold to any individual or company. However, the
government grants "land use rights" for a specified period of time. The Company
amortizes its land use rights according to the actual useful life of 50 years.
Other intangible assets include patents and trademarks and are amortized over
their estimated useful life ranging from five to ten years.
 
 Other
assets
 
 Other
assets consist of deposits made to purchase equipment and a long-term
prepaid expense. The Company will transfer the deposits made to purchase
equipment from other assets to property, plant and equipment upon taking
ownership. The Company amortizes its long-term prepaid expense according to the
service period.
 
 Impairment of long-lived
assets
 
 Long-lived
assets, including intangible assets of the Company, are reviewed annually as to
whether their carrying value has become impaired. The Company considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from related operations. The Company also re-evaluates the periods of
depreciation and amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives.
 
 Deferred
income
 
 Deferred
income consists of government grants. On August 2, 2005 and November 20, 2006,
the Company received two government grants related to the purchase of land use
rights in the amount of RMB 35,803,461 (or US $5,223,725). On August 28, 2008,
Life Resources paid RMB 41,022,061 (or US $5,985,119) for the zoning changes to
one parcel of land on which the land use rights were changed from “industrial”
to “educational”. On September 12, 2008, the Company received RMB 41,022,061 (or
US $5,985,119) from a government grant. The grants are treated as deferred
income and will be amortized over the life of the buildings on the
land.
 
 Noncontrolling
interest
 
 Noncontrolling
interest represents the outside shareholder’s 20% ownership of Biological and 4%
ownership of Tiens Yihai. Effective from November 15, 2009, the company
transferred its share of Tiens Yihai to Tianshi Investment.
 
 Revenue
recognition
 
 The
Company sells both semi-finished products and finished products to Tianshi
Engineering domestically. Revenue from semi-finished products was recognized at
delivery 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 sells mostly finished products. The Company
recognizes revenue from international sales (non-Chinese) to affiliated parties,
net of taxes, as goods are shipped and clear review by the customs department of
the Chinese government.
 
 The
Company is generally not contractually obligated to accept returns. However, on
a case by case negotiated basis, the Company permits customers to return their
products. 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 two years, and management does not anticipate allowing
any returns in 2010 related to revenues in 2009, no allowance for estimated
returns has been recorded for the years ended December 31, 2009 and
2008.
  F-9
 
 Advertising
costs
 
 The
Company sells most of its products to related parties, and these related parties
are primarily responsible for marketing. Advertising costs of the Company for
the years ended December 31, 2009 and 2008 amounted to $11,914 and $418,138,
respectively, and were expensed as incurred.
 
 Shipping and
handling
 
 Shipping
and handling totaled $340,275 and $618,807 for the years ended December 31, 2009
and 2008, respectively. The Company sells products on FOB condition, however, it
usually prepays shipping and handling expenses to transportation companies on
behalf of customers and collects these shipping and handling expenses when it
receives payments from customers. The payments received from customers were
included in revenue, and the related shipping and handling costs were included
in selling, general and administrative expenses.
 
 Research and
development
 
 Research
and development expenses include salaries, supplies, and overhead such as
depreciation, utilities and other costs. These costs are expensed as incurred.
The Company expensed research and development costs of $1,262,623 and $1,549,132
for the years ended December 31, 2009 and 2008, respectively. These costs are
included in selling, general and administrative expenses in the accompanying
statements.
 
 Income
taxes
 
 The
Company accounts for income taxes in under the liability method, deferred income
taxes are recognized for the estimated tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established to reduce deferred tax
assets to the amount expected to be realized when, in management’s opinion, it
is more likely than not that some portion of the deferred tax assets will not be
realized. The provision for income taxes represents current taxes payable net of
the change during the period in deferred tax assets and
liabilities.
 
 The
Company has not been subjected to income tax examinations by taxing authorities
for the years ended December 31, 2009 and 2008. The
Company is subject to tax examination in the PRC for all years, as tax returns
remain open to examination until notified by the taxing authorities, and the
Company has not received any notifications to date.The company records
interest and penalties as other expense on the consolidated income and other
comprehensive income statements. During the years ended December 31, 2009 and
2008, the Company did not recognize any amount in interest and
penalties.
 
 Earnings per
share
 
 Basic
earnings per share (“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, 2009 and
2008.
 
 Recently issued accounting
pronouncements
 
 In
December 2007, the FASB issued a pronouncement establishing principles and
requirements for how the acquirer recognizes and measures in its financial
statements the identifiable assets, the liabilities and any non-controlling
interest in the acquiree, and the goodwill acquired in a business combination or
a gain from a bargain purchase. It also determines what information to disclose.
The objective of the pronouncement 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.
This pronouncement became effective in the first quarter of 2009. The
Company adopted it beginning January 1, 2009 and had no effect on the
Company’s consolidated financial statements..
 
 In
December 2007, the FASB issued a pronouncement providing guidance on how to
report a non-controlling interest in consolidated financial statements. The
objective of the pronouncement is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements. This pronouncement became effective
in the first quarter of 2009, and should be applied retrospectively for all
periods presented. As a result of the adoption of the pronouncement from January
1, 2009, the Company reclassified minority interest of $9.8 million and
$9.0 million to noncontrolling interest as a component of equity on the
Company’s Consolidated Balance Sheet for the years ended December 31, 2009 and
2008, respectively. The
noncontrolling interests is presented after net income in accordance with the
new guidance.
  In March
2008, the FASB issued a pronouncement requiring enhanced disclosure about an
entity’s derivative and hedging activities and thereby improves the transparency
of financial reporting. The objective of the pronouncement is to provide
adequate information about how derivative and hedging activities affect an
entity’s financial position, financial performance, and cash flows. This
pronouncement became effective in the first quarter of 2009, and its
adoption from January 1, 2009 had no effect on the Company’s consolidated
financial statements.
 
 In April
2008, the FASB issued a pronouncement amending the factors to be considered
in determining the useful life of intangible assets accounted for pursuant to
previous topic guidance. Its intent is to improve the consistency between
the useful life of an intangible asset and the period of expected cash flows
used to measure its fair value. This pronouncement is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years, and its adoption had no effect on the
Company’s consolidated financial statements.
 
 In May
2008, the FASB issued a pronouncement requiring that an insurance enterprise
recognize a claim liability prior to an event of default (insured event) when
there is evidence that credit deteriorations have occurred in an insured
financial obligation. This pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and its
adoption had no effect on the Company’s consolidated financial
statements.
 
 In
October 2008, the FASB issued a pronouncement amending previous guidance to
clarify the application of fair value in inactive markets and allows for the use
of management’s internal assumptions about future cash flows with appropriately
risk-adjusted discount rates when relevant observable market data does not
exist. The objective of the pronouncement has not changed and continues to be
the determination of the price that would be received in an orderly transaction
that is not a forced liquidation or distressed sale at the measurement date. The
adoption of the pronouncement did not have an effect on the Company’s
consolidated financial statements.
 
 In June
2009, the FASB issued a pronouncement to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and
cash flows; and a transferor’s continuing involvement, if any, in transferred
financial assets. This pronouncement is effective for financial statements
issued for fiscal years beginning after December 15, 2009 and interim periods
within those fiscal years. The Company is evaluating the impact that this
Statement will have on the Company’s consolidated financial
statements.
  F-10





In June 2009, the FASB issued a
pronouncement amending previous topic guidance, and changes how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a
company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance. This pronouncement is effective for
financial statements issued for fiscal years beginning after December 15, 2009
and interim periods within those fiscal years. The Company is evaluating
the impact that this pronouncement will have on the Company’s consolidated financial
statements.





Note
3 – Supplemental disclosure of cash flow information





On June 5, 2009, Tianshi Holdings,
Biological, Tianshi Investment and Tianshi Group entered an agreement, pursuant
to which liabilities in the form of a loan receivable due to Tianshi Investment from the
Company in the amount of RMB 27,000,000 (or US $3.9 million) were offset
against a cash payment of RMB 27,000,000 (or US $3.9 million) from
Biological to Tianshi Group.





The right to offset existed
because:





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


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


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


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


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


6.
            The agreement to
      offsetis enforceable
      under Chinese contract law.





On June 30, 2009, Tianshi
Engineering paid $2,134,875 to Tianshi Investment on behalf of the Company,
representing a loan payment by Tianshi Holdings. In return, $2,134,875 of
Tianshi Holdings’loan due from Tianshi Engineering was
offset.





The right to offset existed
because:





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


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


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


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


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





On June 30, 2009, Tianshi Engineering
paid $1,170,817to Tianyuan
Capital on behalf of the Company, representing one installment of a loan that
Tianyuan Capital lent to the Company, plus interest on that loan for the six
months ended June 30, 2009. In return, $1,170,817 of a loan that Tianshi
Holdings made toTianshi Engineering was offset against
such payment.





The right to offset existed
because:





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


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


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


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


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





OnDecember31, 2009, Tianshi Engineering paid $3,283,469to Tianyuan Capital on behalf of the
Company, representingthe
paymentof a loan that
Tianyuan Capital lent to the Company, plus interest on that loan for the six
months endedDecember31, 2009. In return, $3,283,469of a loan thatTianshi Holdings made to Tianshi
Engineering was offset against such payment.





The right to offset existed
because:





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


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


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


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


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





Note
4 – Inventories





Inventories
consist of the following:


F-11





December31,
                  
                  
                  December31,2009
                  
                  
                  2008Raw
    materials
                  
                  $
                  1,937,306
                  
                  
                  $
                  2,507,073Packing
      materials
                  
                  
                  729,517
                  
                  
                  
                  1,131,252Miscellaneous
      supplies
                  
                  
                  848,720
                  
                  
                  
                  402,630Work in
    process
                  
                  
                  476,529
                  
                  
                  
                  699,205Finished
    goods
                  
                  
                  1,335,980
                  
                  
                  
                  3,625,447Total
                  
                  $
                  5,328,052
                  
                  
                  $
                  8,365,607





The
Company has written off obsolete inventories that amounted to $309,343 and
$293,648 for the years ended December 31, 2009 and 2008,
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 $115,673 and $112,591 at December 31, 2009 and 2008,
respectively.





Note
6 – Prepaid expenses





Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
details of prepaid expenses net of the allowance as disclosed in Note 2 are as
follows:





December31,
                  
                  
                  December31,2009
                  
                  
                  2008Advance to
      suppliers
                  
                  $
                  655,443
                  
                  
                  $
                  297,576Short-term prepaid
      expenses
                  
                  
                  2,750
                  
                  
                  
                  4,322Total
                  
                  $
                  658,193
                  
                  
                  $
                  301,898




Note
7 – Property, plant and equipment, net





Property,
plant and equipment consisted of the following:





December 31,
                  
                  
                  December 31,2009
                  
                  
                  2008Buildings and
      improvements
                  
                  $
                  1,558,934
                  
                  
                  $
                  1,558,524Office
      equipment
                  
                  
                  348,284
                  
                  
                  
                  383,678Computer equipment and
      software
                  
                  
                  2,405,467
                  
                  
                  
                  2,900,333Machinery and
      equipment
                  
                  
                  14,211,726
                  
                  
                  
                  12,835,301Automobiles
                  
                  
                  4,470,909
                  
                  
                  
                  4,145,367Total
                  
                  
                  22,995,320
                  
                  
                  
                  21,823,203Less: accumulated
      depreciation
                  
                  
                  (12,870,837
                  )
                  
                  
                  (11,548,560
                  )Property, plant and equipment,
      net
                  
                  $
                  10,124,483
                  
                  
                  $
                  10,274,643





Depreciation
expense for the years ended December 31, 2009 and 2008 amounted to $2,173,251
and $2,681,167, respectively.





See Note
10 regarding related party sale of property.





Note
8 - Intangible assets





Intangible
assets consisted of the following:


F-12





December31,
                  
                  
                  December31,2009
                  
                  
                  2008Land use
    rights
                  
                  $
                  13,531,454
                  
                  
                  $
                  13,498,149Other intangible
      assets
                  
                  
                  344,274
                  
                  
                  
                  343,426Less accumulated
      amortization
                  
                  
                  (1,011,433
                  )
                  
                  
                  (704,380
                  )Intangible assets,
      net
                  
                  $
                  12,864,295
                  
                  
                  $
                  13,137,195




On August
25, 2008, Life Resources entered into a definitive agreement with the Wuqing
Branch Bureau of Tianjin Municipal Land and Resources and Administrative Bureau
(the “Tianjin Government”) and Tianjin Tiens Life Science Co., Ltd. (“Life
Science”), pursuant to which Life Resources and Life Science would pay the
Tianjin Government in connection with changes to the zoning on several parcels
of land on which they respectively have land use rights from “industrial” to
“educational”. On August 28, 2008 and August 29, 2008, Life Resources paid a
total of RMB 42,252,723 (or US$ 6,164,672) in connection with the zoning changes
to its parcels.





Amortization
expense for the years ended December 31, 2009 and 2008 amounted to
$381,742  and $323,276 respectively.





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





EstimatedamortizationexpensefortheyearendingDecember31,
                  
                  Amount2010
                  
                  $
                  304,9272011
                  
                  $
                  298,4162012
                  
                  $
                  298,4162013
                  
                  $
                  287,3222014
                  
                  $
                  286,6892015 and
      thereafter
                  
                  $
                  11,388,525





Note
9 – Investment in and sale of Tiens Yihai





On April
20, 2004, Tianshi Holdings entered a Joint Venture Project with Tianshi
Pharmaceuticals to establish Tiens Yihai. On September 15, 2004, the board of
directors of Tianshi Holdings ratified the Joint Venture Project.





In
October 2004, the Company paid a 10% deposit totaling RMB 29,700,000 (or
US$4,333,230) 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. In 2005, the
Chinese central government issued its "Adjustment of Macro-Economic Policy"
statement. This policy implemented a new system of investment and use of
state-owned assets, including land. Pursuant to this policy, local government
organizations readjusted and re-allocated projects, including investment,
construction and reconstruction of state-owned resources. As a result, projects
and enterprises that had been affected, including Tiens Yihai, were required to
wait for decisions by state and local government before proceeding with
development.





On
November 10, 2006, Tianshi 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 $1,776,478) of the original RMB 29,700,000
(or US $4,333,230) 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 $7,295,000) 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 $3,647,500) was paid on
      November 27, 2006.


·
            The
      second installment of RMB 25,000,000 (or US $3,647,500) was to be paid
      after Tiens Yihai obtains a construction engineering license to develop
      the property. The parties have agreed to allow Tiens to reduce this second
      installment by the amount of the RMB 12,176,000 (or US $1,776,478) refund
      due to it.





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. As of November 15, 2009, the Company had accrued $642,658 of
interest receivable which was added to the loan.





In return
for the loan, Tiens Yihai was also to receive a tax credit equal to the amount
of the loan, plus interest. As of December 31, 2009, Local Government had paid
the Company RMB 4,777,773 (or US $ 699,944) for the loan and
interest.





As of
December 31, 2008, Tiens Yihai had obtained the land use rights for
approximately 50 acres. 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 decided to suspend the
development of the property as an industrial park. On September 18, 2008, the
board of directors of Tianshi Holdings approved the disposal of Tiens
Yihai.





On the
initial investment project, the total amount to be invested in Tiens Yihai would
have amounted to $400 million, of which $200 million would have been registered
capital. Tianshi Holdings would have contributed $198.8 million, representing
approximately 99.4% of the registered capital of Tiens Yihai, and Tianshi
Pharmaceuticals agreed to contribute $1.2 million representing 0.6% of the
registered capital of Tiens Yihai. 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. In June
2004, Tianshi Pharmaceuticals finished its capital contributions totaling $1.2
million. In June and July 2004, Tianshi Holdings made capital contributions
totaling $28,789,361 and the remaining registered capital was required to be
contributed 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 by May
27, 2007. After negotiating with the local government in Shanghai, the deadline
of the payment was extended to May 2008.


F-13





In
anticipation of the sale of Tiens Yihai, the Company reduced the registered
capital requirement for Tiens Yihai from $200 million to $29,989,361, equal to
then-current paid in capital. The decrease of the registered capital requirement
for Tiens Yihai was approved by the local government on October 14, 2008. As a
result, the share of Tiens Yihai owned by the Company was reduced from 99.4% to
96%, and Tianshi Pharmaceutical’s increased to 4%.





In March
2007, the Company decided to suspend the proposed development by Tiens Yihai.
After negotiating with Tianshi Pharmaceuticals which is the minority shareholder
of Tiens Yihai, Tianshi Holdings, Tianshi Pharmaceuticals and Tianshi Group
entered into a letter of intent on December 31, 2008. Pursuant to the letter of
intent, Tianshi Holdings intended to sell its 96% share of Tiens Yiahi to
Tianshi Pharmaceuticals, with Tianshi Group guaranteeing payment but the
transaction was abandoned.





The
assets and liabilities of Tiens Yihai have been classified as assets held for
sale and liabilities directly associated with assets classified as held for sale
respectively in 2008 annual report. The assets and liabilities of Tiens Yihai as
of November 15, 2009 were as follows:





November 15, 2009Cash
                    
                    $
                    24,027,957Other
      receivables-third parties
                    
                    
                    10,742Employee
      advances
                    
                    
                    1,612Property,
      plant, and equipment,net
                    
                    
                    310,908Construction
      In Progress
                    
                    
                    2,553,785Intangible
      assets, net
                    
                    
                    2,559,242Long-term
      prepaid Expense
                    
                    
                    5,388,998Assets
      held for sale
                    
                    $
                    34,853,244Accounts
      payable
                    
                    
                    3,326Wages
      and benefits payable
                    
                    
                    76,923Other
      payables
                    
                    
                    36,143Other
      payables - related parties
                    
                    
                    188Liabilities directly
      associted with assets
      classified as held for
      sale
                    
                    $
                    116,580





On
November 15, 2009, Tianshi Holdings entered a Contract for the Transfer of
Equity Interest to sell all of the registered share capital of Tiens Yihai it
owned to Tianshi Investment. Pursuant to the agreement, Tianshi Holdings agreed
to sell its 96% equity interest in Tiens Yihai for $37.0 million. The first
payment of $3,700,000 was settled during the first quarter of 2010, and the
second and final payment of $33,300,000 is due on November 14, 2010. Tianshi
Holdings recorded the gain of $2,474,931 from this transaction as paid in
capital on the Company’s Consolidated Balance Sheet..





Note
10 – Related party sale of property





On
December 25, 2008, Biological and Tianshi Group entered into a Real Property
Transfer Agreement (the “Transfer Agreement”). Under the Transfer Agreement,
Biological transferred to Tianshi Group four buildings consisting of three
workshops and a canteen, totaling 9,974.31 square meters, located at No. 6
Yuanquan Road, Wuqing Development Area, Tianjin New-Tech Industry Park,
China.




Pursuant
to the Transfer Agreement, Tianshi Group will pay Biological RMB 32,800,000 (or
US $4,797,328) to Biological in 2009. This transaction resulted in a loss of RMB
1,912,983 (or $274,762) for Biological. In 2009, Tianshi Group paid RMB
15,000,000 ( or $2,193,900).





On
January 1, 2009, Biological and Life Resources entered two Lease Agreements with
Tianshi Group, pursuant to which Biological and Life Resources had the right to
use and occupy the workshop spaces being transferred under the Transfer
Agreement. The leases are rent-free, but Biological and Life Resources are
required to pay Tianshi Group for utility charges and maintenance costs on the
buildings. The leases continue until the earlier of the date that Biological and
Life Resources acquire use of alternate facilities or the land use rights on the
underlying property expire. For the year ended December 31,
2009,  Biological and Life Resources recorded $303,056 of the rent
expense, which is not paid to Tianshi Group, but recorded as paid in capital
based upon market price.





Note
11 – Other related party transactions and balances





During
the years 2009 and 2008, 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.


F-14




The
Company’s 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 2009 and 2008.





2009
                    
                    
                    2008Revenue-related
      parties
                    
                    $
                    60,032,968
                    
                    
                    $
                    77,247,898




December31,2009
                      
                      
                      December31,2008Accounts receivable, trade –
      related parties, net of allowance for doubtful accountsof $1,419,178 and $1,108,789 as of
      December 31, 2009 and 2008, respectively
                      
                      $
                      15,379,312
                      
                      
                      $
                      23,941,431Other receivables – related
      parties
                      
                      $
                      44,561,626
                      
                      
                      $
                      15,729,076Advances from customers – related
      parties
                      
                      $
                      4,426,751
                      
                      
                      $
                      3,239,650Other payables – related
      parties
                      
                      $
                      3,326,110
                      
                      
                      $
                      6,373,900Current portion of long-term debt
      - related party
                      
                      $
                      -
                      
                      
                      $
                      2,130,000Long term debt – related
      party
                      
                      $
                      -
                      
                      
                      $
                      2,137,742




Revenue -related
parties




The
details of revenue-related parties are as follows:




2009
                      
                      
                      2008Tianshi
      Engineering
                      
                      $
                      25,298,232
                      
                      
                      $
                      33,711,474Overseas Related
      Companies
                      
                      
                      34,734,736
                      
                      
                      
                      43,536,424Total
                      
                      $
                      60,032,968
                      
                      
                      $
                      77,247,898




The
Company markets most of its products through various domestic and international
business entities that are related to the Company through common
ownership.





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


F-15




Accounts receivable, trade
-related parties




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





December 31, 2009
                  
                  
                  December 31, 2008Tianshi
      Engineering
                  
                  $
                  5,035,320
                  
                  
                  $
                  4,362,355Overseas Related
      Companies
                  
                  
                  11,763,170
                  
                  
                  
                  20,687,865Allowance for Doubtful
      Accounts
                  
                  
                  (1,419,178
                  )
                  
                  
                  (1,108,789
                  )Total
                  
                  $
                  15,379,312
                  
                  
                  $
                  23,941,431




On
December 31, 2009, there are accounts receivable due from some overseas related
companies outstanding over one year. The Company made full provision for the
year end balance of accounts receivable due from those overseas related
companies.




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:





December31,
                    
                    
                    December31,2009
                    
                    
                    2008Tianshi
      Investment
                    
                    $
                    37,000,000
                    
                    
                    $
                    -Tianshi
      Engineering
                    
                    
                    5,688,926
                    
                    
                    
                    11,636,208Tianshi
    Group
                    
                    
                    1,613,168
                    
                    
                    
                    4,018,078Sego Property service(Tianjin)
      Co.,Ltd.
                    
                    
                    77,612
                    
                    
                    
                    -Tiens SmartFlow Logistics (
      International) Group Ltd.
                    
                    
                    74,651
                    
                    
                    
                    -Tianjin Tianshi Life Science Co.,
      Ltd.
                    
                    
                    55,878
                    
                    
                    
                    -Tianshi Yinshi
      Hotel
                    
                    
                    36,566
                    
                    
                    
                    36,475Tianshi Indonesia
      Logistic&Trade Co.,Ltd.
                    
                    
                    9,873
                    
                    
                    
                    -Sego Hotel management
      Co.,Ltd.
                    
                    
                    2,730
                    
                    
                    
                    -Tianshi
      Pharmaceuticals
                    
                    
                    1,588
                    
                    
                    
                    5,922Shengshi Real Estate
      Development
                    
                    
                    634
                    
                    
                    
                    1,657Tianjin Xingda Travel Co.,
      Ltd
                    
                    
                    -
                    
                    
                    
                    12,932Shanghai Tianshi Jinquan
      Investment Co.
                    
                    
                    -
                    
                    
                    
                    1,846Beijin Xingda Travel Co.,
      Ltd
                    
                    
                    -
                    
                    
                    
                    1,195Others
                    
                    
                    -
                    
                    
                    
                    14,763Total
                    
                    $
                    44,561,626
                    
                    
                    $
                    15,729,076





On
November 15, 2009, Tianshi Holdings entered a Contract for the Transfer of
Equity Interests to sell all of the registered share capital of Tiens Yihai it
owned to Tianshi Investment Pursuant to the agreement, Tianshi Holdings agreed
to sell its 96% equity interest in Tiens Yihai for $37.0 million. The first
payment of $3,700,000 was settled during the first quarter of 2010, and the
second and final payment of $33,300,000 is due on November 14,
2010.





Historically,
Tianshi Engineering remitted payment to the Company upon sales to third party
customers. However, to support Tianshi Engineering’s marketing efforts in
anticipation of receiving a direct selling license in China, the Company agreed
to allow Tianshi Engineering to defer payment. Balances not remitted to the
Company within 90 days are converted to other receivables - related parties.
Beginning January 1, 2007, the other receivables - related parties became
interest bearing. The stated interest rate is the interest rate for the same
level of loan stipulated by the People’s Bank of China. On April 21, 2009, the
Company entered into a loan agreement with Tianshi Engineering. Pursuant to that
agreement, effective as of April 1, 2009, $2,562,017 of other
receivables-related parties, which originated from Tianshi Engineering as
accounts receivable, became interest bearing. The loan was due on June 30, 2009
and the stated interest rate was 4.86%. Both the principal of $2,562,017 and
interest on the loan of $12,624 were paid off on May 7, 2009. For the year
ended December 31, 2009 and 2008, the interest income from the other receivables
- related parties amounted to $12,624 and $ 0, respectively.





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


F-16





On
December 25, 2008, Biological entered into a Real Property Transfer Agreement
with Tianshi Group, pursuant to which Biological transferred four buildings at
the price of $4,797,328  (See Note 10). As of December 31, 2008, the
remaining balance due from Tianshi Group for the purchase of the four buildings
amounted to $2,603,428.





In order
to avoid exchange loss from the increasing value of the renminbi against the
dollar over the past several years, beginning in 2007 the Company exchanged cash
held in dollars into renminbi through Tianjin Xiongshi Construction and
Decoration Co., Ltd. (“Xiongshi Construction”), a related party construction
company, which is 100% owned by the Company’s current Chairman, Chief Executive
Officer and President, Jinyuan Li. For the years ended December 31, 2009 and
2008, the amounts transferred to Xiongshi Construction and changed to RMB were
$0 and $12,500,000, respectively.




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. As of December 31, 2009 and December 31, 2008, advances from
related party customers amounted to $4.4 million and $3.2 million,
respectively.




Other payables-related
parties




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





December 31, 2009
                    
                    
                    December 31, 2008Fuhong Development
      Co.Ltd.
                    
                    $
                    3,000,000
                    
                    
                    $
                    -Tianshi Germany Co.,
      Ltd.
                    
                    
                    107,326
                    
                    
                    
                    105,553Tianjin Tianshi Globlal
      International Trade Co., Ltd.
                    
                    
                    93,606
                    
                    
                    
                    23,344Tianyuan Capital Development Co.
      Ltd. ("Capital")
                    
                    
                    84,359
                    
                    
                    
                    84,359Tianshi
      Engineering
                    
                    
                    40,805
                    
                    
                    
                    -Tianshi Administrative Committee
      of Industrial Park
                    
                    
                    14
                    
                    
                    
                    14Tianshi
      Investment
                    
                    
                    -
                    
                    
                    
                    6,080,385Beijin Xingda Travel Co.,
      Ltd.
                    
                    
                    -
                    
                    
                    
                    80,245Total
                    
                    $
                    3,326,110
                    
                    
                    $
                    6,373,900





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





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




On
November 10, 2009, Tianshi Holdings borrowed $3,000,000 from Fuhong Development
Co.,Ltd., a British Virgin Islands Company which is 100% owned by Jinyuan Li, to
fund its capital contribution to Life Resources. On the February 10, 2010, the
loan was paid in full by cancelling the same amount Tianshi Investment owed to
the Company.




Long term debt - related
party





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





The
principal of the loan is being paid in consecutive semi-annual installments of
$1,065,000 on the last day of June and December, commencing June 2006 and ending
June 31, 2011. Interest of $186,543 and $266,273 was paid for the years ended
December 31, 2009 and 2008, respectively, and the loan was paid in full by the
Company on December 31, 2009.





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





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





Other transactions with
Tianshi Engineering





On
December 31, 2005, Biological entered four lease agreements with Tianshi
Engineering which enabled Tianshi Engineering to share the use of certain of
Biological’s production workshops and equipment which Tianshi Engineering owns,
or jointly owns with Biological for one year beginning January 1, 2006. These
four lease agreements were renewed in December 2006 for the 2007 fiscal year and
in October 2007 for the 2008 and 2009 fiscal year. On December 25, 2008,
Biological entered into the 2008 Transfer Agreement with Tianshi Group,
pursuant to which Biological transferred to Tianshi Group four buildings subject
to the above described lease agreements. Accordingly, the two production
workshop leases expired at the end of 2008. Rent revenue from these leases
amounted to $219,605 and $326,956 for the years ended 2009 and 2008,
respectively.


F-17





Other transactions with
Tianshi Group





On June
30, 2002, the Company entered an office and facilities lease agreement with
Tianshi Group. Under the terms of the five year agreement, the Company’s annual
rent is equal to 1% of gross revenues. In addition, the Company is obligated to
pay insurance, maintenance and other expenses related to the premises. This
agreement expired on December 31, 2007 and was renewed, effective as of January
1, 2008, for the 2008 fiscal year and again, effective as of January 1, 2009,
for the 2009 fiscal year. Rent expense totaled $458,382 and $545,192 for the
years ended December 31, 2009 and 2008, respectively.





Other
transactions with
Tianshi Investments





On December 20, 2007, Tianshi Holdings
entered a Sale and Purchase Agreement with Tianshi Investment, Biological and
Tianshi Engineering. Pursuant to the Sale and Purchase Agreement, Tianshi
Holdings agreed to buy all of theregistered 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 governmentapproved the
transfer.





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





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





·
            $16,557,914
      was paid by canceling other receivables due to Biological from Tianshi
      Engineering; and





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





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





On
November 15, 2009, Tianshi Holdings entered a Contract for the Transfer of
Equity Interests to sell all of the registered share capital in Tiens Yihai it
owned to Tianshi Investment. Pursuant to the agreement, Tianshi Holdings agreed
to sell its 96% equity interest in Tiens Yihai for $37.0 million.. The first
payment of $3,700,000 was settled during the first quarter of 2010, and the
second and final payment of $33,300,000 is due on November 14,
2010.





Other transactions with
Tianshi Pharmaceutical





On
December 15, 2009, the Company entered into a one-year lease agreement with
Tianshi Pharmaceutical. Under the terms of the lease agreement, the Company
leased equipments at the lease fee of RMB25,383 per month. In addition, the
Company is obligated to pay insurance, maintenance and other expenses related to
the premises. This agreement effective from January 1, 2010 and expired on
December 31, 2010.





Note
12 – Commitments and contingencies





Capital
commitments





Capital
commitments not provided for in the consolidated financial statements include
the followings:





2009
                    
                    
                    2008Purchases of machinery and
      equipment
                    
                    $
                    28,134,098
                    
                    
                    $
                    89,524Construction of
      premises
                    
                    $
                    33,627,022
                    
                    
                    $
                    54,685,540Total
                    
                    $
                    61,761,120
                    
                    
                    $
                    54,775,064




Operating lease commitments
and long-term debt obligations





The
following table sets forth payments due by period for fixed contractual
obligations as of December 31, 2009.


F-18





Payments due by periodLess than 1 year
                      
                      
                      1-3 years
                      
                      
                      3-5
                        years
                      
                      
                      More than 5
                        years
                      
                      
                      TotalOperating Lease
      Obligations
                      
                      $
                      44,527
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      44,527Long-term Debt
      Obligations
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Total fixed contractual
      obligations
                      
                      $
                      44,527
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      44,527





The
Company leases its office building and manufacturing facilities in Tianjin,
China from Tianshi Group, a related party, through common ownership. On June 30,
2002, the Company entered into a written lease agreement with Tianshi Group to
pay annual rent at 1% of its total gross revenues. This agreement expired on
December 31, 2007. The Company entered into a new one-year lease agreement with
Tianshi Group for the fiscal year of 2008 and renewed in January 2009 for the
fiscal year of 2009 with the same terms. Because the rent is based upon a
percentage of its gross total revenues, the Company is not able to include a
fixed figure in the table relating to this obligation. The total amount paid in
2009 under this lease was $458,382.





On
September 4, 2008, the Company entered into a one-year lease agreement (the
“Lease Agreement”) with Tianjin Baofeng Construction & Engineering Co.,
Ltd., an unrelated party company. Under the Lease Agreement, Biological leased a
warehouse of 6,745.28 square meters located in Wuqing New-tech Industrial Park,
Tianjin, China at the lease fees of RMB 87,688.64 per month. The total amount
paid in2009 and 2008 under this lease was $115,365 and $37,784,
respectively.





On
December 15, 2009, the Company entered into a one-year lease agreement with
Tianshi Pharmaceutical. Under the terms of the lease agreement, the Company
leased equipments at the lease fee of RMB25,383 per month. In addition, the
Company is obligated to pay insurance, maintenance and other expenses related to
the premises. This agreement effective from January 1, 2010 and will expire on
December 31, 2010.





Note
13 –Noncontrolling interest and distribution





Effective
from January 1, 2009, the share of Tiens Yihai held by minority shareholder
increased from 0.6% to 4%. On November 15, 2009, Tianshi Holdings entered a
Contract for the Transfer of Equity Interests to sell all of the registered
share capital in Tiens Yihai it owned to Tianshi Investment. The share of Tiens
Yihai held by noncontrolling shareholder decreased from 4% to 0% effective from
November 16, 2009.





Dividends
declared by Biological are split pro rata between the shareholders according to
their ownership interests. 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 noncontrolling ownership percentages. The table below shows
the outstanding dividends payable of Biological which are elimination upon
consolidated, as well as the allocation of dividends between Tianshi Holdings
and the noncontrolling shareholder.





Tianshi
                          
                          
                          NoncontrollingDate
                          
                          Holding
                          
                          
                          Shareholder
                          
                          
                          TotalsDividends outstanding, December
      31, 2007 Balance
                          
                          $
                          8,429,632
                          
                          
                          $
                          4,902,629
                          
                          
                          $
                          13,332,261Dividends
      declared
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Dividends
    paid
                          
                          
                          (2,098,611
                          )
                          
                          
                          (5,070,091
                          )
                          
                          
                          (7,168,702
                          )Accumulated Other Comprehensive
      Income (loss)
                          
                          
                          542,974
                          
                          
                          
                          167,462
                          
                          
                          
                          710,436Dividends outstanding, December
      31, 2008 Balance
                          
                          $
                          6,873,995
                          
                          
                          $
                          -
                          
                          
                          $
                          6,873,995Dividends
      declared
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Dividends
    paid
                          
                          
                          (3,945,510
                          )
                          
                          
                          -
                          
                          
                          
                          (3,945,510
                          )Accumulated Other Comprehensive
      Income (loss)
                          
                          
                          13,452
                          
                          
                          
                          -
                          
                          
                          
                          13,452Dividends outstanding, December
      31, 2009 Balance
                          
                          $
                          2,941,937
                          
                          
                          $
                          -
                          
                          
                          $
                          2,941,937





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 noncontrolling shareholder. Comprehensive income to
Tianshi Holdings for the years ended December 31, 2009 and 2008 amounted to
$13,452 and $542,974 respectively. Comprehensive income to noncontrolling
shareholders for the years ended December 31, 2009 and 2008 amounted to $0 and
$167,462, respectively.




F-19


Note
14 – Accumulated other comprehensive income (loss)





Life
                  
                  
                  TianshiBiological
                  
                  
                  TiensYihai
                  
                  
                  Resources
                  
                  
                  Holdings
                  
                  
                  TotalBalance as of January 1, 2007, as
      adjusted
                  
                  $
                  2,109,074
                  
                  
                  $
                  1,727,692
                  
                  
                  $
                  329,316
                  
                  
                  $
                  1,878,222
                  
                  
                  $
                  6,044,304Increase during the
      year
                  
                  
                  2,358,133
                  
                  
                  
                  2,007,211
                  
                  
                  
                  1,650,382
                  
                  
                  
                  3,900,014
                  
                  
                  
                  9,915,740Balance as of December 31,
      2007
                  
                  $
                  4,467,207
                  
                  
                  $
                  3,734,903
                  
                  
                  $
                  1,979,698
                  
                  
                  $
                  5,778,236
                  
                  
                  $
                  15,960,044Increase during the
      year
                  
                  
                  1,744,406
                  
                  
                  
                  2,158,515
                  
                  
                  
                  3,445,181
                  
                  
                  
                  542,916
                  
                  
                  
                  7,891,018Balance as of December 31,
      2008
                  
                  $
                  6,211,613
                  
                  
                  $
                  5,893,418
                  
                  
                  $
                  5,424,879
                  
                  
                  $
                  6,321,152
                  
                  
                  $
                  23,851,062Increase during the
      year
                  
                  
                  89,014
                  
                  
                  
                  (5,893,418
                  )
                  
                  
                  202,022
                  
                  
                  
                  13,443
                  
                  
                  
                  (5,588,939
                  )Balance as of December 31,
      2009
                  
                  $
                  6,300,627
                  
                  
                  $
                  -
                  
                  
                  $
                  5,626,901
                  
                  
                  $
                  6,334,595
                  
                  
                  $
                  18,262,123





Accumulated
other comprehensive income recorded in Biological, Tiens Yihai and Life
Resources are due to foreign currency translation adjustments. Accumulated other
comprehensive income recorded in Tianshi Holdings is due to the effect of
foreign exchange rates 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





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





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





The
surplus reserve fund is non-distributable other than 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





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





This fund
can only be utilized on capital items for the collective benefit of the
Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. This fund is non-distributable other than
upon liquidation. The transfer to this fund must be made before distribution of
any dividend to shareholders. For the years ended December 31, 2009 and 2008,
the amounts of the Company’s common welfare fund were $5,974,977 and $4,709,499,
respectively.





Enterprise
fund





The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expend on production and operation of the business.  No
minimum contribution is required.  For the years ended December 31,
2009 and 2008, 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, 2009 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. Most of the Company's revenues were
generated from related parties for the years ended December 31, 2009 and 2008.
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:


F-20





2009
                    
                    
                    2008China
                    
                    $
                    27,241,333
                    
                    
                    $
                    33,711,474Asia-Pacific
                    
                    
                    11,805,899
                    
                    
                    
                    19,837,968Europe-Asia
                    
                    
                    10,054,640
                    
                    
                    
                    15,430,118Africa
                    
                    
                    6,838,377
                    
                    
                    
                    4,903,617America
                    
                    
                    4,728,925
                    
                    
                    
                    1,413,444Europe
                    
                    
                    1,306,895
                    
                    
                    
                    1,951,277Total
                    
                    $
                    61,976,069
                    
                    
                    $
                    77,247,898





Revenue
by Product Group:





2009
                    
                    
                    2008Wellness
      products
                    
                    $
                    57,474,154
                    
                    
                    $
                    70,772,304Dietary supplement
      products
                    
                    
                    4,478,222
                    
                    
                    
                    6,432,355Personal care
      products
                    
                    
                    23,693
                    
                    
                    
                    43,239Total
                    
                    $
                    61,976,069
                    
                    
                    $
                    77,247,898





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





Prior to
2008, pursuant to the income tax laws of the PRC concerning Foreign Investment
Enterprises and Foreign Enterprises and various local income tax laws (the
"Income Tax Law"), Sino-foreign joint venture enterprises generally were subject
to income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income as reported in their statutory financial statements
unless the enterprise is located in specially-designated regions or cities for
which more favorable effective rates apply. As Biological, Tiens Yihai and Life
Resources are 80%, 96%, 100%, owned by Tianshi Holdings, respectively, pursuant
to US GAAP, there is no temporary difference between consolidated pretax income
and taxable income.





Biological
is located in Tianjin Wuqing Development Area, a 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.





Biological started generating taxable
profits in the year ended December 31, 2003. Effective January 1, 2005, the
two-year 100% exemption for income taxes expired for Biological and it became subject to
income tax at a reduced rate of 7.5%, which expired on January 1,
2008.


Tiens Yihai is located in a Special
Industry Zone and is subject to a special reduced income tax rate of 15%.
Pursuant to the approval of the relevant local Chinese tax authorities,
Tiens Yihai was fully exempt from PRC income taxes for two years starting from
the first year profits were made, followed by a 7.5% reduced tax rate for the
next three years. In addition, in order to encourage Tiens Yihai to do business in the Special Industry
Zone, the local Chinese tax authorities agreed to refund 50% of the total income
tax after the five-year tax break. As of December 31, 2008, Tiens Yihai was in
the developmental stage of its organization and did nothave any operating
income.





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





Beginning January 1, 2008, the new
Enterprise Income Tax (“EIT”) law replaced the laws for Domestic
Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% will
replace the 33% rate currently applicable to both DES and FIEs. According to the
new EIT, high-tech companies could be subject to a special reduced tax rate of
15%. The qualification of a high-tech company is to be reviewed
annually. Biological currently qualifies as a high-tech company. However, as
there is no detailed regulation regarding the implementation of the new EIT,for the yearof 2008and 2009,Biological was required by the local
tax authority to prepay
income tax at a tax rate of 25%.On December 17, 2009, the prepaid
income tax $1,562,168 for the year of 2008 was fully
refunded.





According to the new EIT, Life Resources
could still be fully exempt from PRC income taxes for two years starting from January 1, 2008,
followed by a 12.5% reduced tax rate for the next three years. However,beforethetax exemption qualificationofLife Resourceswas approved by the tax authority, Life
Resources was required by local tax authority to prepay income tax at a tax rate of
25%.On October10,2008the approvalwasissued and the prepaid income
tax$685,475in Life Resourceswasrefundedin 2009.





Provisions
for income taxes were all current income tax expenses and for the years ended
December, 2009 and 2008 were $930,703 and $2,345,474, respectively.





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


F-21





2009
                  
                  
                  2008U.S. Statutory
      rate
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %Foreign income not recognized in
      USA
                  
                  
                  (34.0
                  )
                  
                  
                  (34.0
                  )China income
      taxes
                  
                  
                  25.0
                  
                  
                  
                  25.0Effect of reduced tax
      rate
                  
                  
                  (20.6
                  )
                  
                  
                  -Total provision for income
      taxes
                  
                  
                  4.4
                  %
                  
                  
                  25.0
                  %





The
estimated tax savings due to the reduced tax rate for the years ended December
31, 2009 and 2008 amounted to $4,311,490 and $8,052,908, 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, 2009 and 2008 by $0.06 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 employees are entitled to a retirement
pension amount calculated based upon their salaries at their dates of retirement
and their length of service in accordance with a government managed pension
plan. The PRC government is responsible for the pension liability to the retired
staff.





The
company is required to make contributions to the state retirement plan at 20% of
the employees' monthly salary. Employees are required to contribute 8% of their
salary to the plan. Total pension expense incurred by the Company amounted to
$1,505.954 and $795,419 for the years ended December 31, 2009 and 2008,
respectively.





The
Company also has an unemployment insurance plan for its employees. The plan
requires each employee to contribute 1% of his or her salary to the plan. The
Company matches the contributions in an amount equal to two times the
contribution of each participant. The Company made contributions to the
unemployment insurance plan of $149,206 and $79,976 for the years ended December
31, 2009 and 2008, respectively. All contributions are paid to a PRC insurance
company, which in turn, is responsible for the unemployment liability. On
January 1, 2002, the Company introduced a basic medical insurance plan for its
employees. Pursuant to that medical insurance plan, the Company is required to
pay an amount equal to 10% of its employees' salary to a PRC insurance company,
which amounted to $761,901 and $407,992 for the years ended December 31, 2009
and 2008, respectively.


F-22