U.S.
SECURITIES AND EXCHANGE COMMISSION
  Washington,
D.C. 20549
  FORM
10-K
  x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
fiscal year ended December 31, 2008
  or
  o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
transition period from _____ to_____
  
 Commission
File Number: 001-32477
  TIENS BIOTECH GROUP (USA), INC.
 (Exact
name of registrant as specified in its charter)
  
 Delaware
                75-2926439(State
      or other jurisdiction of incorporation or organization )
                (I.R.S.
      Employer Identification No.)No.
      6, Yuanquan Rd.
                  Wuqing
      New Tech Industrial Park
                  Tianjin,
      China 301700
                  (Address
      of principal executive offices) (Zip Code)
  Registrant’s
Telephone Number, including area code: (011) 86-22-8213-7626
  Securities
registered under 12(b) of the Exchange Act:
 
 Title of Each Class
                Name of Each Exchange on which
      RegisteredCommon
      Stock, par value $0.001
                NYSE
      Alternext US LLC
  Securities
registered under 12(g) of the Exchange Act: None.
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o  Nox
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes o  Nox
  Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x  Noo
  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. o
  Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.
 o Large Accelerated
Filer  o Accelerated
Filero  Non-Accelerated
Filerx  Smaller
Reporting Company
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o  Nox
  Based
upon the closing sale price of $1.52 per share of Common Stock on NYSE Alternext
US LLC on June 30, 2008, the aggregate market value of the 5,498,586 shares of
voting stock held by non-affiliates of the registrant was approximately
$8,357,850.72.
  There
were 71,333,586 shares of the registrant’s common stock outstanding on March 27,
2009.
  Documents
incorporated by reference – None.
   
 
 TABLE  OF
CONTENTS
 PART
      I
                                                                    2ITEM
      1. BUSINESS.
                                                                    2ITEM
      1A. RISK FACTORS.
                                                                    7ITEM
      1B. UNRESOLVED STAFF COMMENTS.
                                                                    15ITEM
      2. PROPERTIES.
                                                                    15ITEM
      3. LEGAL PROCEEDINGS.
                                                                    16ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
                                                                    16PART
      II
                                                                    17ITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASERS OF EQUITY SECURITIES.
                                                                    17ITEM
      6. SELECTED FINANCIAL DATA.
                                                                    19ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS.
                                                                    19ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK.
                                                                    24ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
                                                                    25ITEM 9.
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
                                                                    25ITEM
      9A (T). CONTROLS AND PROCEDURES.
                                                                    25ITEM
      9B OTHER INFORMATION.
                                                                    26PART
      III
                                                                    26ITEM
      10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
                                                                    26ITEM
      11. EXECUTIVE COMPENSATION.
                                                                    28ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
      RELATED STOCKHOLDER MATTERS.
                                                                    33ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE.
                                                                    33ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
                                                                    39PART
      IV
                                                                    40ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                                                                    40SIGNATURES
                                                                    44
  
   
  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, including the risks outlined under Risk Factors
contained in Item 1A of this Annual Report 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.
  AVAILABILITY
OF SEC FILINGS
  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.
  
  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 46 countries that in turn sell them to
independent direct sales distributors.
  Corporate
History and Organization
  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.
  2
   
  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.
  On
December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
with Tianshi International Investment Group Co., Ltd., a British Virgin Islands
Company (“Tianshi Investment”).  Jinyuan Li owns 100% of Tianshi
Investment.  Pursuant to the Sale and Purchase Agreement, Tianshi
Holdings agreed to buy all of the registered share capital of Life Resources for
$64.2 million.  On March 13, 2008, the Chinese government approved the
transfer of the shares of Life Resources, and Tianshi Holdings became the 100%
owner of Life Resources.  Life Resources is currently constructing
research and development, manufacturing and logistic facilities, as well as
administrative offices in Tianjin, China totaling approximately 420,000 square
meters.  We intend to move our headquarters to these new facilities
once they are completed.
  On August
25, 2008, Life Resources entered a definitive agreement with the Wuqing Branch
Bureau of Tianjin Municipal Land and Resources and Administrative Bureau (the
“Tianjin Government”) and Tianjin Tiens Life Science Co., Ltd. (“Life Science”)
pursuant to which Life Resources and Life Science will make a payment to the
Tianjin Government in connection with changes to the zoning on several parcels
of land on which they respectively have land use rights from “industrial” to
“educational”. On August 28 and 29, 2008, Life Resources paid a total of RMB
42,252,723 ($ 6,163,827) in connection with the zoning changes to its
parcel.
  The
following chart shows the ownership interests in our operating
subsidiaries.
  chart
  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 have
put great emphasis on product quality assurance. In 2002, we were awarded a
Quality System Certificate for compliance with the standard “ISO9001: 2000” in
the area of Design and Development, Production and Service of Food and Health
Care Food in China. In addition, many of our products have received a
certificate for Hazard Analysis Critical Control Point (“HACCP”). HACCP
identifies and assesses hazards and risk associated with the manufacture,
distribution and use of food-handling establishments. In 2007, four of our
products received a kosher certificate from the Kosher Supervision of America
(“KSA”), which is recognized by rabbinical societies throughout the
world.  These products bear the KSA symbol, which tells consumers that
they are in compliance with kosher standards.
  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 (a) (b)
                  Tianshi
      Breast Beauty Capsules (a)Chewable
      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  Capsules (a)Tianshi
      Cell Rejuvenation Capsules (a) (b)
                  Tianshi
      Hemp Seed Oil Softgels (a)Tianshi
      Chitosan Capsules (a) (b)
                  Tianshi
      Lycopene Tablets (a) (b)Tianshi
      Cordyceps Capsules (a) (b)
                  Tianshi
      Multi-Vit-Mine Coffee (a) (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 Capsules (a)Tianshi
      PressureCare Tea (b)
                  Tianshi
      Propeptide Polypeptide Albumen Powder (b)Tianshi
      Slimming Tea (a) (b) (c)
                  Tianshi
      Rich Selenium Green Tea (a)Tianshi
      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 (a) (b)Tianshi
      Super Calcium Powder for Children (a) (b)
                  Tianshi
      Tibet-Garlic Capsules (a) (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.
  For the
years ended December 31, 2008 and 2007, all of our revenue was generated from
related party customers. See note 18 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 2008 and 2007, our Tianshi
Cordyceps Capsules accounted for 15.4% and 18.1% of our revenue,
respectively, and our Tianshi Nutrient Super Calcium Powder accounted for
16.8% and 15.8% of our revenue, respectively.
  4
   
  Trademarks
and Patents
  We
consider the “Tiens” logo important to our business and have registered our
products under the logo “Tiens” with the State Administration of Industry and
Commerce in China. The registration is valid for a period of ten years from May
21, 2002 and can be renewed for further ten-year periods multiple
times.  We have conducted extensive research and developed Tianshi
Super Calcium Powder with Metabolic Factors and Tianshi Super Calcium Powder for
Children, which have each been awarded a patent from State Intellectual
Properties Office in China with respective patent numbers of ZL97115067.2 and
ZL97115068.0. These two patents are effective for 20 years, commencing on
January 13, 2001.
  Suppliers
  We have
established long-term relationships with most of our suppliers. We believe that
the raw materials required for manufacturing our products are relatively easy to
find and alternative suppliers are convenient to locate.
  Research
and Development
  We
incurred research and development expenses of $1.5million and $0.7 million
in 2008 and 2007, respectively. As of December 31, 2008, we employed 119 staff
members in research and development, which includes 50 additional employees
hired for our research and development team during 2008.
  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 2008 Tianshi Engineering closed two of its less
profitable branches in China.  As of December 31, 2008, Tianshi
Engineering had 98 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 2008, 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.
  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.
  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 46 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 2008, we reduced the number of countries
where we sell directly to overseas affiliates from 52 to
46.  Therefore, some of our overseas affiliate customers are now
selling our products on to other overseas affiliates which are no longer our
direct customers.  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 2008 our highest sales
outside of China were to the following eleven countries, in descending
order:  Indonesia, Russia, Ukraine, India, Vietnam, Nigeria,
Kazakhstan, Congo, Hungary, Kenya and Peru.
  5
   
  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%.
  Backlog
was $14.2 million as of December 31, 2008, compared to $12.2 million as of
December 31, 2007.  We expect all of the backlog at the end of 2008 to
be filled within the 2009 fiscal year.
  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 China pursuant to China’s
regulations governing direct selling. In some instances, these licenses can be
limited to certain cities and/or provinces. In cities
and/or provinces where Avon or Alticor (Amway) do not have a direct selling
license, they use similar methods for sale as our company.  Avon and
Alticor (Amway) are our main competitors in our Chinese operations because they
sell products similar to ours to the same type of consumers we
target. 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 mainly 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 the product samples to one of the government
      appointed research institutes;
  ·
                The
      appointed research institute conducts clinic trials, stability tests,
      function tests and toxicity tests on the product, makes a report and sends
      the report back to SFDA within 6 months;
and
  ·
                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 12
months.  Dietary supplement products are not subject to SFDA
regulation.
  6
   
  Sales
and Marketing Regulations
  In most
countries, sales of our products are usually considered under the categories of
general commodities, which do not require specific permits and are not subject
to the strict regulations applied to drugs and medicine. In some countries,
direct selling (or multi-level marketing) is highly regulated or prohibited.
Since we sell our products to our affiliated companies for sale internationally,
the local approval issues with respect to sales and distribution are addressed
by our affiliates.
  In China,
we are aiming to expand our market share through the branches, chain stores, and
affiliated companies of Tianshi Engineering, our affiliate who sells our
products in China. The regulatory environment with respect to direct selling in
this market remains fluid and the process for obtaining the necessary
governmental approvals have been interpreted differently by different
governmental authorities. The direct selling regulations require Tianshi
Engineering to apply for approval to conduct a direct selling enterprise in
China.
  Tianshi
Engineering has applied for a direct selling license in a number of provinces
and must obtain a series of approvals from the Departments of Commerce in such
provinces, as well as the Departments of Commerce in each city and district in
which we plan to operate.  Tianshi Engineering is also required to
obtain the approval of the State Ministry of Commerce, which is the national
government authority overseeing direct selling.
  Tianshi
Engineering has found that it is taking more time than anticipated to work
through the approval process with the Chinese authorities.  These
authorities have broad discretion in interpreting the regulations and granting
necessary approvals.  A delay in obtaining approvals at one level can
delay 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 2008, we did not incur any costs to comply with
environmental laws.
  Employees
  As of
December 31, 2008, we had 1,549 employees.  We believe that our
relations with our employees are satisfactory.
  ITEM
1A.  RISK
FACTORS.
  THE
FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS,
FINANCIAL OR OTHERWISE . REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT
OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT
THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR
STATEMENTS.  WE ARE SUBJECT TO, AMONG OTHERS, THE FOLLOWING
RISKS:
  RISKS
RELATED TO OUR BUSINESS
  A
GENERAL ECONOMIC DOWNTURN, A RECESSION IN CHINA OR IN ONE OR MORE OF THE 46
COUNTRIES WHERE WE SELL TO INTERNATIONAL AFFILIATED COMPANIES OR SUDDEN
DISRUPTION IN BUSINESS CONDITIONS MAY AFFECT CONSUMER PURCHASES OF DISCRETIONARY
ITEMS, INCLUDING NUTRITION SUPPLEMENT PRODUCTS, WHICH COULD ADVERSELY AFFECT OUR
BUSINESS.
  7
   
  Consumer
spending is generally affected by a number of factors, including general
economic conditions, the level of unemployment, inflation, interest rates,
energy costs, gasoline prices and consumer confidence generally, all of which
are beyond our control. Consumer purchases of discretionary items tend to
decline during recessionary periods, when disposable income is lower, and may
impact sales of our products. In addition, sudden disruptions in business
conditions as a result of a terrorist attack, retaliation and the threat of
further attacks or retaliation, war, adverse weather conditions and climate
changes or other natural disasters, pandemic situations or large scale power
outages can have a short or, sometimes, long-term impact on consumer spending. A
downturn in the economies in China or in one or more of the 46 countries where
we sell to international affiliated companies, or where they sell to other
companies, including any recession or a sudden disruption of business conditions
in those economies, could adversely affect our business, financial condition,
and results of operation.
  WE
MAY NOT BE ABLE TO RAISE ADEQUATE FUNDS TO COMPLETE THE CONSTRUCTION OF OUR NEW
HEADQUARTERS, RESEARCH AND DEVELOPMENT AND MANUFACTURING FACILITIES BEING BUILT
BY LIFE RESOURCES.
  As of
December 31, 2008, the majority of the main structures of the Life Resources
facility construction project had been completed. Since September 30, 2008, the
office buildings, warehouses, work plants, product exhibition center and
dormitories have undergone internal decoration. The cost of the completed work
of these facilities is approximately $69,581,772 (based on an exchange rate of
$1 = RMB 6.85 as of September 30, 2008), which includes amounts paid for the
underlying land use rights.  The main structures of the quality
control center, power center, boiler room and new main material center are
expected be completed in the first half of 2009 and internal decoration is
expected to be completed in the second half of 2009.  As of the end of
2008, the cost of the completed work of these facilities was $78,782,353 (based
on an exchange rate of $1 = RMB 6.8542 as of December 31, 2008), which includes
amounts paid for the underlying land use right.  We expect that all
construction work and equipment installation will be completed in 2009 and that
the Life Resources facility is estimated to begin operation by the end of
2009.  We have provided for an amount of up to $72,957,554 (based on
an exchange rate of $1 = RMB 6.8533 as of January 1, 2009) in our 2009 budget
for capital expenditures on the Life Resources facility. Depending on the rate
of construction and our cash flow, we may require additional financing to
complete the funding of the Life Resources facility construction project. If we
are not able to fund the completion of the new facilities, our future growth
opportunities may be limited.
  OUR
REPUTATION, REVENUES AND OPERATING INCOME MAY BE ADVERSELY AFFECTED BY PRODUCT
LIABILITY CLAIMS.
  As a
manufacturer of products designed for human consumption, claims may be brought
against us that a product injured its consumer. Our dietary supplement products
consist of vitamins, minerals, herbs and other ingredients that are not subject
to pre-market regulatory approval. Our products could contain contaminated
substances, and some of our products contain innovative ingredients that do not
have long histories of human consumption. Previously unknown adverse reactions
resulting from human consumption of these ingredients could occur. A product
liability claim against us could result in increased costs and could adversely
affect our reputation with our customers, which in turn could adversely affect
our revenues and operating income.
  OUR
MANUFACTURING PROCESS IS SUBJECT TO RISKS.
  There are
risks associated with ingredients mixing and production processes and
techniques. Our manufacturing process requires a significant degree of technical
expertise. If we fail to manufacture our products to specifications or
inadvertently use defective materials in the manufacturing process, the
reliability and performance of our products will be compromised.
  We rely
on our manufacturing operations to produce nearly all of the proprietary
products we sell. Any significant disruption in those operations for any reason,
such as regulatory requirements and loss of certifications, power interruptions,
fires, hurricanes, war or other force majeure, could adversely affect our sales
and customer relationships.
  OUR
NEWLY DEVELOPED PRODUCTS MAY NOT BE COMPATIBLE WITH MARKET NEEDS.
  Our
business is particularly subject to changing consumer trends and preferences.
Our continued success depends in part on our ability to anticipate and respond
to these changes, and we may not respond in a timely or commercially appropriate
manner to such changes. Because markets for nutrition supplement products
differentiate geographically, we must accurately assess specific demand in each
specific market into which we wish to make sales. If we fail to accurately
assess consumer health needs in each market we target, we may face limited
market acceptance of our products, which could have a material adverse effect on
our sales and revenue.
  8
   
  OUR
PRODUCTS MUST KEEP PACE WITH ADVANCES IN THE INDUSTRY OR THEY MAY BE DISPLACED
BY COMPETITORS’ NEWLY DEVELOPED PRODUCTS.
  The
nutrition supplement products industry is characterized by rapid product
development, with significant competitive advantages gained by companies that
introduce products that are first to market, deliver constant innovation in
products and techniques, offer frequent new product introductions and have
competitive prices. Our future growth partially depends on our ability to
develop products that are more effective in meeting consumer needs. In addition,
we must be able to manufacture and effectively market those products. The sales
of our existing products may decline if a competing product is introduced by
other companies.
  The
success of our new product offerings depends upon a number of factors, including
our ability to:
  ·
                accurately
      anticipate consumer needs;
  ·
                innovate
      and develop new products;
  ·
                successfully
      commercialize new products in a timely
manner;
  ·
                price
      our products competitively;
  ·
                manufacture
      and deliver our products in sufficient volumes and in a timely manner;
      and
  ·
                differentiate
      our product offerings from those of our
  competitors.
  If we
fail to do any of the above or we focus on technologies that do not lead to more
effective products, our current and future products could be surpassed by more
effective or advanced products of others.
  WE
CONDUCT OUR BUSINESS WITH RELATED PARTIES, AND YOUR INVESTMENT MAY BE SUBJECT TO
CONFLICT OF INTEREST AND SELF-DEALING RISKS.
  Due to
the inter-related ownership and business dealings among us and our affiliates,
there are conflict of interest and self-dealing risks. We have affiliated
companies or business entities that are owned by Jinyuan Li and his immediate
family members (mostly his daughter Baolan Li). Although all affiliated
companies and business entities were established so that they are legally and
financially independent, except for the common ownership, they are centrally
administrated by Tianshi Group. The decisions of Tianshi Group could materially
affect the operation of our business, which could be adverse to our
investors.
  We sell
all of our products for resale in China to Tianshi Engineering. As both we and
Tianshi Engineering are majority owned by Jinyuan Li, even given consideration
to the internal price transferring policies set among the related parties, these
internal policies could be faulty or might not be strictly
followed.
  WE
HAVE LIMITED CONTROL OVER THE ACTIVITIES OF OUR DISTRIBUTORS.
  We place
significant reliance on a network of affiliates to act as our primary sales
force. Although a majority of our affiliated companies are controlled in whole
or part by Jinyuan Li, our Chairman, Chief Executive Officer and President, such
affiliates are not employed or otherwise controlled by us and are generally free
to conduct their business at their own discretion. The distributors are
dedicated more to establishing their own reputations and business relationships
than to promoting our products. The simultaneous loss of a number of these
distributors could have a material adverse effect on our business, financial
condition, and results of operations.
  9
   
  WE
FACE RISKS DUE TO OUR RELIANCE ON SALES IN INTERNATIONAL MARKETS.
  Our
future success will depend in part on the continued expansion of international
sales. Such international operations expose us to certain risks, including but
not limited to: a need for export licenses; unexpected regulatory requirements;
tariffs and other potential trade barriers and restrictions; political, legal
and economic instability in foreign markets; longer account receivable cycles;
difficulties in managing operations across disparate geographic areas; foreign
currency fluctuations; limited protection of our intellectual property rights in
some countries; dependence on local distributors; and potential disruptions in
sales due to military or terrorist acts.  Any or a combination of
these risks could result in a material adverse effect on our business, financial
condition or results of operations.
  OUR
PRODUCTS ARE SUBJECT TO REGULATION OVER NUTRITIONAL SUPPLEMENT PRODUCTS IN
MARKETS OUTSIDE CHINA.
  Nutrition
supplement products are subject to regulatory requirements that vary by country.
Obtaining approval to sell nutrition supplement products internationally
involves complexities of dealing with a variety of governmental regulations. We
have limited experience in dealing with the specific regulations that may be
required to sell our products in certain international markets, which could
delay our ability to obtain relevant regulatory approval for our products. In
addition, our product sales in other countries are subject to product regulatory
regimes of various degrees and direct marketing or distribution regulations.
Although currently these aspects are handled by our affiliated distributors in
the relevant jurisdictions, there can be no assurance that the current
operations of our company and our affiliates and distributors will not be
adversely affected by compliance issues and changes in applicable laws and
regulations in relevant jurisdictions.
  THE
DISTRIBUTION OF OUR PRODUCTS IS SUBJECT TO REGULATION OUTSIDE
CHINA.
  Products
distributed outside China are subject to government regulations of different
jurisdictions, which could be stricter than in China. In some developed
countries, the government regulations for product approval could be stricter
than in China, while in developing countries, government regulation could be
uncertain. Our products could take a significantly longer time than we expect to
gain regulatory approval or may never gain approval in certain countries, which
could limit our ability to promote, sell and distribute products. In addition,
in terms of our marketing approach, multi-level marketing may also be prohibited
in some countries. As such, our sales may be adversely affected if such approval
cannot be obtained in certain jurisdictions.
  OUR
MANAGEMENT LACKS EXPERIENCE OPERATING A U.S. PUBLIC COMPANY.
  Our
management had no experience operating a U.S. public company before our
acquisition of Tianshi Holdings. The initial difficulties with public company
regulations faced by U.S. managers of a newly public company are aggravated with
respect to our management, by our unfamiliarity with Western regulatory regimes
and language and time zone differences. In addition, management must integrate
new accounting rules and control procedures to comply with the requirements of
the Sarbanes-Oxley Act of 2002. Learning compliance is likely to distract
management from operations to a greater degree than might be the case of
management of a U.S. company, and the period during which our management masters
the rules, when errors are more likely to occur, may be longer. Accordingly, the
expense and operational risks inherent to a transition from private to public
company are greater for Tiens USA than might usually be the case.
  RISKS
RELATED TO DOING BUSINESS IN CHINA
  WE
ARE SUBJECT TO THE RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA.
  As most
of our operations are conducted in China, we are subject to special
considerations and significant risks not typically associated with companies
operating in North America and Western Europe. These include risks associated
with, among others, the political, economic and legal environments and foreign
currency exchange. Our results may be adversely affected by changes in the
political and social conditions in China, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
  10
   
  Although
the majority of productive assets in China are owned by the Chinese government,
in the past several years the government has implemented economic reform
measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
  ·
                We
      will be able to capitalize on economic
reforms;
  ·
                The
      Chinese government will continue its pursuit of economic reform
      policies;
  ·
                The
      economic policies, even if pursued, will be successful;
  and
  ·
                Economic
      policies will not be significantly altered from time to
    time.
  A
CAMPAIGN IMPOSED BY THE CHINESE GOVERNMENT AGAINST THE EXPORT OF UNSAFE FOOD AND
SUBSTANDARD PRODUCTS, IN HINDERING OUR ABILITY TO EXPORT OUR PRODUCTS
INTERNATIONALLY.
  In August
2007, China’s Administration of Quality Supervision, Inspection and Quarantine
(“AQSIQ”) announced an ongoing national campaign in China against unsafe food
and substandard products. The special campaign against poor product quality was
launched in response to a series of safety scares involving Chinese products
worldwide. The campaign set 20 detailed goals, including twelve “100 percents”.
For example, 100 percent of food producers should be licensed; 100 percent of
agricultural wholesale markets in cities must be monitored; 100 percent of
suppliers of raw materials for exported products should be inspected; and 100
percent of agricultural products must be free of five types of strong
pesticides.
  As a
result of this campaign by the AQSIQ, there has been a general slow-down and
backlog of export clearances for Chinese food products, and from August 2007
through the first quarter of 2008, we experienced significant delays in
obtaining export clearance for all of the products which we sell to our
international affiliates. Beginning in the second quarter of 2008, these export
restrictions were reduced for exports to countries in Africa and Asia, but
remained in place for exports to countries in Europe and the Americas. During
the third quarter of 2008, these export restrictions were further reduced and
the campaign ended at the end of 2008.
  We
believe that these restrictions have resulted in some of our international
affiliates not being able to purchase sufficient quantities of our products to
meet their demand during 2007 and 2008, resulting in a loss of sales. Any
similar campaigns in the future could have a negative impact on our
revenue.
  THE
RESEARCH, DEVELOPMENT, TESTING, MANUFACTURING AND MARKETING OF OUR PRODUCTS ARE
SUBJECT TO VARIOUS GOVERNMENTAL REGULATIONS IN CHINA.
  Government
regulation includes inspection of and controls over testing, manufacturing,
safety and environmental controls, efficacy, labeling, advertising, promotion,
record keeping and the sale and distribution of wellness products. Tianshi
Engineering is also subject to government regulations with respect to the prices
it will charge, the rebates it may offer to customers and the methods of its
marketing. Government regulation may substantially increase the cost of
developing, manufacturing and selling our products.
  UNCERTAINTY
IN THE DEVELOPMENT OF DIRECT SELLING REGULATIONS MAY ADVERSELY AFFECT SALES OF
OUR PRODUCTS IN CHINA.
  Substantially
all of our assets are located in China, and approximately 41% and 48% of our
revenues in 2007 and 2008, respectively, were derived from our operations in
China. Accordingly, our operations are subject, to a significant degree, to
Chinese law. In China, we are aiming to expand our market share through the
branches, chain stores, and affiliated companies of Tianshi Engineering, our
affiliate who sells our products in China. The regulatory environment with
respect to direct selling in this market remains fluid and the process for
obtaining the necessary governmental approvals have been interpreted differently
by different governmental authorities. The direct selling regulations require
Tianshi Engineering to apply for approval to conduct a direct selling enterprise
in China.
  11
   
  Tianshi
Engineering has applied for a direct selling license in a number of provinces
and must obtain a series of approvals from the Departments of Commerce in such
provinces, as well as the Departments of Commerce in each city and district in
which we plan to operate. Tianshi Engineering is also required to obtain the
approval of the State Ministry of Commerce, which is the national government
authority overseeing direct selling.
  Tianshi
Engineering has found that it is taking more time than anticipated to work
through the approval process with the Chinese authorities. These authorities
have broad discretion in interpreting the regulations and granting necessary
approvals. A delay in obtaining approvals at one level can delay our ability to
obtain approvals at the next level. The complexity of the approval process as
well as the government’s continued cautious approach as direct selling develops
in China makes it difficult to predict a timeline for obtaining these approvals.
If Tianshi Engineering does not receive a direct selling license in China, then
its ability to compete against its competitors who have received such a license
may be hurt. As a result, Tianshi Engineering may lose distributors who find a
competitor’s direct selling business and compensation model more attractive.
This could materially decrease the revenue that we receive from sales by Tianshi
Engineering in China.
  IF
PREFERENTIAL TAX CONCESSIONS GRANTED BY THE PRC GOVERNMENT CHANGE OR EXPIRE, OUR
FINANCIAL RESULTS AND RESULTS OF OPERATIONS WOULD BE MATERIALLY AND ADVERSELY
AFFECTED.
  Our
results of operation may be adversely affected by changes to or expiration of
preferential tax concessions that our Chinese subsidiaries, Biological and Life
Resources currently enjoy. The statutory tax rate generally applicable to
domestic Chinese companies was 33% before January 1, 2008. On January 1, 2008,
the new Chinese Enterprise Income Tax (“EIT”) law replaced the existing laws for
Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”). The new
standard EIT rate of 25% is now applicable to both DES and FIEs. A reduced rate
of 10% may be possible for high-tech companies which qualified by local
government and reviewed annually. As a result of preferential tax rate
incentives, our operations under Biological have been subject to relatively
lower tax liabilities than under the statutory tax rate. The estimated tax
savings for the year ended December 31, 2008 and 2007 for Biological amounted to
approximately $1,563,649 and $6,851,099, respectively. 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. The estimated tax savings for the year ended December 31, 2008
amounted to $6,489,259 for Life Resources.
 
 Tax laws
in China are subject to interpretations by relevant tax authorities. The
preferential tax treatment may not remain in effect or may change, in which case
we could be required to pay the higher income tax rate generally applicable to
Chinese companies, or such other rate as the relevant tax authorities may
determine to be required by the laws of China.
  WE
ARE SUBJECT TO COMPLEX CHINESE BUSINESS REGULATIONS.
  As China
changes its economy from planned to more market-oriented, uncertainties arise
regarding governmental policies and measures. Although, in recent years, the
Chinese government has implemented measures emphasizing the use of market forces
for economic reform, reduction of state ownership of productive assets, and
establishment of sound corporate governance practices, a substantial portion of
productive assets in China are still owned by the Chinese government. For
example, all lands are state owned and leased to business entities or
individuals through governmental grants of state-owned land use rights. The
grant process is typically based on government policies at the time of grant,
which can be lengthy and complex and may adversely affect our planned
manufacturing expansion. The Chinese government also exercises significant
control over China’s economic growth through allocation of resources, foreign
currency control and providing preferential treatment to particular industries
or companies.
  BECAUSE
MOST OF OUR DIRECTORS AND OFFICERS RESIDE OUTSIDE OF THE UNITED STATES, AND
SUBSTANTIALLY ALL OF OUR ASSETS ARE LOCATED OUTSIDE OF THE UNITED STATES, IT MAY
BE DIFFICULT FOR INVESTORS TO ENFORCE THEIR LEGAL RIGHTS AGAINST SUCH
INDIVIDUALS OR SUCH ASSETS.
  Most of
our directors and officers reside outside of the United States, and
substantially all of our assets are located outside of the United States. As a
result, it may not be possible for investors in the United States to enforce
their legal rights, to effect service of process upon our directors or officers
or to enforce judgments of United States courts predicated upon civil
liabilities and criminal penalties of our directors and officers under Federal
securities laws. Although China has executed the Agreement on Mutual Judicial
Assistance in Criminal Matters with the United States in June 2000, there is no
extradition treaty between the United States and China. Therefore, it is unclear
whether criminal penalties under United States federal securities laws would be
enforced effectively in China, if at all.
  12
   
  DUE
TO VARIOUS RESTRICTIONS UNDER PRC LAWS ON THE DISTRIBUTION OF DIVIDENDS BY OUR
PRC OPERATING COMPANIES, WE MAY NOT BE ABLE TO PAY DIVIDENDS TO OUR
STOCKHOLDERS.
  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
Biological and Life Resources, may pay dividends only out of their accumulated
profits, if any, determined in accordance with PRC accounting standards and
regulations. Additionally, Biological and 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.  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.
  THE
CHINESE LEGAL SYSTEM IS NOT FULLY DEVELOPED AND HAS INHERENT UNCERTAINTIES THAT
COULD LIMIT THE LEGAL PROTECTIONS AVAILABLE TO INVESTORS.
  The
Chinese legal system is a system based on written statutes and their
interpretation by the Supreme People’s Court. Prior court decisions may be cited
for reference but have limited legal precedent. Since 1979, the PRC government
has been developing a comprehensive system of commercial laws, and considerable
progress has been made in introducing laws and regulations dealing with economic
matters such as foreign investment, corporate organization and governance,
commerce, taxation and trade. Two examples are the promulgation of the Contract
Law of the PRC to unify the various economic contract laws into a single code,
which went into effect on October 1, 1999, and the Securities Law of the
People’s Republic of China, which went into effect on July 1, 1999. However,
because these laws and regulations are relatively new, and because of the
limited volume of published cases and their non-binding nature, interpretation
and enforcement of these laws and regulations involve uncertainties. In
addition, as the Chinese legal system develops, changes in such laws and
regulations, their interpretation or their enforcement may have a material
adverse effect on our business operations.
  WE
MAY EXPERIENCE DIFFICULTIES IN RESOLUTION OF LEGAL DISPUTES.
  As China
has not developed a dispute resolution mechanism similar to the Western court
system, it may be difficult to enforce contracts and dispute resolution over
Chinese projects and joint ventures can be difficult.  There is no
assurance that any dispute involving our business in China can be resolved
expeditiously and satisfactorily.
  CHINESE
ECONOMIC, POLITICAL AND SOCIAL CONDITIONS AS WELL AS GOVERNMENT POLICIES COULD
ADVERSELY AFFECT OUR BUSINESS.
  All of
our assets and operations are located in China. The economy of China differs
from the economies of most developed countries in many respects, including
government involvement, level of development, growth rate,  control of
foreign exchange, and allocation of resources.  The economy of China
has been changing from a planned economy to a more market-oriented economy.
Although in recent years the Chinese government has implemented measures
emphasizing the utilization of market forces for economic reform, the reduction
of state ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the Chinese government. In addition, the Chinese
government continues to play a significant role in regulating industry by
imposing industrial policies. It also exercises significant control over China’s
economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies.
  13
   
  The
economy of China has experienced significant growth in the past 20 years, but
growth has been uneven both geographically and among various sectors of the
economy. The Chinese government has implemented various measures from time to
time to control the rate of economic growth. Some of these measures benefit the
overall economy of China, but may have a negative effect on us. For example, our
operating results and financial condition may be adversely affected
by:
  ·
                changes
      in the rate or method of taxation;
  ·
                imposition
      of additional restrictions on currency conversion and remittances
      abroad;
  ·
                reduction
      in tariff or quota protection and other import restrictions;
      and
  ·
                changes
      in the usage and costs of state-controlled transportation
      services.
  FLUCTUATIONS
IN THE VALUE OF THE CHINESE RENMINBI RELATIVE TO FOREIGN CURRENCIES COULD AFFECT
OUR OPERATING RESULTS.
  Substantially
all our revenues and expenses are denominated in the Chinese Renminbi. However,
we use the United States dollar for financial reporting purposes. The value of
Chinese Renminbi against the United States dollar and other currencies may
fluctuate and is affected by, among other things, changes in China’s political
and economic conditions. The Chinese government values the exchange rate of the
Chinese Renminbi against a number of currencies, rather than just exclusively
the United States dollar. Although the Chinese government has stated its
intention to support the value of the Chinese Renminbi, we cannot assure you
that the government will not revalue it. As our operations are primarily in
China, any significant revaluation of the Chinese Renminbi may materially and
adversely affect our cash flows, revenues and financial condition. To date, we
have not engaged in any hedging transactions in connection with our
operations.
  
  RISKS
RELATED TO OUR COMMON STOCK
  THE
LIQUIDITY OF OUR COMMON STOCK IS AFFECTED BY ITS LIMITED TRADING
MARKET.
  Shares of
our common stock are traded on NYSE Alternext US LLC under the symbol “TBV”. The
trading volume of our common stock historically has been limited and sporadic.
As a result , the price for our common stock is not necessarily a reliable
indicator of its fair market value and may fluctuate widely.
  OUR
COMMON STOCK MAY BE SUBJECT TO REGULATIONS PRESCRIBED BY THE SECURITIES AND
EXCHANGE COMMISSION RELATING TO “PENNY STOCK.”
  The
Securities and Exchange Commission has adopted regulations that generally define
a penny stock to be any equity security that has a market price (as defined in
such regulations) of less than $5.00 per share, subject to certain exceptions.
If our common stock meets the definition of a penny stock, it will be subjected
to these regulations, which impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors.
  WE
ARE MAJORITY OWNED BY ONE STOCKHOLDER.
  Our
president and chief executive officer, Jinyuan Li, controls a majority of our
common stock. Jinyuan Li beneficially owns approximately 95.1% of our
outstanding common stock. As a result, Jinyuan Li has the ability to exert
significant control over our management and affairs requiring stockholder
approval, including approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a
change in control, including a merger, consolidation or other business
combination involving us, or discouraging a potential acquirer from making a
tender offer or otherwise attempting to obtain control, even if such change of
control would benefit our other shareholders.
  14
   
  WE
DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE, AND THE LACK OF
DIVIDENDS MAY HAVE A NEGATIVE EFFECT ON THE STOCK PRICE.
  We have
never declared or paid any cash dividends or distributions on our common stock.
We currently intend to retain our future earnings to support operations and to
finance expansion and, therefore, do not anticipate paying any cash dividends on
our common stock in the foreseeable future.  Also, see risk factor
titled “Due to Various Restrictions Under PRC Laws on the Distribution of
Dividends by Our PRC Operating Companies, We May Not Be Able to Pay Dividends to
Our Stockholders.”
  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.  Effective January 1, 2008, we entered into a new lease with
Tianshi Group regarding the following properties on the same terms as the lease
which expired at the end of 2007:
  ·
                three
      office buildings with a total area of 8,265 square
  meters;
  ·
                one
      research building with an area of 2,400 square meters;
  and
  ·
                one
      dormitory with an area of 2,365 square
meters.
  In 2008
we paid $545,192 to Tianshi Group under the lease.  Effective January
1, 2009, we entered into a new lease with Tianshi Group regarding the same
properties and on the same terms as the lease which expired at the end of
2008.
  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 pursuant to which
Biological has the right to use and occupy the office and workshop spaces being
transferred under the Transfer Agreement. The lease is rent-free, but Biological
is required to pay Tianshi Group for utility charges and maintenance costs on
the buildings. The lease continues until the earlier of the date that we move to
the new administrative offices being constructed by Life Resources, or the land
use rights on the underlying property expire.
  The
following properties are covered by the December 14, 2007 lease:
  ·
                two
      workshops with an area of 8,600 square
meters;
  ·
                two
      warehouses with an area of 9,447 square meters;
  and
  ·
                one
      power station with an area of 615 square
meters
  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 ($4,785,520) over several
installments during 2009.
  15
   
  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 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.
  Life
Resources Property
  On
December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
with Tianshi Investment to buy all of the registered share capital of Life
Resources for $64.2 million. The closing of the transaction was subject to
government approval of transfer of the share capital of Life Resources to
Tianshi Holdings.  On March 13, 2008, the Chinese government approved
the transfer. Pursuant to the Sale and Purchase Agreement, the Tianshi Holdings
advanced a deposit of $64,247,182 to Tianshi Investment on December 20, 2007.
This acquisition deposit was settled as follows:
  ·
                $28,592,743
      was paid by canceling a loan in the principal amount of RMB 200,000,000 to
      Tianshi Engineering owned by Biological together with interest
      accrued;
  ·
                $16,557,914
      was paid by canceling of other receivable owned by Tianshi Engineering to
      Biological; and
  ·
                $19,096,525
      was paid in cash.
  Life
Resources is currently constructing research and development, manufacturing and
logistic facilities, as well as administrative offices totaling approximately
420,000 square meters. Construction began in July 2006. The facilities are
located 7 kilometers from our current headquarters in Tianjin,
China.
  As of
December 31, 2008, the majority of the main structures of the Life Resources
facility construction project had been completed. Since September 30, 2008, the
office buildings, warehouses, work plants, product exhibition center and
dormitories have undergone internal decoration. The cost of the completed work
of these facilities is approximately $69,581,772 (based on an exchange rate of
$1 = RMB 6.8551 as of September 30, 2008), which includes amounts paid for the
underlying land use rights.  The main structures of the quality
control center, power center, boiler room and new main material center are
expected be completed in the first half of 2009 and internal decoration is
expected to be completed in the second half of 2009.  As of the end of
2008, the cost of the completed work of these facilities was $78,782,353 (based
on an exchange rate of $1 = RMB 6.8542 as of December 31, 2008), which includes
amounts paid for the underlying land use right.  We expect that all
construction work and equipment installation will be complete in 2009 and that
the Life Resources facility is estimated to begin operation by the end of
2009.  We have provided for an amount of up to $72,957,554 (based on
an exchange rate of $1 = RMB 6.8533 as of January 1, 2009) in its 2009 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.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
  On
December 4, 2008, the annual meeting of our stockholders (the “Annual Meeting”)
was held at our Tianjin offices for the following purposes:
  1.
                  Elect
      the following persons to the Board of Directors: Jinyuan Li, Zheng Wan,
      Yupeng Yan, Gilbert Raker, Howard Balloch, and Socorro
      Quintero.
  16
  2.
                  Ratify
      the Board of Directors’ appointment of Grobstein, Horwath & Company
      LLP, the independent registered public accountants as our auditor for the
      fiscal year 2008.
  In this
Annual Meeting, there were accordingly present, in person or by proxy, an
aggregate of 68,210,917 shares of Common Stock, such shares being a majority of
the 71,333,586 shares of Common Stock entitled to notice of and to vote at the
meeting.
  The
result of the vote taken for the election of directors at the meeting was as
follows:
 
 Directors
                    
                    No.
      of Shares For
                    
                    
                    No.
      of Shares Against
                    
                    
                    Withheld
      AuthorityJinyuan
      Li
                    
                    
                    68,091,345
                    
                    
                    
                    106,522
                    
                    
                    
                    13,050Zheng
      Wan
                    
                    
                    68,091,645
                    
                    
                    
                    106,222
                    
                    
                    
                    13,050Yupeng
      Yan
                    
                    
                    68,090,655
                    
                    
                    
                    107,212
                    
                    
                    
                    13,050Socorro
      Quintero
                    
                    
                    68,197,304
                    
                    
                    
                    563
                    
                    
                    
                    13,050Howard
      Balloch
                    
                    
                    68,090,255
                    
                    
                    
                    107,612
                    
                    
                    
                    13,050Gilbert
      Raker
                    
                    
                    68,197,304
                    
                    
                    
                    563
                    
                    
                    
                    13,050
  The result of the vote taken for the ratification
of the appointment of Grobstein, Horwath & Company LLP was as
follows:
  ·
                68,197,773
      shares voted in favor of the
proposal,
  ·
                989
      shares voted against the proposal,
and
  ·
                9,802
      shares abstained.
  
  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 Alternext US LLC under the symbol “TBV”. The
following table sets forth the range of high and low bid prices for our common
stock reported by NYSE Alternext US LLC in each fiscal quarter from January 1,
2007 to December 31, 2008.
 
 High
                  Low2007Quarter
      Ended March 31
                  $
      6.99
                  $
      3.75Quarter
      Ended June 30
                  $
      4.55
                  $
      3.55Quarter
      ended September 30
                  $
      4.55
                  $
      2.65Quarter
      ended December 31
                  $
      6.85
                  $
      2.252008Quarter
      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
                  $
      0.76
  
  17
   Stockholders
  As of
March 27, 2009, there were a total of 71,333,586 shares of our common stock
outstanding, held by approximately 937 stockholders of record. This number of
holders of record does not represent the actual number of beneficial owners of
shares of our common stock because shares are frequently held in “street name”
by securities dealers and others for the benefit of individual owners who have
the right to vote their shares.
  Dividend
Policy
  We have
not declared any dividends on our common stock since inception and do not intend
to pay dividends on our common stock in the foreseeable future.  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.”
  18
   ITEM
6.  SELECTED
FINANCIAL DATA.
  This
information has been omitted based on the Company’s status as a smaller
reporting company.
  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.
  On
December 20, 2007 Tianshi Holdings entered into 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 of the shares of Life Resources, and Tianshi
Holdings became the 100% owner of Life Resources.  As Tianshi Holdings
and Life Resources were under common control by Jinyuan Li before the
combination, the combination was treated for accounting purposes as a pooling of
interests.  Our balance sheet at December 31, 2007 and financial
statements for the twelve months ended December 31, 2007 year were adjusted as
if Life Resources had been combined with us before January 1, 2007.
  Overview
  Tiens USA
researches, develops, manufactures, and markets nutrition supplement products,
including wellness products and dietary supplement products. Our operations are
conducted from our headquarters in Tianjin, China through our 80% owned
subsidiary, Biological 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. We have developed and produce 37 nutrition
supplement products, which include wellness products and dietary nutrition
supplements.
  In China,
we sell our products to Tianshi Engineering, an affiliated company. Tianshi
Engineering, in turn, sells the products to customers through its branches and
affiliated companies and at chain stores which are owned by individual
distributors.  Internationally, we sell our products to overseas
affiliates who in turn 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.
  19
   
  
  Results
of Operations
  Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
  Revenue.In 2008 revenue was
$77.2 million compared to $54.9 million in 2007, an increaseof 40.7%. The breakdown
of revenue between Chinese and international sales is as follows:
  Chinese
and International Revenue
  RevenueRegion
                
                Year
      2008
                
                Year
      2007
                
                %
      ChangeChina
                
                $
      33,711,474
                
                $22,476,135
                
                50.0%International
                
                $
      43,536,424
                
                $32,423,925
                
                34.3%
  We
believe that our strong sales growth in China was due to increased marketing
efforts during 2008. In addition, 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. The price increase of Tianshi Engineering products
will not affect the price at which Biological sells to Tianshi
Engineering.
  The
application of Tianshi Engineering for a direct selling license in China is
still pending.  Until the application is approved, Tianshi Engineering
will continue to sell our products through its branches, affiliated companies,
and chain stores in China.
  Increased
international sales reflect a sharp increase in sales to Russia and Indonesia
during 2008. In addition, in August of 2007, Administration for Quality
Supervision, Inspection and Quarantine (AQSIQ) announced an ongoing national
campaign in China against unsafe food and substandard products.  The
special campaign against poor product quality was launched in response to a
series safety scares involving Chinese products worldwide. The campaign set 20
detailed goals, including twelve “100 percents”.  For example, 100
percent of food producers should be licensed; 100 percent of agricultural
wholesale markets in cities must be monitored; 100 percent of suppliers of raw
materials for exported products should be inspected; and 100 percent of
agricultural products must be free of five types of strong
pesticides.
  As a
result of this campaign by the AQSIQ, there has been a general slow-down and
backlog of export clearances for Chinese food products, and from August 2007
through the first quarter of 2008, we experienced significant delays in
obtaining export clearance for all of the products which we sell to our
international affiliates.  Beginning in the second quarter of 2008,
these export restrictions were reduced for exports to countries in Africa and
Asia, but remained in place for exports to countries in Europe and the Americas.
During the last two quarters of 2008, these export restrictions were further
reduced, and the campaign ended at the end of 2008.
  Cost of sales. Cost of sales
were $24.9 million in 2008 compared to $16.5 million in 2007, an increase of
50.5%.  This increase was primarily due to the corresponding increase
in sales revenue. Cost of sales increased at a higher rate than revenue because
of increases in the costs of raw materials and packing materials, and an
increase in the portion of the products we sold in 2008 bearing a higher cost of
production, relative to our other products, than in 2007.
  Gross profit. Gross profit
increased by 36.5% to $52.4 million in 2008, compared to $38.4 million in 2007.
The gross profit margin for 2008 was 67.8% compared to 69.9% in
2007.  This decrease reflects an increase in the costs of raw
materials and packing materials, and an increase in the portion of the products
we sold in 2008 bearing a higher cost of production, relative to other products,
than in 2007.
  Selling, general and administrative
expenses. Selling, general and administrative expenses increased by
24.5% to $18.6 million in 2008, compared to $14.9 million in 2007. The increase
was primarily due to increases in salaries and insurance costs ($1,149,665),
allowance for bad debt ($1,037,089), research and development ($828,457),
advertising expenses ($392,774) and house reserve funds ($231,456). The selling
and administrative expenses as a percentage of sales decreased to 24.1% in 2008
from 27.2% in 2007, because of the increase in sales.
  20
   
  Other (expense) income, net.
Other expense, net was $1.5 million of expense in 2008, compared to income of
$1.5 million in 2007. On January 1, 2007, the $25.6 million loan to Tianshi
Engineering became interest bearing.  In addition beginning in January
2007, we adopted a policy pursuant to which accounts receivable relating to
Tianshi Engineering older than 90 days are transferred to other
receivables-related parties and become interest bearing. In December 2007
Tianshi Engineering paid off the $25.6 million loan in full.  No
accounts receivable relating to Tianshi Engineering remained outstanding for
more than 90 days in 2008.
  Net income. For the above
stated reasons, net income in 2008 was $27.7 million compared to $17.9 million
in 2007, an increase of 54.2%.
  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 $18.8 million in 2008, compared to $7.3
million in 2007. The increaseprimarily reflects the
increase in net income and the fact that in 2008 Tianshi Engineering paid us for
products timely, while in 2007 Tianshi Engineering offset much of the amounts
owed to us in purchase liabilities and other liabilities we owed Tianshi
Engineering and its affiliates.
  As of
December 31, 2008, we had positive working capital of $62.0
million.  Cash was $44.9 million as of December 31, 2008, compared to
$54.1 as of December 31, 2007.
  Net cash
used in investing activities was $37.3 million in 2008 compared to $33.7 million
in 2007.  In August 2008, Life Resources paid RMB 42,252,723
($6,164,672) in connection with the zoning changes to one parcel of land on
which the land use rights was changed from “industrial” to
“educational.”
  Net cash
provided by financing activities was $5.8 million for 2008, compared to $21.7
million for 2007.  In 2007, Life Resources received $21 million of
capital contributions from Tianshi Investment.
  Accounts
receivable-related parties increased to $23.9 million as of December 31, 2008
from $14.3 million as of December 31, 2007. This is mainly due to the increase
in sales in the fourth quarter of 2008 compared to that of 2007. Other
receivable-related parties increased to $15.7 million as of December 31, 2008
from $13.9 million as of December 31, 2007. On December 25, 2008, Biological
entered a Real Property Transfer Agreement with Tianshi Group, pursuant to which
Biological transferred four buildings at the price of RMB 32,800,000
($4,785,520). As of December 31, 2008, Tianshi Group had not paid us for the
property transfer.
  Going
forward, our primary requirements for cash consist of:
  ·
                construction
      by Life Resources of new research and development, manufacturing and
      logistic facilities, and administrative
offices;
  ·
                the
      continued production of existing products and general overhead and
      personnel related expenses to support these
  activities;
  ·
                the
      development costs of new products;
and
  ·
                expansion
      of production scale to meet the demands of our
  markets.
  As of
December 31, 2008, the majority of the main structures of the Life Resources
facility construction project had been completed. Since September 30, 2008, the
office buildings, warehouses, work plants, product exhibition center and
dormitories have undergone internal decoration. The cost of the completed work
of these facilities is approximately $69,581,772 (based on an exchange rate of
$1 = RMB 6.8551 as of September 30, 2008), which includes amounts paid for the
underlying land use rights.  The main structures of the quality
control center, power center, boiler room and new main material center are
expected be completed in the first half of 2009 and internal decoration is
expected to be completed in the second half of 2009.  As of the end of
2008, the cost of the completed work of these facilities was $78,782,353 (based
on an exchange rate of $1 = RMB 6.8542 as of December 31, 2008), which includes
amounts paid for the underlying land use right.  We expect that all
construction work and equipment installation will be complete in 2009 and that
the Life Resources facility will begin operations by the end of
2009.  We have provided for an amount of up to $72,957,554 (based on
an exchange rate of $1 = RMB 6.8533 as of January 1, 2009) in its 2009 budget
for capital expenditures on the Life Resources facility.
  21
   
  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
Biological and Life Resources, may pay dividends only out of their accumulated
profits, if any, determined in accordance with PRC accounting standards and
regulations. Additionally, Biological and 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 2009.
  Off-Balance
Sheet Arrangements
  We have
no off-balance sheet arrangements.
  Critical
Accounting Policies
  Management’s
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following reflect the more
critical accounting policies that currently affect our financial condition and
results of operations.
  Revenue
Recognition
  During
2008, we sold both semi-finished products and finished products to Tianshi
Engineering domestically. Revenue from semi-finished products was recognized at
FOB Tianjin shipping point. Revenue from finished products was recognized only
when the related party Chinese distributors recognized sales of 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 their products. In
accordance with SFAS No. 48, “Revenue Recognition when the Right of Return
Exists”, revenue is recorded net of an allowance for estimated returns. Such
reserves are based upon management’s evaluation of historical experience and
estimated costs. The amount of the reserves ultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements. As of December 31, 2008, Tianshi Engineering,
an affiliated company, owned all of the related party distributors which sell
our products in China.
  22
   
  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
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurement"
(“SFAS 157”), which provides enhanced guidance for using fair value to measure
assets and liabilities.  This standard also responds to investors'
requests for expanded information about the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings.  The
standard applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value. The adoption of this Statement had no
effect on the consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" (“SFAS 159”). SFAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective of SFAS 159 is to
provide opportunities to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently, without having to apply
hedge accounting provisions. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 will be effective in the first quarter of fiscal 2008. The
adoption of this Statement had no effect on the consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combination" (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements the
identifiable assets, the liabilities and any non-controlling interest in the
acquiree, and the goodwill acquired in business combination or a gain from a
bargain purchase. It also determines what information to disclose. The objective
of SFAS 141R is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS 141R will
be effective in the first quarter of fiscal 2009. We are evaluating the impact
that this statement will have on its consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements- An amendment of ARB No. 51" (“SFAS 160”).
SFAS 160 provides a guide on how to report a non-controlling interest in
consolidated financial statements. The objective of SFAS 160 is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. SFAS 160
will be effective in the first quarter of fiscal 2009. We are evaluating the
impact, if any, that this statement will have on our consolidated financial
statements.
 
  In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”).
SFAS 161 requires an enhanced disclosure about an entity’s derivative and
hedging activities and thereby improves the transparency of financial reporting.
The objective of SFAS 161 is to provide adequate information about how
derivative and hedging activities affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 will be effective in the first
quarter of fiscal 2009. We are evaluating the impact that this statement will
have on our consolidated financial statements.
  23
   
 
 In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, "Determination of
the Useful Life of Intangible Assets." FSP 142-3 amends the factors an entity
should considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, "Goodwill and Other Intangible Assets." The intent of this FSP if to
improve the consistency between the useful life of a recognized intangible asset
under Statement 142 and the period of expected cash flows to measure the fair
value of the asset under FASB Statement No. 141 (Revised 2007), "Business
Combinations," and other U.S. generally accepted accounting principles (GAAP).
FSP 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. We are currently evaluating the impact, if
any, that FSP 142-3 will have on our consolidated financial
statements.
  In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS
162 shall be effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The adoption of this Statement had no effect on the consolidated
financial statements.
  In May
2008, the FASB issued Statement of Financial Accounting Standards No. 163,
“Accounting for Financial Guarantee Insurance Contracts” (“SFAS 163”). SFAS 163
requires that an insurance enterprise recognize a claim liability prior to an
event of default (insured event) when there is evidence that credit
deteriorations have occurred in an insured financial obligation. SFAS 163 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The adoption of SFAS 163 will not have a material impact on
our consolidated financial statements.
  ITEM
7A.  QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  Effects
of Inflation
  We are
subject to commodity price risks arising from price fluctuations in the market
prices of the various raw materials that comprise our products. Price risks are
managed by each business unit through productivity improvements and
cost-containment measures. For the time being, the management does not believe
that inflation risk is material to our business or our consolidated financial
position, results of operations or cash flows.
  Effect
of Fluctuations in Foreign Exchange Rates
  Our
operating subsidiary, Biological, is located in China, and buys all of its raw
materials in China and sells our products in China using the renminbi as the
functional currency. Based on Chinese government regulations, all foreign
currencies under the category of current accounts are allowed to be freely
exchanged with hard currencies. As of December 31, 2008, the exchange rate was
$1 = RMB 6.85, compared to $1 = RMB 7.31 as of December 31, 2007.
  Substantially
all our revenues and expenses are denominated in the renminbi. However, we use
the dollar for financial reporting purposes. The value of renminbi against the
dollar and other currencies may fluctuate and is affected by, among other
things, changes in China’s political and economic conditions. As our operations
are primarily in China, any significant revaluation of the renminbi may
materially and adversely affect our cash flows, revenues and financial
condition. For example, to the extent that we need to convert dollars into
renminbi for our operations, appreciation of this currency against the dollar
could have a material adverse effect on our business, financial condition and
results of operation. Conversely, if we decide to convert our renminbi into
dollars for other business purposes and the dollar appreciates against this
currency, the dollar equivalent of the renminbi would be reduced.
  We are
exposed to a foreign currency risk arising from the possibility that
fluctuations in foreign exchange rates could impact accounts receivable from our
sales to overseas affiliate companies. Overseas affiliate companies pay for the
products they purchase in US dollars; therefore, the main foreign currency risk
is the fluctuation of the US dollar against other currencies. In general, our
payment term for accounts receivable is approximately 180 days, during which
period those overseas affiliate companies exchange their local currency for US
dollars, and, when we collect the accounts receivable from them in US dollars,
we exchange the US dollars for renminbi. The collection and exchange of local
currency may take overseas affiliates approximately 50 days, almost one third of
our payment term of 180 days.  Thus, we believe that overseas
affiliates bear approximately 30% of our exposure to U.S. currency exchange rate
fluctuations. Sales to overseas affiliates totaled $39.8 million in 2008, and
the average balance of our renminbi-denominated bank accounts was $46.7 million.
Our 70% share in an adverse exchange rate swing of 10% would amount to
approximately $2.8 million of the amount of sales to overseas affiliates and
$3.3 million of the amount of renminbi-denominated bank accounts, which are
insignificant in relation to our assets of $204.9 million and shareholders
equity of $148.9 million as of December 31, 2008.  The total amount of
sales in 2008 was $77.2 million, while the impact of fluctuation of foreign
exchange rates would amount to approximately $2.8 million, which is less than 4%
of the total sales in 2008, and we believe it is immaterial. Therefore, the
anticipated fluctuation of foreign exchange rates will not significantly impact
our relative financial data.
  24
   
  Currently
we have not entered agreements or purchased instruments to hedge our exchange
rate risks, although we may do so in the future.
  ITEM
8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
  The
financial statement required by this item may be found following the signature
page of this Annual Report.
  ITEM
9.  CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
  Not
applicable.
  ITEM
9A  (T).
CONTROLS AND PROCEDURES.
  Disclosure
Controls and Procedures
  Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness, as of December 31, 2008, of the design and
operation of our disclosure controls and procedures, as such term is defined in
Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our
principal executive officer and principal financial officer have concluded that,
as of such date, our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in our Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the 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 Rules
13a-15(f) and 15d-15(f).  Internal control over financial reporting
refers to the process designed by, or under the supervision of, our principal
executive officer and principal financial officer, and effected by our Board of
Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles, and includes those policies and procedures
that:
  (1)
Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
  (2)
Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and directors;
and
  (3)
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could have a
material effect on the financial statements.
  25
   
  Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Management is responsible
for establishing and maintaining adequate internal control over financial
reporting for the company.
  Management
has used the framework set forth in the report entitled Internal
Control—Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission, known as COSO, to evaluate the
effectiveness of our internal control over financial reporting. Based on this
assessment, management has concluded that our internal control over financial
reporting was effective as of December 31, 2008.
  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.  We are not required to include in our Annual Report an
attestation report by our independent auditors under the Public Company
Accounting Oversight Board’s auditing Standard No. 2 until the filing of the
Annual Report for the fiscal year ending December 31, 2009.
  Changes
in Internal Control over Financial Reporting
  There has
been no change in our internal control over financial reporting during the
fourth quarter of 2008 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 27,
2009. Jinyuan Li has served on the Board since September 2003. Zheng Wan was
appointed to the Board in November 2008. All other directors have served on the
Board since January 2004.
 
 NAME
                
                AGE
                
                POSITIONJinyuan
      Li
                
                51
                
                Chairman,  Chief
      Executive Officer, President and DirectorZheng
      Wan
                
                43
                
                Chief
      Financial Officer and DirectorYupeng
      Yan
                
                46
                
                Executive
      Vice President and DirectorSocorro
      Quintero
                
                57
                
                DirectorHoward
      Balloch
                
                58
                
                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.
  26
   
  Jinyuan
Li
  Jinyuan
Li has served as the Chairman of the Board and a Director since September 2003.
Jinyuan Li is also our President and founder. He also serves as President of
Tianshi Group and has held that position since 1995. Mr. Li has 14 years of
experience in the petroleum and plastics industries. He holds a number of
leadership positions in government and social associations, including as
commissioner of the Tianjin Political Consultative Conference; Standing Director
of China Entrepreneur’s National Council; Executive Commissioner of All-China
Federation of Industry and Commerce; Vice President of Chinese Bioengineering
Association; and Vice president of Chinese Healthcare Association. Mr. Li was
elected as one of the Top Ten Most Outstanding Talents in the Greater China
Area; one of the Ten Most Popular Personages Among the High-Ranking, by China
Economic Forum; Excellent Entrepreneur, by the Organization Committee of the
Second Chinese Entrepreneur Forum in 2003, and as the Most Creative Chinese
Businessman of Asia in 2004. Mr. Li holds an MBA from Nankai
University.
  Zheng
Wan
  Mr. Wan
has served as our Chief Financial Officer since November 2008. Prior to that,
Mr. Wan served as General Manager for the Global Financial Center of the Company
from June 2008, and as Manager for the Planning and Accounting Department of the
Company from April 2005 to June 2008. Before joining the Company, Mr. Wan was
the Vice President and Chief Financial Officer of Beijing Founder Information
Technology Co. Ltd., an information technology business, from September 2001 to
April 2005. Mr. Wan received his Bachelor of Economics from Capital Economic and
Business University in Beijing, China, and a Master of Professional Accounting
from Deakin University in Australia.  Mr. Wan is a Certified Public
Accountant in China and holds the title of Senior Accountant.
  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 August 2008 Mr. Yan has served as the General Manager of Tianshi
Group’s Global Marketing Center.  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 served as Assistant Professor of Finance at the University of South
Florida. Dr. Quintero has extensive work experience in various industrial
engineering capacities and management levels while working for Atlantic Steel
Company, Abbott Laboratories and Levi Strauss & Co. She received a Bachelor
of Science in Physics from the University of the Philippines, an M.S. in
Industrial Engineering from the Georgia Institute of Technology, and a Doctorate
in Finance from the University of Texas at Austin.
  Gilbert
Raker
  Mr. Raker
serves as our director and is currently a Partner at Wellfleet Partners, Inc.,
an investment banking and advisory firm in New York.  From November
1988 to January 2009 he was the President, Chief Executive Officer and Chairman
the Board of SEMX Corporation, a 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 the Chief Operating Officer of two New York Stock Exchange listed companies
and served in a variety of capacities in numerous private
companies.  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.
  27
   
  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.
  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 November 17, 2008 for its Annual Meeting
of Stockholders, which was held on December 4, 2008.
  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 Alternext US LLC 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 qualify
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, Henry
Wen, at Tiens Biotech Group (USA), Inc., No. 6, Yuanquan Road, Wuqing New-Tech
Industrial Park, Tianjin, China 301700.
  Section 16(a) Beneficial Ownership Reporting
Compliance
  Based
solely upon a review of Forms 3 and 4 and amendments to these forms furnished to
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
2008.
  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 Alternext US LLC Rules (“NYSE Alternext
Rules”).  Therefore, we are exempt from NYSE Alternext 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.
  28
   
  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 and Wenjun Jiao’s salaries
for 2008 were fixed pursuant to employment agreements with Tianjin Tianshi
Biological Development Co. Ltd. (“Biological”) entered into in 2005. Wenjun Jiao
was our principal financial officer until October 30, 2008. Zheng Wan has been
our principal financial officer since November 12, 2008 and his salary for 2008
was fixed pursuant to an employment agreement dated November 3,
2008.  Their base salaries were based on our CEO’s subjective
perceptions of salaries paid by comparable companies for comparable positions.
The amount of the payments required to be paid upon termination of employment
agreements for specified reasons are determined according to local Chinese
employment regulations. Our executive officers did not receive any bonuses for
2008.  Due to the fact that we does not currently and did not in 2008
give bonuses to any of its named executive officers, Jinyuan Li did not identify
any individual or corporate goals when setting the remuneration of Messrs. Jiao
and Wan for 2008.
  Our
strategy is to maintain its compensation for employees at levels that are equal
to or in excess of those offered by companies of comparable sizes, 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, Jiao and Wan which
provided for base salaries.
  The
employment agreements with Messrs. Li and Wan provide for payments upon
termination for specified reasons. These payments are required by local Chinese
employment regulations. Additional information regarding applicable payments
under such agreements is provided under the heading “Potential Payments Upon
Termination or Change of Control.”
  How
we determine the amount for each element of pay.
  With
respect to the executive officers’ base salaries, our CEO bases his
recommendations on past salary levels and his perception of the quality of their
respective performances and attempts to match their salaries with his perception
of compensation levels at a small number of companies he considers comparable,
although not necessarily included in the NYSE Alternext 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.
  29
   
  Compensation
Committee Interlocks and Insider Participation
  During
2008, the members of the Compensation Committee were Gilbert Raker and Yupeng
Yan. The Compensation Committee did not deliberate on executive compensation for
fiscal 2008.  Wenjun Jiao, Yupeng Yan and Zheng Wan were each an
employee and officer of our company during 2008. 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
2008.
  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, 2008, 2007 and
2006.
 Name
      and
                                          Principal
      Position (1)
                                        
                                        Year
                                        
                                        
                                        Salary
                                          ($)
                                        
                                        
                                        Total
                                          ($)Jinyuan
      Li
                                        
                                        2008
                                        
                                        
                                        $
                                        166,660
                                        
                                        
                                        $
                                        166,660Chairman,
      Chief Executive
                                        
                                        2007
                                        
                                        
                                        $
                                        166,660
                                        
                                        
                                        $
                                        166,6602006
                                        
                                        
                                        $
                                        166,660
                                        
                                        
                                        $
                                        166,660Zheng
      Wan
                                        
                                        2008
                                        
                                        
                                        $
                                        8,618
                                        
                                        
                                        $
                                        8,618Chief
      Financial Officer (2)Wenjun
      Jiao
                                        
                                        2008
                                        
                                        
                                        $
                                        71,815
                                        
                                        
                                        $
                                        71,815Former
      Chief Financial
                                        
                                        2007
                                        
                                        
                                        $
                                        77,000
                                        
                                        
                                        $
                                        77,000Officer
      (3)
                                        
                                        2006
                                        
                                        
                                        $
                                        77,000
                                        
                                        
                                        $
                                        77,000
  (1) Yupeng
Yan was an employee Director of our company during 2008 but did not qualify as a
“named executive officer” because his total compensation was less than
$100,000.
 
 (2)  Zheng
Wan became Chief Financial Officer and Director on November 12, 2008 and was not
an executive officer of our company prior to that.
 
 (3)  Wenjun
Jiao resigned as our Chief Financial Officer, Secretary and Director on October
30, 2008.
 
  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.
  30
   
  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. Wenjun Jiao’s contract was
dated June 1, 2005 and provided for a term through June 30, 2010. The employment
contract for Yupeng Yan is dated April 1, 2004 and provides for a term through
March 31, 2009. Zheng Wan also has an employment contract with Biological, dated
November 3, 2008 which provides for a term through December 31,
2013.
  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 its contract on 30 days’ written
notice.
  For 2008,
we paid a salary of $166,660 to Jinyuan Li and $77,000 to each of Wenjun Jiao
and Yupeng Yan. Mr. Wan’s contract provides for an annual salary of
$80,000.
  Potential
Payments upon Termination or Change of Control
  The
employment contracts of Messrs. Li and Wan each provide for a one-time lump sum
payment equal to six months of the employee’s then current salary if we
terminate their employment contract for one of the following
reasons:
  ·
                The
      employee has a non-work-related injury and is unable to perform his
      responsibilities; or
  ·
                The
      employee is unable to perform his responsibilities for other reasons;
      or
  ·
                The
      circumstances based on which the employment contract was entered into have
      materially changed and the performance of the contract becomes
      impractical; or
  ·
                We
      are contemplating bankruptcy and determine to reduce
  staff.
  Assuming
that Messrs. Li and Wan were terminated for one of the above-stated reason, Mr.
Li would receive $83,330and Mr. Wan would
receive $40,000.  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, 2008, 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, 2008.
  31
  
 Name
      (1)
                      
                      Fees Earned or
                        Paid
      in Cash
                        ($)
                      
                      Total
                        ($)Howard
      Balloch
                      
                      $
                      30,000
                      
                      $
                      30,000Gilbert
      Raker
                      
                      $
                      30,000
                      
                      $
                      30,000Socorro
      Quintero
                      
                      $
                      30,000
                      
                      $
                      30,000Yupeng
      Yan (2)
                      
                      $
                      0
                      
                      $
                      0
    (1)
                Jinyuan
      Li, Wenjun Jiao and Zheng Wan are not included in this table as they were
      our employees during 2008 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 2008 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”.
 
  32
   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 27, 2009 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.
 
 Name
      of Beneficial Owner (1)
                
                Number
      of Shares
                
                Percent
      of ClassJinyuan
      Li
                
                67,830,000
                
                95.1%Zheng
      Wan
                
                --
                
                --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.
  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
Alternext US LLC. 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 Alternext US LLC 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 Alternext US
LLC 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 Alternext US
LLC 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
all of our products through various domestic and international business entities
that are related to us through common ownership. As a result, all of our total
consolidated sales in 2008 were to related parties.
  33


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.
  Internationally,
we sell our products to overseas related companies located in 46 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 2008 and 2007.
  December
      31,
                    2008
                  
                  
                  December
      31, 2007
                    As
      AdjustedAccounts
      receivable, trade – related parties, net of allowance for doubtful
      accounts
                    of
      $1,108,789 and $71,700 as of December 31, 2008 and 2007,
      respectively
                  
                  $
                  23,941,431
                  
                  
                  $
                  14,268,229Other
      receivables – related parties
                  
                  $
                  15,729,076
                  
                  
                  $
                  13,887,138Advances
      from customers – related parties
                  
                  $
                  3,239,650
                  
                  
                  $
                  1,700,838Other
      payables – related parties
                  
                  $
                  6,373,900
                  
                  
                  $
                  7,938,205Current
      portion of long-term debt - related party
                  
                  $
                  2,130,000
                  
                  
                  $
                  2,130,000Long
      term debt – related party
                  
                  $
                  2,137,742
                  
                  
                  $
                  4,267,742
  
  Revenue-related
Parties
  The
details of revenue-related parties are as follows:
  2008
                    
                    
                    2007Tianshi
      Engineering
                    
                    $
                    33,711,474
                    
                    
                    $
                    22,476,135Overseas
      Related Companies
                    
                    
                    43,536,424
                    
                    
                    
                    32,423,925Total
                    
                    $
                    77,247,898
                    
                    
                    $
                    54,900,060
 
 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.
  34
  
  Accounts
Receivable-related Parties
 
 The
details of accounts receivables, trade-related parties are as
follows:
 
 December
      31, 2008
                    
                    December
      31, 2007Tianshi
      Engineering
                    $
                    4,362,355
                    
                    $
                    2,062,333Overseas
      Related Companies
                    
                    20,687,865
                    
                    
                    12,277,596Allowance
      for Doubtful Accounts
                    
                    (1,108,789)
                    
                    
                    (71,700)Total
                    $
                    23,941,431
                    
                    $
                    14,268,229
 
 
 Other
Receivables-related Parties
 
 Other
receivables - related parties are generated by us 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
      31,2007December
      31, 2008
                  
                  As
      AdjustedTianshi
      Engineering
                  $
                  11,636,208
                  $
                  9,460,811Tianshi
      Group
                  
                  4,018,078
                  
                  2,347,489Tianshi
      Yinshi Hotel
                  
                  36,475
                  
                  -Tianjin
      Xingda Travel Co., Ltd
                  
                  12,932
                  
                  1,939Tianshi
      Pharmaceuticals
                  
                  5,922
                  
                  5,065Shanghai
      Tianshi Jinquan Investment Co.
                  
                  1,846
                  
                  874Shengshi
      Real Estate Development
                  
                  1,657
                  
                  2,238Beijin
      Xingda Travel Co., Ltd
                  
                  1,195
                  
                  5,959Tianjin
      Xiongshi Construction and
                    Decoration
      Co., Ltd
                  
                  -
                  
                  2,062,763Others
                  
                  14,763
                  
                  -Total
                  $
                  15,729,076
                  $
                  13,887,138
 
  Historically,
Tianshi Engineering remitted payment to us upon sales to third party
customers.  However, in order to support Tianshi Engineering’s
marketing efforts in anticipation of receiving a direct selling license in
China, we have agreed to allow Tianshi Engineering to defer payment to
us.  Balances not remitted to us within 90 days are converted to other
receivables - related parties.  Beginning on January 1, 2007, the
other receivables - related parties became interest bearing.  The
stated interest rate is the interest rate for the same level of loan stipulated
by the People’s Bank of China. The credit terms provide an interest-free credit
term of three months. Any amounts exceeding this term are transferred from
accounts receivable - related parties to other receivable - related
parties.  Beginning January 1, 2007, the other receivables - related
parties 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. In 2008,
Tianshi Engineering remitted payment to us timely and therefore no accounts
receivable due from Tianshi Engineering were converted to interest bearing
receivables. For the year ended December 31, 2008 and 2007, the interest income
from the other receivables - related parties amounted to $0 and $ 435,913,
respectively.
  During
the years ended December 31, 2008 and 2007, we and Tianshi Group used common
meters at our headquarters for electricity and water, and also used the same
employee insurance account. When making payments to these outside parties, we
usually pay the fees first and then are reimbursed by Tianshi Group. These
pro-rated amounts relating to Tianshi Group are categorized as other receivables
- related parties.
  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 ($4,785,520).  As of December 31, 2008,
Tianshi Group had not paid for the property transfer.
  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, 2008 and 2007, the amounts transferred to
Xiongshi and changed to renminbi were $12,500,000 and $21,028,671,
respectively.
  35
   
  Advances
from Customers-related Parties
  Advances
from related party customers were $3.2 million and $1.7 million as of December
31, 2008 and 2007, 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, 2008
                  
                  
                  December
      31, 2007
                    As
      adjustedTianshi
      Investment
                  
                  $
                  6,080,385
                  
                  
                  $
                  7,490,136Tianshi
      Germany Co., Ltd
                  
                  
                  105,553
                  
                  
                  
                  109,233Tianyuan
      Capital Development Co. Ltd. ("Capital")
                  
                  
                  84,359
                  
                  
                  
                  84,359Beijin
      Xingda Travel Co., Ltd
                  
                  
                  80,245
                  
                  
                  
                  -Tianjin
      Tianshi Global International Trade Co., Ltd
                  
                  
                  23,344
                  
                  
                  
                  -Tianshi
      Administrative Committee of Industrial Park
                  
                  
                  14
                  
                  
                  
                  13Tianshi
      Engineering
                  
                  
                  -
                  
                  
                  
                  244,980Tianshi
      Pharmaceuticals
                  
                  
                  -
                  
                  
                  
                  9,308Tianshi
      Shanghai Co., Ltd
                  
                  
                  -
                  
                  
                  
                  176Total
                  
                  $
                  6,373,900
                  
                  
                  $
                  7,938,205
  
  On
December 21, 2007, we, Tianshi Investment and Life Resources entered a Loan
Agreement, pursuant to which Tianshi Investment loaned $7.5 million to Life
Resources without interest. We agreed to repay the $7.5 million to Tianshi
Investment within five days of the date of the government’s approval of the
transfer of the shares of Life Resources to Tianshi Holdings. On March 13, 2008,
the Chinese government approved the transfer, and we repaid $7.5 million to
Tianshi Investment on March 18, 2008, by canceling $7.5 million of accounts
receivable owed to it by Tianshi Engineering.  (See note 4 to our
consolidated financial statements.)
  On
January 21, 2008, Life Resources and Tianshi Investment entered into a loan
agreement pursuant to which Tianshi Investment provided a loan to Life Resources
for $6.5 million without interest. The loan was due on June 30, 2008. On June
30, 2008, the parties agreed to extend the loan until December 31, 2008. Life
Resources used the loan to increase its registered share capital.  In
November 2008, we paid $419,614.80 to Tianshi Investment. The remaining loan was
extended to June 30, 2009 by the parties as agreed on December 31,
2008.
  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. 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 $266,273 and two installment payments
totaling $2,130,000 were made in 2008.
  36
   
  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. We entered into a new one-year lease agreement with
Tianshi Group, effective January 1, 2008 covering the same facilities and having
identical rent terms.  The total amount paid on this lease amounted to
$545,192 for the 12 months ended December 31, 2008.  Effective January
1, 2009, we entered into a new lease with Tianshi Group regarding the same
facilities and on the same terms as the lease which expired at the end of
2008.
  On
December 14, 2007, Biological entered into a Real Property Transfer Agreement
(the “Transfer Agreement”) with Tianshi Group. Under the Transfer Agreement,
Biological transferred to Tianshi Group title to buildings consisting of
approximately 34,000 square meters total of office, workshop, conference and
exhibition space, located at our headquarters in Tianjin China for
$15,316,496.  Land use rights on the underlying land, which is owned
by the government of China and which rights continue through December 30, 2054
with respect to the conference center property and May 31, 2043 with respect the
other properties were also transferred.  Biological also assigned
certain contracts with third parties related to the servicing and upkeep of the
buildings being transferred (collectively, the “Third Party
Contracts”).  In consideration for the transfer of the buildings and
land-use rights, Tianshi Group paid Biological $15,334,037, plus $3,190,773 to
cover pre-payments previously made by Biological under the Third Party
Contracts.
  On
December 14, 2007, Biological and Tianshi Group also entered a Lease Agreement
pursuant to which Biological has the right to use and occupy the office and
workshop spaces being transferred under the Transfer Agreement. The lease is
rent-free, but Biological is required to pay Tianshi Group for utility charges
and maintenance costs on the buildings. The lease continues until the earlier of
the date that we move to the new administrative facilities being constructed by
Life Resources, or the land use rights on the underlying property
expire.
  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 ($4,785,520). 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.
  Transactions
with Tianshi Engineering
  On
December 31, 2005, Biological entered into four lease agreements with Tianshi
Engineering which enabled Tianshi Engineering to share the use of certain of
Biological’s product production workshops and equipment to manufacture products
which Tianshi Engineering owns, or jointly owns with Biological for one year
started from January 1, 2006. These four lease agreements were renewed in
December 2006 for the 2007 fiscal year and on October 17, 2007 for the 2008
fiscal year. Rent revenue from these leases amounted to $326,965 and $379,083
for the years ended 2008 and 2007, respectively.
  On
October 31, 2007, Biological entered into four lease agreements with Tianshi
Engineering which enable Tianshi Engineering to share the use of certain of
Biological’s product production workshops and equipment to manufacture products
which Tianshi Engineering owns, or jointly owns with Biological.  Each
of the four agreements is effective as of January 1, 2008 and expires on
December 31, 2009. 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):
  37
  
 Lease Agreement
                  
                  Monthly rentLease
      Agreement for Health Products Production Equipment
                  
                  $
                  12,252Lease
      Agreement for Health Products Production Workshops
                  
                  $
                  6,326Lease
      Agreement for Personal Care Product Production Equipment
                  
                  $
                  6,014Lease
      Agreement for Personal Care Products Production Workshops
                  
                  $
                  3,086
  On
December 25, 2008, Biological entered into a Transfer Agreement with Tianshi
Group, the parent company of Tianshi Engineering, pursuant to which Biological
transferred to Tianshi Group four buildings which were all buildings in the
Lease Agreements. The Lease Agreement for Health Products Production Workshops,
entered into on October 31, 2007, the related supplemental agreement entered
into on December 31, 2007, and the Lease Agreement for Personal Care Products
Production Workshops, entered into on October 31, 2007, expired at the end of
fiscal 2008.
  Other
Transactions with Tianshi Engineering
  In
October 2005, Biological entered into two agreements with Tianshi Engineering
regarding the joint ownership of certain certificates issued by the PRC
government to enable Tianshi Engineering to distribute Biological’s products in
China. Biological and Tianshi Engineering continue to have joint ownership of
these certificates.
  On
October 26, 2005, Biological entered an agreement with Tianshi Engineering (the
“Wellness Products Agreement”) relating to the joint ownership of the
Certificates of Domestic Wellness Product issued by the State Food and Drug
Administration of the PRC (the “SFDA”) covering 18 of Biological’s wellness
products (the “Wellness Certificates”) and the relevant production technology.
Pursuant to the Wellness Products Agreement, Biological will jointly share the
ownership of the Wellness Certificates and relevant production technology with
Tianshi Engineering. Under the agreement, Biological and Tianshi Engineering
both have the right to use the Wellness Certificates and all technology to
produce, manufacture and sell wellness products pursuant to local
law.
  On
October 26, 2005, Biological entered an agreement with Tianshi Engineering (the
“Dietary Supplement Products Agreement”) relating to the joint ownership of the
Certificates of Domestic Dietary Supplement Product covering ten of Biological’s
dietary supplement products (the “Dietary Supplement Certificates”) and the
relevant production technology. Pursuant to the Dietary Supplement Products
Agreement, Biological will jointly share the ownership of the Dietary Supplement
Certificates and relevant production technology with Tianshi Engineering.
Tianshi Engineering is agreeing to share ownership of the Dietary Supplement
Certificates and relevant production technology with Biological. Under the
agreement, Biological and Tianshi Engineering both have the right to use the
Dietary Supplement Certificates and all technology to produce, manufacture and
sell the dietary supplement products pursuant to local law.
  Tianshi
Engineering paid Biological the full purchase price for the rights to the
certificates in 2005. The Nutrition Supplements Market Committee of the China
Health Care Association (“CHCA”) assessed the value of the certificates subject
to the agreements. The CHCA is an independent, non-profit organization composed
of manufacturing enterprises, research and development institutions in the
medical and health industry and entrepreneurs and professionals from related
fields.
  Transactions
with Tianshi Pharmaceuticals
  In April
2004, Tianshi Holdings entered a joint venture contract with Tianshi
Pharmaceuticals to establish Tiens Yihai Co. Ltd., a Chinese-Foreign Equity
Joint Venture (“Tiens Yihai”). Tiens Yihai was initially 99.4% owned by Tianshi
Holdings and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai is located in
Shanghai, China, and was established to build a new research and development
facility in Shanghai, China. In March 2007, we decided to suspend the proposed
development by Tiens Yihai.
  On
October 14, 2008, Tiens Yihai received an approval from the local government to
decrease its registered capital from $200 million to $29,989,361, 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.
  38
   
  Due to
the continued uncertainty relating to the Tiens Yihai project, we plan to sell
Tiens Yihai in 2009. Tianshi
Holdings, Tianshi Pharmaceuticals and Tianshi Group entered into a letter of
intent on December 31, 2008, pursuant to which Tianshi Pharmaceuticals agreed to
buy Tianshi Holdings' 96% share of Tiens Yihai, with Tianshi Group guaranteeing
payment.
  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 owned by Biological together with interest
      accrued;
 ·
                $16,557,914
      was paid by canceling of other receivable owned by Tianshi Engineering to
      Biological; and
 ·
                $19,096,525
      was paid in cash.
  On
December 21, 2007, Tianshi Holdings and Tianshi Investment entered into a
Capital Contribution Agreement, pursuant to which Tianshi Investment agreed to
fund a capital increase of Life Resources in the amount of $7.5 million. Tianshi
Holdings agreed to pay back the $7.5 million to Tianshi Investment within five
days of the date of the government approval of the transfer of the shares of
Life Resources to Tianshi Holdings.   The approval was received
on March 13, 2008 and the $7.5 million was paid back on March 18, 2008, by
canceling $7.5 million of accounts receivable owed to us by Tianshi
Engineering.
  On
January 14, 2008, Tianshi Holdings and Tianshi Investment entered into a Loan
Agreement pursuant to which Tianshi Holdings loaned Tianshi Investment $4.1
million without interest.  The loan was required to be used by Tianshi
Investment to increase the registered share capital of Life
Resources.  The loan was due on March 31, 2008, provided however, that
if the government approved the transfer of the shares of Life Resources to
Tianshi Holdings prior to that date, the loan would be cancelled, as Life
Resources would then be a wholly-owned subsidiary of Tianshi
Holdings.  The approval was received on March 13, 2008, and therefore,
the loan was cancelled on the same date.
  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
terminates on September 9, 2009.  The total amount paid in 2008 under
this lease was $37,784.
  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.  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.
  39
   
  Public
Accounting Fees
 
 Moore
      Stephens Wurth Frazer and Torbet, LLP2007Audit
      Fees
                
                $
                200,000Audit
      Related Fees
                
                $
                0Tax
      Fees
                
                $
                5,000All
      Other Fees
                
                $
                0
  Audit
fees were for professional services rendered by MSWF&T during the 2007
fiscal year for the review of the financial statements included in our first and
second quarter reports on Forms 10-Q, and services that are normally provided by
MSWF&T in connection with statutory and regulatory filings or engagements
for that fiscal year.  MSWF&T did not bill any other fees for
services rendered to us during the fiscal year ended December 31, 2007 for
assurance and related services in connection with the audit or review of our
financial statements. Tax fees involved preparation of the consolidated tax
returns. All other fees consisted of professional advice on our company’s
compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
 
 Grobstein,
      Horwath & Company LLP2008
                
                
                2007Audit
      Fees
                
                $
                294,000
                
                
                $
                20,000Audit
      Related Fees
                
                $
                0
                
                
                $
                0Tax
      Fees
                
                $
                5,000
                
                
                $
                0All
      Other Fees
                
                $
                0
                
                
                $
                0
  Audit
fees were for professional services rendered by GH&C during the 2007 fiscal
year for the review of the financial statements included in our third quarter
report on Form 10-Q, and services that are normally provided by GH&C in
connection with statutory and regulatory filings or engagements for that fiscal
year. 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. Tax fees involved
preparation of the consolidated tax returns.GH&C did not bill
any other fees for services rendered to us during the fiscal years ended
December 31, 2007 and 2008 for assurance and related services in connection with
the review of our financial statements.
  Pre-approval
of Services
  The Audit
Committee has adopted pre-approval policies for all services, including both
audit and non-audit services, provided by 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 2007 and 2008.
  
  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.
  40
  
 
 (2)  Not
applicable.
 
 (3)  The
exhibits referred to below, which include the following managerial contracts or
compensatory plans or arrangements:
 
 ·
                Form
      of Labor Contract; and
 
 ·
                Labor
      Contract dated November 3, 2008 between Tianjin Tianshi Biological
      Development Co., Ltd. and Zheng
Wan.
 
 (b) The
exhibits listed on the Exhibit Index are filed as part of this
report.
 
 (c) Not
applicable.
 
  41
  
  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 Group 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 Group 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)
 
  42
  
 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 Wan10.27*
                    Property
      Transfer Agreement dated December 25, 2008 between Tianjin Tianshi
      Biological Development Co., Ltd. and Tianjin Tianshi Group Co.
      Ltd.10.28*
                    Lease
      Agreement dated January 1, 2009 between Tianjin Tianshi Biological
      Development Co., Ltd. and Tianjin Tianshi Group Co.
Ltd.10.29*
                    Equipment
      Lease Agreement dated January 1, 2009 between Tianjin Tiens Life Resources
      Co., Ltd. and Tianjin Tianshi Group Co. Ltd.10.30*
                    Storage
      Service Agreement dated September 4, 2008 between Tianjin Tianshi
      Biological Development Co., Ltd.  and Tianjin Baofeng
      Construction & Engineering Co., Ltd.10.31*
                    Loan
      Agreement Amendment dated December 31, 2008between
      Tianjin Tiens Life Resources Co., Ltd. and Tianshi International
      Investment Group Co., Ltd.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.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.14.1
                    Code
      of Ethics (10)21.1*
                    Subsidiaries31.1*
                    Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2*
                    Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1*
                    Certification
      of the Chief Executive Officer and Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002
 
 * Filed
herewith
 
 (1) Filed
as an exhibit to the Registrant’s Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 31, 2005.
 (2) Filed
as an exhibit to the Registrant’s Form 10-KSB filed with the Securities and
Exchange Commission on March 7, 2002.
 (3) Filed
as an exhibit to the Registrant’s Form 10-K filed with the Securities and
Exchange Commission on March 31, 2006.
 (4) Filed
as an exhibit to the Registrant’s Form 10-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.
  43
   SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  TIENS
      BIOTECH GROUP (USA), INC.Date:  March
      31, 2009/s/ Jinyuan LiJinyuan
      LiChief
      Executive Officer and President(Principal
      Executive Officer)Date:  March
      31, 2009/s/ Zheng WanZheng
      WanChief
      Financial Officer(Principal
      Financial and Accounting
Officer)
  44
  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
                                            
                                            March
      31, 2009Jinyuan
      Li
                                            
                                            Officer
      and President (Principal Executive Officer)/s/ Zheng Wan
                                            
                                            Chief
      Financial Officer (Principal
                                            
                                            March
      31, 2009Zheng
      Wan
                                            
                                            Financial
      and Accounting Officer) and Director/s/ Yupeng Yan
                                            
                                            Executive
      Vice President and Director
                                            
                                            March
      31, 2009Yupeng
      Yan/s/ Gilbert Raker
                                            
                                            Director
                                            
                                            March
      31, 2009Gilbert
      Raker/s/ Howard Balloch
                                            
                                            Director
                                            
                                            March
      31, 2009Howard
      Balloch/s/ Socorro Quintero
                                            
                                            Director
                                            
                                            March
      31, 2009Socorro
      Quintero
  
  45
   TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
  CONSOLIDATED
FINANCIAL STATEMENTS
  DECEMBER
31, 2008
  
 TABLE
OF CONTENTS
  Report
      of Independent Registered Public Accounting Firm
                F-1Report
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets
                F-3Consolidated
      Statements of Income and Other Comprehensive Income
                F-4Consolidated
      Statements of Shareholders’ Equity
                F-5Consolidated
      Statements of Cash Flows
                F-6Notes
      to Consolidated Financial Statements
                F-7
   
  
  
   REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
 To the
Stockholders and Board of Directors of Tiens Biotech Group (USA),
Inc.
 
 We have
audited the accompanying consolidated balance sheet of Tiens Biotech Group
(USA), Inc.  as of December 31, 2008, and the related consolidated
statements of income and other comprehensive income, shareholders’ equity, and
cash flows for the year then ended.  These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
 
 In our
opinion, the 2008 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2008, and the consolidated results of its operations
and its cash flows for the year then ended, in conformity with U.S. generally
accepted accounting principles.
 
 As
discussed in Notes 1, 3, 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.
     
  F-1
   
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Stockholders and Board of Directors of Tiens Biotech Group (USA),
Inc.
 
 We have
audited the accompanying consolidated balance sheet of Tiens Biotech Group
(USA), Inc. (the “Company”) as of December 31, 2007 and the related consolidated
statements of income and other comprehensive income, stockholders’ equity and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
 
 In our
opinion, the 2007 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tiens
Biotech Group (USA), Inc. as of December 31, 2007, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with U.S. generally accepted accounting principles.
 
 As
discussed in Notes 1, 10, 11 and 12 to the consolidated financial statements,
the Company has had numerous significant transactions with entities that are
under common control. The most significant of these transactions is that all of
the Company’s sales are currently and have historically been made to a related
party controlled by the shareholder of the Company
 
  /s/
GROBSTEIN, HORWATH & COMPANY LLP
 
 Sherman
Oaks, California
 March 25,
2008, except for Note 3, as to
 which
date is May 9, 2008
 
  
  
  F-2
  TIENS BIOTECH GROUP (USA), INC. AND
      SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSAS
      OF DECEMBER 31, 2008 AND DECEMBER 31, 2007
 
 20072008
                                
                                
                                As
      AdjustedA S S E T SCURRENT
      ASSETS:Cash
                                
                                $
                                20,992,573
                                
                                
                                $
                                54,081,848Cash
      related to assets held for sale
                                
                                
                                23,861,938
                                
                                
                                
                                -Total
      cash
                                
                                
                                44,854,511
                                
                                
                                
                                54,081,848Accounts
      receivable, trade - related parties, net ofallowance
      for doubtful accounts of $1,108,789 and $71,700as
      of December 31, 2008 and 2007, respectively
                                
                                
                                23,941,431
                                
                                
                                
                                14,268,229Accounts
      receivable, trade - third parties
                                
                                
                                -
                                
                                
                                
                                104,398Inventories
                                
                                
                                8,365,607
                                
                                
                                
                                5,949,963Other
      receivables
                                
                                
                                813,591
                                
                                
                                
                                1,068,343Other
      receivables - related parties
                                
                                
                                15,729,076
                                
                                
                                
                                13,887,138Employee
      advances
                                
                                
                                112,591
                                
                                
                                
                                65,901Prepaid
      expenses
                                
                                
                                301,898
                                
                                
                                
                                623,638Prepaid
      income taxes
                                
                                
                                1,531,207
                                
                                
                                
                                -Assets
      held for Sale
                                
                                
                                10,904,842
                                
                                
                                
                                -Total
      current assets
                                
                                
                                106,554,754
                                
                                
                                
                                90,049,458PROPERTY,
      PLANT AND EQUIPMENT, net
                                
                                
                                10,274,643
                                
                                
                                
                                16,071,900OTHER
      ASSETS:Construction
      in progress
                                
                                
                                72,300,104
                                
                                
                                
                                39,792,774Construction
      deposits
                                
                                
                                2,586,302
                                
                                
                                
                                1,089,216Intangible
      assets, net
                                
                                
                                13,137,195
                                
                                
                                
                                9,246,879Other
      assets
                                
                                
                                87,541
                                
                                
                                
                                5,301,847Total
      other assets
                                
                                
                                88,111,142
                                
                                
                                
                                55,430,716Total
      assets
                                
                                $
                                204,940,539
                                
                                
                                $
                                161,552,074L I A B I L I T I E S    A N
      D    S H A R E H O L D E R S'    E Q U I T
      YCURRENT
      LIABILITIES:Accounts
      payable
                                
                                $
                                6,283,849
                                
                                
                                $
                                4,070,906Advances
      from customers - related parties
                                
                                
                                3,239,650
                                
                                
                                
                                1,700,838Wages
      and benefits payable
                                
                                
                                1,449,146
                                
                                
                                
                                1,250,685Other
      taxes payable
                                
                                
                                117,818
                                
                                
                                
                                536,819Income
      taxes payable
                                
                                
                                -
                                
                                
                                
                                665,726Contractor
      deposits
                                
                                
                                163,248
                                
                                
                                
                                595,128Contractor
      payables
                                
                                
                                11,871,456
                                
                                
                                
                                7,820,285Other
      payables
                                
                                
                                1,933,743
                                
                                
                                
                                1,133,539Other
      payables - related parties
                                
                                
                                6,373,900
                                
                                
                                
                                7,938,205Dividend
      payable to minority interest
                                
                                
                                -
                                
                                
                                
                                4,902,629Current
      portion of long term debt, related party
                                
                                
                                2,130,000
                                
                                
                                
                                2,130,000Liabilities
      directly associated with assets classified as held for
sale
                                
                                
                                122,047
                                
                                
                                
                                -Total
      current liabilities
                                
                                
                                33,684,857
                                
                                
                                
                                32,744,760NON-CURRENT
      LIABILITIESLong
      term debt, net of current portion, related party
                                
                                
                                2,137,742
                                
                                
                                
                                4,267,742Other
      payables-non current
                                
                                
                                -
                                
                                
                                
                                538,130Deferred
      income
                                
                                
                                11,208,844
                                
                                
                                
                                4,895,049Total
      non current liabilities
                                
                                
                                13,346,586
                                
                                
                                
                                9,700,921Total
      liabilities
                                
                                
                                47,031,443
                                
                                
                                
                                42,445,681MINORITY
      INTEREST
                                
                                
                                9,006,438
                                
                                
                                
                                6,144,063COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Common
      stock, $0.001 par value, 250,000,000 shares authorized,71,333,586
      issued and outstanding, respectively
                                
                                
                                71,334
                                
                                
                                
                                71,334Paid-in-capital
                                
                                
                                9,234,123
                                
                                
                                
                                8,842,009Statutory
      reserves
                                
                                
                                9,420,783
                                
                                
                                
                                9,420,783Retained
      earnings
                                
                                
                                106,325,356
                                
                                
                                
                                78,668,160Accumulated
      other comprehensive income
                                
                                
                                23,851,062
                                
                                
                                
                                15,960,044Total
      shareholders' equity
                                
                                
                                148,902,658
                                
                                
                                
                                112,962,330Total
      liabilities and shareholders' equity
                                
                                $
                                204,940,539
                                
                                
                                $
                                161,552,074
 
 The
      accompanying notes are an integral part of this
  statement.
  F-3
  TIENS
      BIOTECH GROUP (USA), INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOMEFOR
      THE YEARS ENDED DECEMBER 31, 2008 and 2007
 
 20072008
                    
                    
                    As
      AdjustedREVENUE
      - RELATED PARTIES
                    
                    $
                    77,247,898
                    
                    
                    $
                    54,900,060COST
      OF SALES - RELATED PARTIES
                    
                    
                    24,870,178
                    
                    
                    
                    16,526,695GROSS
      PROFIT
                    
                    
                    52,377,720
                    
                    
                    
                    38,373,365SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                    
                    
                    18,574,719
                    
                    
                    
                    14,921,414INCOME
      FROM OPERATIONS
                    
                    
                    33,803,001
                    
                    
                    
                    23,451,951(Interest
      expense)
                    
                    
                    (266,273
                    )
                    
                    
                    (399,773
                    )Interest
      income
                    
                    
                    881,070
                    
                    
                    
                    3,038,755Other
      (expense) income, net
                    
                    
                    (2,099,913
                    )
                    
                    
                    (1,161,071
                    )OTHER
      (EXPENSE) INCOME, NET
                    
                    
                    (1,485,116
                    )
                    
                    
                    1,477,911INCOME
      BEFORE PROVISION FOR INCOME TAXESAND
      MINORITY INTEREST
                    
                    
                    32,317,885
                    
                    
                    
                    24,929,862PROVISION
      FOR INCOME TAXES
                    
                    
                    2,345,474
                    
                    
                    
                    2,026,875INCOME
      BEFORE MINORITY INTEREST
                    
                    
                    29,972,411
                    
                    
                    
                    22,902,987MINORITY
      INTEREST
                    
                    
                    2,315,215
                    
                    
                    
                    4,966,397NET
      INCOME
                    
                    
                    27,657,196
                    
                    
                    
                    17,936,590OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                    
                    
                    7,891,018
                    
                    
                    
                    9,915,740COMPREHENSIVE
      INCOME
                    
                    $
                    35,548,214
                    
                    
                    $
                    27,852,330EARNINGS
      PER SHARE, BASIC AND DILUTED
                    
                    $
                    0.39
                    
                    
                    $
                    0.25WEIGHTED
      AVERAGE NUMBER OF SHARES
                    
                    
                    71,333,586
                    
                    
                    
                    71,333,586
 
 The
      accompanying notes are an integral part of this statement.
  F-4
   
 TIENS
      BIOTECH GROUP (USA), INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITYAccumulatedotherNumber
                      
                      
                      Common
                      
                      
                      Paid-in
                      
                      
                      Statutory
                      
                      
                      Retained
                      
                      
                      comprehensiveof
      shares
                      
                      
                      stock
                      
                      
                      capital
                      
                      
                      reserves
                      
                      
                      earnings
                      
                      
                      income
                      
                      
                      TotalsBALANCE,
      January 1, 2007,
                        as
      adjusted,
                      
                      
                      71,333,586
                      
                      
                      $
                      71,334
                      
                      
                      $
                      8,842,009
                      
                      
                      $
                      9,420,783
                      
                      
                      $
                      60,731,570
                      
                      
                      $
                      6,044,304
                      
                      
                      $
                      85,110,000Net
      Income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      17,936,590
                      
                      
                      
                      
                      
                      
                      
                      17,936,590Foreign
      currency translation gain
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      9,915,740
                      
                      
                      
                      9,915,740BALANCE,
      December 31, 2007
                      
                      
                      71,333,586
                      
                      
                      $
                      71,334
                      
                      
                      $
                      8,842,009
                      
                      
                      $
                      9,420,783
                      
                      
                      $
                      78,668,160
                      
                      
                      $
                      15,960,044
                      
                      
                      $
                      112,962,330Net
      Income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      27,657,196
                      
                      
                      
                      
                      
                      
                      
                      27,657,196Foreign
      currency translation gain
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      7,891,018
                      
                      
                      
                      7,891,018Paid-in-capital
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      392,114
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      392,114BALANCE,
      December 31, 2008
                      
                      
                      71,333,586
                      
                      
                      $
                      71,334
                      
                      
                      $
                      9,234,123
                      
                      
                      $
                      9,420,783
                      
                      
                      $
                      106,325,356
                      
                      
                      $
                      23,851,062
                      
                      
                      $
                      148,902,658The
      accompanying notes are an integral part of this statement.
  
  F-5
  TIENS BIOTECH GROUP (USA), INC. AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED DECEMBER 31, 2008 AND 200720072008
                    
                    
                    As
      AdjustedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                    
                    $
                    27,657,196
                    
                    
                    $
                    17,936,590Adjustments
      to reconcile net income to cashprovided
      by (used in) operating activities:Provision
      for doubtful accounts
                    
                    
                    1,037,089
                    
                    
                    
                    (15,076
                    )Minority
      interest
                    
                    
                    2,315,215
                    
                    
                    
                    4,966,397Depreciation
                    
                    
                    2,681,167
                    
                    
                    
                    2,898,586Amortization
                    
                    
                    323,276
                    
                    
                    
                    384,464Interest
      income
                    
                    
                    55,641
                    
                    
                    
                    313,402(Gain)
      loss on sale of assets
                    
                    
                    39,208
                    
                    
                    
                    (145,475
                    )(Gain)
      loss on assets written off
                    
                    
                    192,833
                    
                    
                    
                    -Inventory
      write off
                    
                    
                    -
                    
                    
                    
                    84,521(Increase)
      decrease in assets:Accounts
      receivable, trade - related parties
                    
                    
                    (17,917,994
                    )
                    
                    
                    (25,662,367
                    )Accounts
      receivable, trade - third parties
                    
                    
                    109,674
                    
                    
                    
                    (81,673
                    )Other
      receivables
                    
                    
                    314,367
                    
                    
                    
                    1,824,205Other
      receivables - related parties
                    
                    
                    2,538,775
                    
                    
                    
                    1,439,387Inventories
                    
                    
                    (1,873,607
                    )
                    
                    
                    1,211,822Employee
      advances
                    
                    
                    (42,928
                    )
                    
                    
                    81,239Prepaid
      expense
                    
                    
                    356,136
                    
                    
                    
                    1,586,652Increase
      (decrease) in liabilities:Accounts
      payable
                    
                    
                    2,007,985
                    
                    
                    
                    (313,235
                    )Accounts
      payable - related parties
                    
                    
                    -
                    
                    
                    
                    -Advances
      from customers - related parties
                    
                    
                    1,402,445
                    
                    
                    
                    25,320Wages
      and benefits payable
                    
                    
                    195,555
                    
                    
                    
                    185,502Other
      taxes payable
                    
                    
                    (2,654,720
                    )
                    
                    
                    142,666Other
      payables
                    
                    
                    459,357
                    
                    
                    
                    576,205Other
      payables - related parties
                    
                    
                    (390,158
                    )
                    
                    
                    (107,546
                    )Net
      cash provided by operating activities
                    
                    
                    18,806,512
                    
                    
                    
                    7,331,586CASH
      FLOWS FROM INVESTING ACTIVITIES:Payment
      of deposit on acquisition of Life Resource
                    
                    
                    -
                    
                    
                    
                    (19,096,525
                    )Increase
      in loans receivable - related party
                    
                    
                    -
                    
                    
                    
                    493,941Increase
      in long-term prepaid expense
                    
                    
                    -
                    
                    
                    
                    (209,087
                    )Collections
      from loans to local government
                    
                    
                    457,329
                    
                    
                    
                    -Increase
      in intangible assets
                    
                    
                    (6,068,759
                    )
                    
                    
                    (132,027
                    )Construction
      deposits
                    
                    
                    (4,391,560
                    )
                    
                    
                    (1,045,877
                    )Contractor
      deposits
                    
                    
                    (464,499
                    )
                    
                    
                    346,934Addition
      to construction in progress
                    
                    
                    (25,714,095
                    )
                    
                    
                    (25,196,562
                    )Proceeds
      from sales  of properties
                    
                    
                    426,288
                    
                    
                    
                    14,111,723Purchase
      of equipment and automobiles
                    
                    
                    (1,531,589
                    )
                    
                    
                    (3,003,945
                    )Net
      cash used in investing activities
                    
                    
                    (37,286,885
                    )
                    
                    
                    (33,731,425
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Loan
      from related parties
                    
                    
                    6,080,385
                    
                    
                    
                    27,900,609Increase
      (payment) in other payables-non current
                    
                    
                    (282,664
                    )
                    
                    
                    516,718Increased
      in paid in capital
                    
                    
                    482,516
                    
                    
                    
                    -Increase
      in deferred income
                    
                    
                    5,891,999
                    
                    
                    
                    -Payments
      on long term debt, related party
                    
                    
                    (1,197,662
                    )
                    
                    
                    -Payments
      to minority interest shareholder
                    
                    
                    (5,150,414
                    )
                    
                    
                    (6,676,102
                    )Net
      cash provided by financing activities
                    
                    
                    5,824,160
                    
                    
                    
                    21,741,225EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                    
                    
                    3,428,876
                    
                    
                    
                    3,525,922DECREASE IN
      CASH
                    
                    
                    (9,227,337
                    )
                    
                    
                    (1,132,692
                    )CASH,
      beginning of year
                    
                    
                    54,081,848
                    
                    
                    
                    55,214,540CASH,
      end of year
                    
                    $
                    44,854,511
                    
                    
                    $
                    54,081,848Supplemental
      disclosures of cash flow informationCash
      paid during the year for:Interest
                    
                    $
                    266,273
                    
                    
                    $
                    399,773Income
      taxes
                    
                    $
                    3,877,420
                    
                    
                    $
                    2,215,159
 
 The
      accompanying notes are an integral part of this
  statement.
  F-6
  Note
1 - Background
 
 Tiens
Biotech Group (USA), Inc. (the "Company" or "Tiens") was incorporated on July
13, 1990 as Super Shops, Inc. in the State of Michigan. In October 2000, Super
Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition
Corp., and subsequently to Strategika, Inc. in February 2002. On December 31,
2003, the Company changed its name from Strategika, Inc. to Tiens Biotech Group
(USA), Inc.
 
 The
Company is currently owned 4.91% by public stockholders and 95.09% by Jinyuan
Li, the Company’s current Chairman, CEO and President. The Company owns 100% of
Tianshi International Holdings Group Limited ("Tianshi Holdings"). Tianshi
Holdings owns 80% of Tianjin Tianshi Biological Development Co., Ltd.
("Biological"), 96% of Tiens Yihai Co., Ltd. ("Tiens Yihai") and 100% of Tianjin
Tiens Life Resources Co., Ltd. (“Life Resources”).
 
 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 of Tiens
Yihai
 
 On April
20, 2004, Tianshi Holdings entered a joint venture contract (the “Joint Venture
Project”) with Tianshi Pharmaceuticals to establish Tiens Yihai. Tiens Yihai is
located in Shanghai, the People’s Republic of China (“PRC”), and was established
to build a new research facility which would also produce the Company’s
nutrition supplement, home care, and personal care products. Tianshi Holdings
contributed 99.4% of the registered capital and Tianshi Pharmaceuticals
contributed the remaining 0.6%.
 
 In 2007
the Company decided to transfer the location of its new research and
development, production and marketing center from Shanghai Industrial Park to
Tiens International Health Industrial Park in Wuqing, Tianjin. The Company plans
to sell Tiens Yihai in 2009. In anticipation of this sale, the registered
capital requirement of Tiens Yihai was decreased from $200 million to
$29,989,361 which coincided with its then-current paid in capital. This
reduction was approved by the local government on October 14, 2008. Pursuant to
the change of the registered capital requirement and the capital contributions
from both investors, the share held by Tianshi Holding decreased from 99.4% to
96% and the share held by Tianshi Pharmaceuticals increased to 4% from
0.06%.
  F-7


Acquisition of Life
Resources
 
 On
December 20, 2007, Tianshi Holdings entered a Sale and Purchase Agreement with
Tianshi International Investment Group Co., Ltd., a British Virgin Islands
Company (“Tianshi Investment”). Jinyuan Li owns 100% of Tianshi Investment.
Pursuant to the Sale and Purchase Agreement, Tianshi Holdings agreed to buy all
of the registered share capital of 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, the Chinese government approved
the increase of registered capital of Life Resources from $30,000,000 to
$50,000,000.
 
 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. During 2007, the Company discontinued its personal care
products, which had not been a material part of its business. 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 46
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”).
 
 The reporting
entity
 
 The
Company’s consolidated financial statements reflect the activities of the
following Company subsidiaries:
  F-8
  
 Subsidiary
                  
                  Jurisdiction
                  
                  %
      OwnershipTianshi
      Holding
                  
                  British
      Virgin Islands
                  
                  100.0%Biological
                  
                  P.R.C.
                  
                  80.0%Tiens
      Yihai
                  
                  P.R.C.
                  
                  96.0%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.
 
 As
Tianshi Holdings and Life Resources were under common control before the
combination was consummated, the combination of Life Resources was treated for
accounting purposes in a manner similar to a pooling of interests. The
consolidated financial statements of the Company as of and for the years ended
December 31, 2008 and 2007 were adjusted as if Life Resources had been combined
with the Company on January 1, 2007.
 
 Use of
estimates
 
 The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Management
believes that the estimates utilized in preparing its financial statements are
reasonable. Actual results could differ from these estimates.
 
 Foreign currency
translation
  The
reporting currency of the Company is the US dollar. Biological, Tiens Yihai and
Life Resources’ financial records are maintained and the statutory financial
statements are stated in 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 $7,891,018 and $9,915,740 for the years ended December
31, 2008 and 2007, respectively. Asset and liability accounts at December 31,
2008 were translated at RMB6.85 to $1.00 USD compared to RMB7.31 at December 31,
2007. Equity accounts were stated at their historical rate. The average
translation rates applied to income statement accounts for the years ended
December 31, 2008 and 2007 were RMB6.96 and RMB7.62, 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.
  F-9
  
 Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. These amounts are not material to the
financial statements.
 
 Fair value of financial
instruments
 
 The
Company's financial instruments consist primarily of cash, trade accounts
receivable, trade payables, advances, other receivables, and debt instruments.
The carrying amounts of the Company's financial instruments generally
approximate their fair values at December 31, 2008 and December 31, 2007, except
for long-term debt, which has a fixed interest rate. The fair value of the
long-term debt is estimated based on the borrowing rates currently available to
the Company for bank loans with similar terms and average maturities. The
carrying value and fair value of long-term debt is as follows:
 December
      31, 2008
                  
                  
                  December
      31, 2007Balance
      sheet amount
                  
                  
                  Fair
      value
                  
                  
                  Balance
      sheet amount
                  
                  
                  Fair
      valueLong-term
      debt - related party
                  
                  $
                  4,267,742
                  
                  
                  $
                  4,244,098
                  
                  
                  $
                  6,397,742
                  
                  
                  $
                  6,443,795
 
 
 Cash
 
 Cash
includes cash on hand and demand deposits in accounts maintained with banks of
which no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant risks
on its cash in bank accounts.
 
 Accounts
receivable
 
 The
Company's trade accounts receivable are mainly due from related companies. The
Company has made full provision for accounts receivable-related parties aged
over one year based upon the related parties ability to collect their
receivables and a general allowance for doubtful debt of 0.5% of the remaining
accounts receivable-related parties. Management reviews its accounts receivable
on a regular basis to determine if the bad debt allowance is adequate, paying
particular attention to the age of receivables outstanding. At December 31, 2008
and December 31, 2007 receivables outstanding more than 180 days totaled
$3,316,115 and $2,937,718, respectively. The Company did not incur any losses on
receivables for the periods reported. The following table represents the changes
in the allowance for doubtful accounts:
  F-10
  
 Balance
      at
                                    Beginning
      of
                                    Period
                                  
                                  
                                  Increase
                                    (Decrease)
      of
                                    provision
      for
                                    Doubtful
                                    Accounts
                                  
                                  
                                  Balance
      at
                                    End
      of
                                    PeriodPeriod
      ended December 31, 2008Reserves
      and allowances deducted
      from assets accounts:Allowance
      for doubtful accounts:
                                  
                                  $
                                  71,700
                                  
                                  
                                  $
                                  1,037,089
                                  
                                  
                                  $
                                  1,108,789Period
      ended December 31, 2007Reserves
      and allowances deducted
      from assets accounts:Allowance
      for doubtful accounts:
                                  
                                  $
                                  86,776
                                  
                                  
                                  $
                                  (15,076
                                  )
                                  
                                  $
                                  71,700
  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
                                      
                                      
                                      Increaseof
                                        provision
      for
                                        Doubtful
                                        Accounts
                                      
                                      
                                      Balance
      at
                                        End
      of
                                        PeriodPeriod
      ended December 31, 2008Reserves
      and provisions deducted
      from assets accounts:Provision
      for prepaid expenses:
                                      
                                      $
                                      872,053
                                      
                                      
                                      $
                                      80,018
                                      
                                      
                                      $
                                      952,071Period
      ended December 31, 2007Reserves
      and provisions deducted
      from assets accounts:Provision
      for prepaid expenses:
                                      
                                      $
                                      684,371
                                      
                                      
                                      $
                                      187,682
                                      
                                      
                                      $
                                      872,053
 
 
 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-11
  
 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 mainly consist of a deposit and a related loan made to a local government
agency for the acquisition of land use rights in Shanghai. Originally, the
deposit related to the proposed acquisition of land use rights for 263 acres of
land by Tiens Yihai. However, on November 10, 2006, Tiens Holdings and the local
government entered a supplemental agreement pursuant to which the parties agreed
to the acquisition of land use rights by Tiens Yihai for a reduced 80 acre
parcel of land. As of December 31, 2008, land use rights for only 50 of the 80
acres had been received. Since the Company plans to sell its 96% share of Tiens
Yihai in 2009, the loan made to local government agency was included in assets
held for sale in the consolidated financial statements of the Company as of
December 31, 2008.
 
 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.
  F-12
  
 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.
 
 Minority
interest
 
 Minority
interest represents the outside shareholder’s 20% ownership of Biological and
0.6% ownership of Tiens Yihai. Effective from January 1, 2009, the share of
Tiens Yihai owned by minority shareholders increased from 0.6% to 4%. The net
income shown in Consolidated Statements of Cash Flows and Consolidated
Statements of Income and Other Comprehensive Income is net of minority
interest.
 
 Revenue
recognition
 
 During
2008, the Company sold both semi-finished products and finished products to
Tianshi Engineering domestically. Revenue from semi-finished products was
recognized at FOB Tianjin shipping point. Revenue from finished products was
recognized only when the related party Chinese distributors recognized sales of
the Company's products to unaffiliated third parties. Revenues in both cases are
net of taxes.
 
 For
overseas sales, the Company only sells finished products. The Company recognizes
revenue from international sales (non-Chinese) to affiliated parties, net of
taxes as goods are shipped and clear review by the customs department of the
Chinese government.
 
 The
Company is generally not contractually obligated to accept returns. However, on
a case by case negotiated basis, the Company permits customers to return their
products. In accordance with SFAS No. 48, "Revenue Recognition when the Right of
Return Exists", revenue is recorded net of an allowance for estimated returns.
Such reserves are based upon management's evaluation of historical experience
and estimated costs. The amount of the reserves ultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements. As the Company did not receive any returns of
products during the past two years, and management does not anticipate allowing
any returns in 2009 related to revenues in 2008, no allowance for estimated
returns has been recorded for the years ended December 31, 2008 and
2007.
 
 Advertising
costs
 
 The
Company sells all of its products to related parties, and these related parties
are primarily responsible for marketing. Advertising costs of the Company for
the years ended December 31, 2008 and 2007 amounted to $418,138 and $25,364,
respectively, and were expensed as incurred.
  F-13
  Shipping and
handling
 Shipping
and handling totaled $618,807 and $550,972 for the years ended December 31, 2008
and 2007, 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 in
accordance with SFAS No. 2, "Accounting for Research and Development Costs." The
Company expensed research and development costs of $1,549,132 and $720,675 for
the years ended December 31, 2008 and 2007, respectively. These costs are
included in selling, general and administrative expenses in the accompanying
statements.
 
 Income
taxes
 
 The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes”. Under this method, deferred income taxes are recognized for
the estimated tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation
allowances are established to reduce deferred tax assets to the amount expected
to be realized when, in management’s opinion, it is more likely than not that
some portion of the deferred tax assets will not be realized. The provision for
income taxes represents current taxes payable net of the change during the
period in deferred tax assets and liabilities. The Company adopted FIN 48,
Accounting for Uncertainty in Tax Positions.
 
 The
Company has not been subjected to income tax examinations by taxing authorities
for the years ended December 31, 2008 and 2007. During the years ended December
31, 2008 and 2007, the Company did not recognize any amount in interest and
penalties. The Company did not accrue any amount for the payment of interest and
penalties at December 31, 2008 and 2007, respectively.
 
 Earnings per
share
 
 The
Company has adopted SFAS No. 128, "Earnings per Share". SFAS No. 128 requires
the presentation of earnings per share (“EPS”) as Basic EPS and Diluted EPS.
Basic EPS excludes dilution and is computed by dividing net income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. There are no differences between Basic and
Diluted EPS for the periods ended December 31, 2008 and 2007.
  F-14
  
 Other comprehensive
income
 
 Other
comprehensive income represents foreign currency translation adjustments for the
year. The amounts shown in the Consolidated Statements of Income and Other
Comprehensive Income and Consolidated Statements of Shareholders’ Equity do not
include other comprehensive income attributed to minority interest.
 
 Recently issued accounting
pronouncements
 
 In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, "Fair Value Measurement" ("SFAS 157"), which provides enhanced guidance for
using fair value to measure assets and liabilities. This standard also responds
to investors' requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the information used to
measure fair value, and the effect of fair value measurements on
earnings.  The standard applies whenever other standards require (or
permit) assets or liabilities to be measured at fair value. The adoption of this
Statement had no effect on the consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" (“SFAS 159”). SFAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value thatare not currently required
to be measured at fair value. The objective of SFAS 159 is to provide
opportunities to mitigate volatility in reported earnings caused bymeasuring related assets
and liabilities differently, without having to apply hedge accounting
provisions. SFAS 159 also establishes presentation and disclosurerequirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS159 will be effective in
the first quarter of fiscal 2009. The adoption of this Statement had no effect
on the consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements the
identifiable assets, the liabilities and any non-controlling interest in the
acquiree, and the goodwill acquired in a business combination or a gain from a
bargain purchase. It also determines what information to disclose. The objective
of SFAS 141R is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS141R will be effective in
the first quarter of fiscal 2009. The Company is evaluating the impact that this
statement will have on its consolidated financialstatements.
 
 In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements -- An amendment of ARB No. 51" (“SFAS
160”). SFAS 160 provides a guide on how to report a non-controlling
interest in consolidated financial statements. The objective of SFAS 160 is to
improve the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements. SFAS160
will be effective in the first quarter of fiscal 2009. The Company is evaluating
the impact that this statement will have on its consolidated financialstatements.
  F-15
  
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosure
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. The objective of SFAS 161 is to
provide adequate information about how derivative and hedging activities affect
an entity’s financial position, financial performance, and cash flows. SFAS
161 will be effective in the first quarter of fiscal 2009. The Company is
evaluating the impact that this statement will have on its consolidated
financial statements.
 
 In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, "Determination of
the Useful Life of Intangible Assets." FSP 142-3 amends the factors an entity
should consider in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB Statement No. 142,
"Goodwill and Other Intangible Assets." The intent of this FSP if to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows to measure the fair value of
the asset under SFAS 141R, and other U.S. generally accepted accounting
principles (GAAP). FSP 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. Early adoption is prohibited. The Company is currently evaluating
the impact, if any, that FSP 142-3 will have on its consolidated financial
statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that
are presented in conformity with U.S. GAAP. SFAS 162 shall be effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight
Board (“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” The
adoption of this Statement had no effect on the consolidated financial
statements.
 
 In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts” (“SFAS 163”). SFAS 163 requires that an insurance
enterprise recognize a claim liability prior to an event of default (insured
event) when there is evidence that credit deteriorations have occurred in
an insured financial obligation. SFAS 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The adoption of
SFAS 163 will not have a material impact on the Company’s consolidated financial
statements.
 
 Note
3 – 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. The closing of the transaction was subject to government approval
of transfer of all of the share capital of Life Resources to Tianshi Holdings.
On March 13, 2008, the Chinese government approved the transfer. As Tianshi
Holdings and Life Resources were under common control by Jinyuan Li before the
combination, the combination was treated for accounting purposes as a pooling of
interests. The December 31, 2007 consolidated financial statements
were adjusted as if Life Resources had been combined on January 1, 2007. The
following are audited statements of income and other comprehensive income of
Life Resources for the years ended December 31, 2008 and 2007. Since part of the
sales by Life Resources were to Biological, the amounts in the statements of
income of Life Resource are not the same as amounts shown as the “Effect of
Change” presented in the following comparative interim financial
statements.
 
 The
following financial statement line items for the years ended December 31, 2008
and 2007 were affected by the combination of Life Resources:
  F-16
  
 Tianjin
      Tiens Life-Resources Co., Ltd.STATEMENTS
      OF INCOME AND OTHER COMPREHENSIVE INCOMEFOR
      THE YEAR ENDED DECEMBER 31, 2008 AND 2007Year
      ended December 31,2008
                            
                            
                            2007REVENUE
      - RELATED PARTIES
                            
                            $
                            42,256,136
                            
                            
                            $
                            -COST
      OF SALES - RELATED PARTIES
                            
                            
                            10,128,418
                            
                            
                            
                            -GROSS
      PROFIT
                            
                            
                            32,127,718
                            
                            
                            
                            -SELLING,
      GENERAL AND  ADMINISTRATIVE EXPENSES
                            
                            
                            6,106,765
                            
                            
                            
                            614,754INCOME
      (LOSS) FROM OPERATIONS
                            
                            
                            26,020,953
                            
                            
                            
                            (614,754
                            )Interest
      income
                            
                            
                            76,920
                            
                            
                            
                            19,602Other
      (expense) income
                            
                            
                            (140,839
                            )
                            
                            
                            (61,899
                            )OTHER
      (EXPENSE) INCOME, NET
                            
                            
                            (63,919
                            )
                            
                            
                            (42,297
                            )INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXESAND
      MINORITY INTEREST
                            
                            
                            25,957,034
                            
                            
                            
                            (657,051
                            )PROVISION
      FOR INCOME TAXES
                            
                            
                            -
                            
                            
                            
                            -NET
      INCOME (LOSS)
                            
                            
                            25,957,034
                            
                            
                            
                            (657,051
                            )OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                            
                            
                            3,445,181
                            
                            
                            
                            1,650,382COMPREHENSIVE
      INCOME
                            
                            $
                            29,402,215
                            
                            
                            $
                            993,331
 
 
 
 
 
 
 
 
 
 
 
  F-17
  
 Income
statement
 For the
year ended December 31, 2008
  For
      the year ended
                          December
      31, 2008As
      computed,
                          without
      Life
                          Resources
                        
                        
                        As
      reported,
                          combined
                          with
      Life
                          Resources
                        
                        
                        Effect
                          of
      ChangeREVENUE
      - RELATED PARTIES
                        
                        $
                        60,821,801
                        
                        
                        $
                        77,247,898
                        
                        
                        $
                        16,426,097COST
      OF SALES - RELATED PARTIES
                        
                        
                        33,427,158
                        
                        
                        
                        24,870,178
                        
                        
                        
                        (8,556,980
                        )GROSS
      PROFIT
                        
                        
                        27,394,643
                        
                        
                        
                        52,377,720
                        
                        
                        
                        24,983,077SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                        
                        
                        12,464,370
                        
                        
                        
                        18,574,719
                        
                        
                        
                        6,110,349INCOME
      FROM OPERATIONS
                        
                        
                        14,930,273
                        
                        
                        
                        33,803,001
                        
                        
                        
                        18,872,728OTHER
      (EXPENSE) INCOME, NET
                        
                        
                        (1,421,197
                        )
                        
                        
                        (1,485,116
                        )
                        
                        
                        (63,919
                        )INCOME
      BEFORE PROVISION FOR INCOME TAXESAND
      MINORITY INTEREST
                        
                        
                        13,509,076
                        
                        
                        
                        32,317,885
                        
                        
                        
                        18,808,809PROVISION
      FOR INCOME TAXES
                        
                        
                        2,345,474
                        
                        
                        
                        2,345,474
                        
                        
                        
                        -INCOME
      BEFORE MINORITY INTEREST
                        
                        
                        11,163,602
                        
                        
                        
                        29,972,411
                        
                        
                        
                        18,808,809MINORITY
      INTEREST
                        
                        
                        2,315,200
                        
                        
                        
                        2,315,215
                        
                        
                        
                        15NET
      INCOME
                        
                        
                        8,848,402
                        
                        
                        
                        27,657,196
                        
                        
                        
                        18,808,794OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                        
                        
                        4,445,893
                        
                        
                        
                        7,891,018
                        
                        
                        
                        3,445,125COMPREHENSIVE
      INCOME
                        
                        $
                        13,294,295
                        
                        
                        $
                        35,548,214
                        
                        
                        $
                        22,253,919EARNINGS
      PER SHARE, BASIC AND DILUTED
                        
                        $
                        0.12
                        
                        
                        $
                        0.39
                        
                        
                        $
                        0.27WEIGHTED
      AVERAGE NUMBER OF SHARES
                        
                        
                        71,333,586
                        
                        
                        
                        71,333,586
 
 
 
 
  F-18
  
 For the
year ended December 31, 2007
 
 For
      the year ended
                              December
      31, 2007As
      reported,
                              without
      Life
                              Resources
                            
                            
                            As
      adjusted,
                              combined
                              with
      Life
                              Resources
                            
                            
                            Effect
      of
                              ChangeREVENUE
      - RELATED PARTIES
                            
                            $
                            54,900,060
                            
                            
                            $
                            54,900,060
                            
                            
                            $
                            -COST
      OF SALES - RELATED PARTIES
                            
                            
                            16,526,695
                            
                            
                            
                            16,526,695
                            
                            
                            
                            -GROSS
      PROFIT
                            
                            
                            38,373,365
                            
                            
                            
                            38,373,365
                            
                            
                            
                            -SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                            
                            
                            14,306,660
                            
                            
                            
                            14,921,414
                            
                            
                            
                            614,754INCOME
      FROM OPERATIONS
                            
                            
                            24,066,705
                            
                            
                            
                            23,451,951
                            
                            
                            
                            (614,754
                            )OTHER
      (EXPENSE) INCOME, NET
                            
                            
                            1,520,208
                            
                            
                            
                            1,477,911
                            
                            
                            
                            (42,297
                            )INCOME
      BEFORE PROVISION FOR INCOME TAXESAND
      MINORITY INTEREST
                            
                            
                            25,586,913
                            
                            
                            
                            24,929,862
                            
                            
                            
                            (657,051
                            )PROVISION
      FOR INCOME TAXES
                            
                            
                            2,026,875
                            
                            
                            
                            2,026,875
                            
                            
                            
                            -INCOME
      BEFORE MINORITY INTEREST
                            
                            
                            23,560,038
                            
                            
                            
                            22,902,987
                            
                            
                            
                            (657,051
                            )MINORITY
      INTEREST
                            
                            
                            4,966,397
                            
                            
                            
                            4,966,397
                            
                            
                            
                            -NET
      INCOME
                            
                            
                            18,593,641
                            
                            
                            
                            17,936,590
                            
                            
                            
                            (657,051
                            )OTHER
      COMPREHENSIVE INCOME:Foreign
      currency translation adjustment
                            
                            
                            8,265,358
                            
                            
                            
                            9,915,740
                            
                            
                            
                            1,650,382COMPREHENSIVE
      INCOME
                            
                            $
                            26,858,999
                            
                            
                            $
                            27,852,330
                            
                            
                            $
                            993,331EARNINGS
      PER SHARE, BASIC AND DILUTED
                            
                            $
                            0.26
                            
                            
                            $
                            0.25
                            
                            
                            $
                            -0.01WEIGHTED
      AVERAGE NUMBER OF SHARES
                            
                            
                            71,333,586
                            
                            
                            
                            71,333,586
 
 
 
 
  F-19
  
 
 Balance
sheet
 December
31, 2008
 December
      31, 2008As
      computed,
                            without
      Life
                            Resources
                          
                          
                          As
      reported,
                            combined
      with
                            Life
      Resources
                          
                          
                          Effect
      of
                            ChangeA S S E T SCURRENT
      ASSETS:Cash
                          
                          $
                          16,885,509
                          
                          
                          $
                          20,992,573
                          
                          
                          $
                          4,107,064Cash
      related to assets held for sale
                          
                          
                          23,861,938
                          
                          
                          
                          23,861,938
                          
                          
                          
                          -Total
      cash
                          
                          
                          40,747,447
                          
                          
                          
                          44,854,511
                          
                          
                          
                          4,107,064Accounts
      receivable, trade - related parties, net
                          
                          
                          19,958,936
                          
                          
                          
                          23,941,431
                          
                          
                          
                          3,982,495Inventories
                          
                          
                          12,636,683
                          
                          
                          
                          8,365,607
                          
                          
                          
                          (4,271,076
                          )Other
      receivables
                          
                          
                          162,400
                          
                          
                          
                          813,591
                          
                          
                          
                          651,191Other
      receivables - related parties
                          
                          
                          25,332,711
                          
                          
                          
                          15,729,076
                          
                          
                          
                          (9,603,635
                          )Employee
      advances
                          
                          
                          112,120
                          
                          
                          
                          112,591
                          
                          
                          
                          471Prepaid
      expenses
                          
                          
                          201,443
                          
                          
                          
                          301,898
                          
                          
                          
                          100,455Prepaid
      income taxes
                          
                          
                          845,732
                          
                          
                          
                          1,531,207
                          
                          
                          
                          685,475Assets
      held for Sale
                          
                          
                          10,904,842
                          
                          
                          
                          10,904,842
                          
                          
                          
                          -Total
      current assets
                          
                          
                          110,902,314
                          
                          
                          
                          106,554,754
                          
                          
                          
                          (4,347,560
                          )PROPERTY,
      PLANT AND EQUIPMENT, net
                          
                          
                          9,535,616
                          
                          
                          
                          10,274,643
                          
                          
                          
                          739,027OTHER
      ASSETS:Construction
      in progress
                          
                          
                          159,702
                          
                          
                          
                          72,300,104
                          
                          
                          
                          72,140,402Construction
      deposits
                          
                          
                          -
                          
                          
                          
                          2,586,302
                          
                          
                          
                          2,586,302Intangible
      assets, net
                          
                          
                          102,681
                          
                          
                          
                          13,137,195
                          
                          
                          
                          13,034,514Other
      assets
                          
                          
                          87,541
                          
                          
                          
                          87,541
                          
                          
                          
                          -Acquisition
      deposit
                          
                          
                          84,247,182
                          
                          
                          
                          -
                          
                          
                          
                          (84,247,182
                          )Total
      other assets
                          
                          
                          84,597,106
                          
                          
                          
                          88,111,142
                          
                          
                          
                          3,514,036Total
      assets
                          
                          $
                          205,035,036
                          
                          
                          $
                          204,940,539
                          
                          
                          $
                          (94,497
                          )L I A B I L I T I E S    A N
      D    S H A R E H O L D E R S'   E Q U I
      T YCURRENT
      LIABILITIES:Accounts
      payable
                          
                          $
                          2,821,548
                          
                          
                          $
                          6,283,849
                          
                          
                          $
                          3,462,301Accounts
      payable-related parties
                          
                          
                          16,402,336
                          
                          
                          
                          -
                          
                          
                          
                          (16,402,336
                          )Advances
      from customers - related parties
                          
                          
                          3,239,650
                          
                          
                          
                          3,239,650
                          
                          
                          
                          -Wages
      and benefits payable
                          
                          
                          1,397,147
                          
                          
                          
                          1,449,146
                          
                          
                          
                          51,999Other
      taxes payable
                          
                          
                          (585,784
                          )
                          
                          
                          117,818
                          
                          
                          
                          703,602Contractor
      deposits
                          
                          
                          -
                          
                          
                          
                          163,248
                          
                          
                          
                          163,248Contractor
      payables
                          
                          
                          208,483
                          
                          
                          
                          11,871,456
                          
                          
                          
                          11,662,973Other
      payables
                          
                          
                          1,850,370
                          
                          
                          
                          1,933,743
                          
                          
                          
                          83,373Other
      payables - related parties
                          
                          
                          6,270,311
                          
                          
                          
                          6,373,900
                          
                          
                          
                          103,589Dividend
      payable to minority interest
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Current
      portion of long term debt, related party
                          
                          
                          2,130,000
                          
                          
                          
                          2,130,000
                          
                          
                          
                          -Liabilities
      directly assoicated with assets classified as held for
sale
                          
                          
                          122,047
                          
                          
                          
                          122,047
                          
                          
                          
                          -Total
      current liabilities
                          
                          
                          33,856,108
                          
                          
                          
                          33,684,857
                          
                          
                          
                          (171,251
                          )NON-CURRENT
      LIABILITIESLong
      term debt, net of current portion, related party
                          
                          
                          2,137,742
                          
                          
                          
                          2,137,742
                          
                          
                          
                          -Deferred
      income
                          
                          
                          -
                          
                          
                          
                          11,208,844
                          
                          
                          
                          11,208,844Total
      non current liabilities
                          
                          
                          2,137,742
                          
                          
                          
                          13,346,586
                          
                          
                          
                          11,208,844Total
      liabilities
                          
                          
                          35,993,850
                          
                          
                          
                          47,031,443
                          
                          
                          
                          11,037,593MINORITY
      INTEREST
                          
                          
                          9,006,422
                          
                          
                          
                          9,006,438
                          
                          
                          
                          16Common
      stock
                          
                          
                          71,334
                          
                          
                          
                          71,334
                          
                          
                          
                          -Paid-in-capital
                          
                          
                          9,303,228
                          
                          
                          
                          9,234,123
                          
                          
                          
                          (69,105
                          )Statutory
      reserves
                          
                          
                          9,420,783
                          
                          
                          
                          9,420,783
                          
                          
                          
                          -Retained
      earnings
                          
                          
                          122,813,180
                          
                          
                          
                          106,325,356
                          
                          
                          
                          (16,487,824
                          )Accumulated
      other comprehensive income
                          
                          
                          18,426,239
                          
                          
                          
                          23,851,062
                          
                          
                          
                          5,424,823Total
      shareholders' equity
                          
                          
                          160,034,764
                          
                          
                          
                          148,902,658
                          
                          
                          
                          (11,132,106
                          )Total
      liabilities and shareholders' equity
                          
                          $
                          205,035,036
                          
                          
                          $
                          204,940,539
                          
                          
                          $
                          (94,497
                          )
 `
 
  F-20
  
 December
31, 2007
 December
      31, 2007As
      reported,
                          without
      Life
                          Resources
                        
                        
                        As
      adjusted,
                          combined
      with
                          Life
      Resources
                        
                        
                        Effect
      of
                          ChangeA S S E T SCURRENT
      ASSETS:Cash
                        
                        $
                        48,678,945
                        
                        
                        $
                        54,081,848
                        
                        
                        $
                        5,402,903Accounts
      receivable, trade - related parties, net
                        
                        
                        14,268,229
                        
                        
                        
                        14,268,229
                        
                        
                        
                        -Accounts
      receivable, trade - third parties
                        
                        
                        104,398
                        
                        
                        
                        104,398
                        
                        
                        
                        -Inventories
                        
                        
                        5,949,963
                        
                        
                        
                        5,949,963
                        
                        
                        
                        -Other
      receivables
                        
                        
                        892,489
                        
                        
                        
                        1,068,343
                        
                        
                        
                        175,854Other
      receivables - related parties
                        
                        
                        13,070,907
                        
                        
                        
                        13,887,138
                        
                        
                        
                        816,231Employee
      advances
                        
                        
                        64,336
                        
                        
                        
                        65,901
                        
                        
                        
                        1,565Prepaid
      expenses
                        
                        
                        623,638
                        
                        
                        
                        623,638
                        
                        
                        
                        -Total
      current assets
                        
                        
                        83,652,905
                        
                        
                        
                        90,049,458
                        
                        
                        
                        6,396,553PROPERTY,
      PLANT AND EQUIPMENT, net
                        
                        
                        16,034,812
                        
                        
                        
                        16,071,900
                        
                        
                        
                        37,088OTHER
      ASSETS:Construction
      in progress
                        
                        
                        2,287,807
                        
                        
                        
                        39,792,774
                        
                        
                        
                        37,504,967Construction
      deposits
                        
                        
                        -
                        
                        
                        
                        1,089,216
                        
                        
                        
                        1,089,216Intangible
      assets, net
                        
                        
                        2,603,084
                        
                        
                        
                        9,246,879
                        
                        
                        
                        6,643,795Long-term
      prepaid expenses
                        
                        
                        5,301,847
                        
                        
                        
                        5,301,847
                        
                        
                        
                        -Acquisition
      deposit
                        
                        
                        71,747,182
                        
                        
                        
                        -
                        
                        
                        
                        (71,747,182
                        )Total
      other assets
                        
                        
                        81,939,920
                        
                        
                        
                        55,430,716
                        
                        
                        
                        (26,509,204
                        )Total
      assets
                        
                        $
                        181,627,637
                        
                        
                        $
                        161,552,074
                        
                        
                        $
                        (20,075,563
                        )L I A B I L I T I E S    A N
      D    S H A R E H O L D E R S'   E Q U I
      T YCURRENT
      LIABILITIES:Accounts
      payable
                        
                        $
                        4,070,906
                        
                        
                        $
                        4,070,906
                        
                        
                        $
                        -Advances
      from customers - related parties
                        
                        
                        1,700,838
                        
                        
                        
                        1,700,838
                        
                        
                        
                        -Wages
      and benefits payable
                        
                        
                        1,250,685
                        
                        
                        
                        1,250,685
                        
                        
                        
                        -Other
      taxes payable
                        
                        
                        536,819
                        
                        
                        
                        536,819
                        
                        
                        
                        -Income
      taxes payable
                        
                        
                        665,726
                        
                        
                        
                        665,726
                        
                        
                        
                        -Contractor
      deposits
                        
                        
                        -
                        
                        
                        
                        595,128
                        
                        
                        
                        595,128Contractor
      payable
                        
                        
                        -
                        
                        
                        
                        7,820,285
                        
                        
                        
                        7,820,285Other
      payables
                        
                        
                        1,133,539
                        
                        
                        
                        1,133,539
                        
                        
                        
                        -Other
      payables - related parties
                        
                        
                        7,938,205
                        
                        
                        
                        7,938,205
                        
                        
                        
                        -Dividend
      payable to minority interest
                        
                        
                        4,902,629
                        
                        
                        
                        4,902,629
                        
                        
                        
                        -Current
      portion of long term debt, related party
                        
                        
                        2,130,000
                        
                        
                        
                        2,130,000
                        
                        
                        
                        -Total
      current liabilities
                        
                        
                        24,329,347
                        
                        
                        
                        32,744,760
                        
                        
                        
                        8,415,413NON-CURRENT
      LIABILITIESLong
      term debt, net of current portion, related party
                        
                        
                        4,267,742
                        
                        
                        
                        4,267,742
                        
                        
                        
                        -Other
      payables-non current
                        
                        
                        538,130
                        
                        
                        
                        538,130
                        
                        
                        
                        -Deferred
      income
                        
                        
                        -
                        
                        
                        
                        4,895,049
                        
                        
                        
                        4,895,049Total
      non current liabilities
                        
                        
                        4,805,872
                        
                        
                        
                        9,700,921
                        
                        
                        
                        4,895,049Total
      liabilities
                        
                        
                        29,135,219
                        
                        
                        
                        42,445,681
                        
                        
                        
                        13,310,462MINORITY
      INTEREST
                        
                        
                        6,144,063
                        
                        
                        
                        6,144,063
                        
                        
                        
                        -SHAREHOLDERS'
      EQUITY:Common
      stock
                        
                        
                        71,334
                        
                        
                        
                        71,334
                        
                        
                        
                        -Paid-in-capital
                        
                        
                        8,911,114
                        
                        
                        
                        8,842,009
                        
                        
                        
                        (69,105
                        )Statutory
      reserves
                        
                        
                        9,420,783
                        
                        
                        
                        9,420,783
                        
                        
                        
                        -Retained
      earnings
                        
                        
                        113,964,778
                        
                        
                        
                        78,668,160
                        
                        
                        
                        (35,296,618
                        )Accumulated
      other comprehensive income
                        
                        
                        13,980,346
                        
                        
                        
                        15,960,044
                        
                        
                        
                        1,979,698Total
      shareholders' equity
                        
                        
                        146,348,355
                        
                        
                        
                        112,962,330
                        
                        
                        
                        (33,386,025
                        )Total
      liabilities and shareholders' equity
                        
                        $
                        181,627,637
                        
                        
                        $
                        161,552,074
                        
                        
                        $
                        (20,075,563
                        )
 
  F-21
  
 Statements of cash
flows
 For the
year ended December 31, 2008
 
 For
      the year ended
                          December
      31, 2008As
      computed,
                          without
      Life
                          Resources
                        
                        
                        As
      reported,
                          combined
      with
                          Life
      Resources
                        
                        
                        Effect
      of
                          ChangeCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                        
                        $
                        8,848,402
                        
                        
                        $
                        27,657,196
                        
                        
                        $
                        18,808,794Adjustments
      to reconcile net income to cashprovided
      by (used in) operating activities:
                        
                        
                        (6,710,871
                        )
                        
                        
                        (8,850,684
                        )
                        
                        
                        (2,139,813
                        )Net
      cash provided by operating activities
                        
                        
                        2,137,531
                        
                        
                        
                        18,806,512
                        
                        
                        
                        16,668,981CASH
      FLOWS FROM INVESTING ACTIVITIES:Payment
      of deposit on acquisition of Life Resource
                        
                        
                        (12,500,000
                        )
                        
                        
                        -
                        
                        
                        
                        12,500,000Collections
      from local government
                        
                        
                        457,329
                        
                        
                        
                        457,329
                        
                        
                        
                        -Acquisition
      of  intangible assets
                        
                        
                        -
                        
                        
                        
                        (6,068,759
                        )
                        
                        
                        (6,068,759
                        )Construction
      deposits
                        
                        
                        -
                        
                        
                        
                        (4,391,560
                        )
                        
                        
                        (4,391,560
                        )Contractor
      deposits
                        
                        
                        -
                        
                        
                        
                        (464,499
                        )
                        
                        
                        (464,499
                        )Addition
      to construction in progress
                        
                        
                        (352,357
                        )
                        
                        
                        (25,714,095
                        )
                        
                        
                        (25,361,738
                        )Proceeds
      from sale of equipment
                        
                        
                        426,288
                        
                        
                        
                        426,288
                        
                        
                        
                        -Purchase
      of equipment and automobiles
                        
                        
                        (866,781
                        )
                        
                        
                        (1,531,589
                        )
                        
                        
                        (664,808
                        )Net
      cash used in investing activities
                        
                        
                        (12,835,521
                        )
                        
                        
                        (37,286,885
                        )
                        
                        
                        (24,451,364
                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Loan
      from related parties
                        
                        
                        6,080,385
                        
                        
                        
                        6,080,385
                        
                        
                        
                        -Payments
      on other payables-non current
                        
                        
                        (282,664
                        )
                        
                        
                        (282,664
                        )
                        
                        
                        -Payments
      on long term debt, related party
                        
                        
                        (1,197,662
                        )
                        
                        
                        (1,197,662
                        )
                        
                        
                        -Increased
      in paid in capital
                        
                        
                        482,516
                        
                        
                        
                        482,516
                        
                        
                        
                        -Increase
      in deferred income
                        
                        
                        -
                        
                        
                        
                        5,891,999
                        
                        
                        
                        5,891,999Payments
      to minority interest shareholder
                        
                        
                        (5,150,414
                        )
                        
                        
                        (5,150,414
                        )
                        
                        
                        -Net
      cash provided by  (used in) financing activities
                        
                        
                        (67,839
                        )
                        
                        
                        5,824,160
                        
                        
                        
                        5,891,999EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                        
                        
                        2,834,331
                        
                        
                        
                        3,428,876
                        
                        
                        
                        594,545DECREASE
      IN CASH
                        
                        
                        (7,931,498
                        )
                        
                        
                        (9,227,337
                        )
                        
                        
                        (1,295,839
                        )CASH,
      beginning of year
                        
                        
                        48,678,945
                        
                        
                        
                        54,081,848
                        
                        
                        
                        5,402,903CASH,
      end of year
                        
                        $
                        40,747,447
                        
                        
                        $
                        44,854,511
                        
                        
                        $
                        4,107,064
  
 
   F-22
  
 For
      the year ended
                        December
      31, 2007As
      reported,
                        without
      Life
                        Resources
                      
                      
                      As
      adjusted,
                        combined
      with
                        Life
      Resources
                      
                      
                      Effect
      of
                        ChangeCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                      
                      $
                      18,593,641
                      
                      
                      $
                      17,936,590
                      
                      
                      $
                      (657,051
                      )Adjustments
      to reconcile net income to cashprovided
      by (used in) operating activities:
                      
                      
                      (13,098,356
                      )
                      
                      
                      (10,605,004
                      )
                      
                      
                      2,493,352Net
      cash provided by operating activities
                      
                      
                      5,495,285
                      
                      
                      
                      7,331,586
                      
                      
                      
                      1,836,301CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of Life Resource
                      
                      
                      (19,096,525
                      )
                      
                      
                      (19,096,525
                      )
                      
                      
                      -Repayment
      from related parties
                      
                      
                      -
                      
                      
                      
                      493,941
                      
                      
                      
                      493,941Increase
      in long-term prepaid expense
                      
                      
                      (209,087
                      )
                      
                      
                      (209,087
                      )
                      
                      
                      -Acquisition
      of  intangible assets
                      
                      
                      (132,027
                      )
                      
                      
                      (132,027
                      )
                      
                      
                      -Construction
      deposits
                      
                      
                      -
                      
                      
                      
                      (1,045,877
                      )
                      
                      
                      (1,045,877
                      )Contractor
      deposits
                      
                      
                      -
                      
                      
                      
                      346,934
                      
                      
                      
                      346,934Addition
      to construction in progress
                      
                      
                      -
                      
                      
                      
                      (25,196,562
                      )
                      
                      
                      (25,196,562
                      )Proceeds
      from sales equipment and automobiles
                      
                      
                      14,111,723
                      
                      
                      
                      14,111,723
                      
                      
                      
                      -Purchase
      of equipment and automobiles
                      
                      
                      (2,978,395
                      )
                      
                      
                      (3,003,945
                      )
                      
                      
                      (25,550
                      )Net
      cash used in investing activities
                      
                      
                      (8,304,311
                      )
                      
                      
                      (33,731,425
                      )
                      
                      
                      (25,427,114
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Loan
      from related parties
                      
                      
                      -
                      
                      
                      
                      27,900,609
                      
                      
                      
                      27,900,609Increase
      in other payables-non current
                      
                      
                      516,718
                      
                      
                      
                      516,718
                      
                      
                      
                      -Payments
      to minority interest shareholder
                      
                      
                      (6,676,102
                      )
                      
                      
                      (6,676,102
                      )
                      
                      
                      -Net
      cash provided by (used in) financing activities
                      
                      
                      (6,159,384
                      )
                      
                      
                      21,741,225
                      
                      
                      
                      27,900,609EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
                      
                      
                      3,377,290
                      
                      
                      
                      3,525,922
                      
                      
                      
                      148,632INCREASE
      (DECREASE) IN CASH
                      
                      
                      (5,591,120
                      )
                      
                      
                      (1,132,692
                      )
                      
                      
                      4,458,428CASH,
      beginning of year
                      
                      
                      54,270,065
                      
                      
                      
                      55,214,540
                      
                      
                      
                      944,475CASH,
      end of year
                      
                      $
                      48,678,945
                      
                      
                      $
                      54,081,848
                      
                      
                      $
                      5,402,903
 
 Note
4 – Supplemental disclosure of cash flow information
 
 On
December 21, 2007 the Company, Tianshi Investment and Life Resources entered
into a Loan Agreement, pursuant to which Tianshi Investment loaned $7.5 million
to Life Resources without interest. The Company agreed to pay back the $7.5
million to Tianshi Investment within five days of the date of the government
approval of the transfer of the shares of Life Resources to Tianshi Holdings. On
March 13, 2008, the Chinese government approved the transfer and the Company
repaid $7.5 million to Tianshi Investment on March 18, 2008 by offsetting part
of the accounts receivable due from Tianshi Engineering.
  F-23


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 amount of a loan to repay to
      Tianshi Investment;
 3.
                The
      Company had the right to offset the two
amounts;
 4.
                The
      Company, Tianshi Investment and Tianshi Engineering agreed to offset the
      two amounts; and
 5.
                The
      agreement to offset is enforceable under Chinese contract
    law.
 
 On April
9, 2008, liabilities in the form of accounts receivable due to Biological from
Tianshi Engineering in the amount of $900,000 were offset against a cash payment
of $900,000 from Tianshi Investment to Tianshi Holdings. Tianshi Holdings used
such monies to increase the capital contribution of Life Resources.
 
 The right
to offset existed because:
 
 1.
                Tianshi
      Engineering had a determinable outstanding debt payable to the
      Company;
 2.
                The
      Company received a determinable amount in cash from Tianshi
      Investment;
 3.
                The
      Company had the right to offset the two
amounts;
 4.
                The
      Company, Tianshi Investment and Tianshi Engineering agreed to offset the
      two amounts; and
 5.
                The
      agreement to offset is enforceable under Chinese contract
    law.
 
 On
December 31, 2008, Tianshi Engineering paid $1,198,611 to Tianyuan Capital (See
Note 13) on behalf of the Company, representing one installment of the loan and
interest on the remaining loan for the six months ended December 31, 2008. In
return, $1,198,611 of Biological’s accounts receivable from Tianshi Engineering
was offset.
 
 The right
to offset existed because:
 
 1.
                Tianshi
      Engineering had a determinable outstanding debt payable to the
      Company;
 2.
                The
      Company received 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
5 – Inventories
 
 Inventories
consist of the following:
  F-24
  
 December
      31,
                    
                    
                    December
      31,2008
                    
                    
                    2007Raw
      materials
                    
                    $
                    2,507,073
                    
                    
                    $
                    1,842,760Packing
      materials
                    
                    
                    1,131,252
                    
                    
                    
                    810,319Miscellaneous
      supplies
                    
                    
                    402,630
                    
                    
                    
                    217,370Work
      in process
                    
                    
                    699,205
                    
                    
                    
                    571,173Processing
      materials
                    
                    
                    -
                    
                    
                    
                    137,188Finished
      goods
                    
                    
                    3,625,447
                    
                    
                    
                    2,371,153Total
                    
                    $
                    8,365,607
                    
                    
                    $
                    5,949,963
 
 
 The
Company has written off obsolete inventories that amounted to $293,648 and
$84,521 for the years ended December 31, 2008 and 2007,
respectively.
 
 Note
6 – 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 $112,591 and $65,901 at December 31, 2008 and 2007,
respectively.
 
 Note
7 – Prepaid expenses
 
 Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses. The
details of prepaid expenses are as follows:
 
 December
      31,
                    
                    
                    December
      31,2008
                    
                    
                    2007Advance
      to suppliers
                    
                    $
                    297,576
                    
                    
                    $
                    622,275Short-term
      prepaid expenses
                    
                    
                    4,322
                    
                    
                    
                    1,363Total
                    
                    $
                    301,898
                    
                    
                    $
                    623,638
 
 F-25
  Note
8 – Property, plant and equipment, net
 
 Property,
plant and equipment consisted of the following:
 
 December
      31,December
      31,
                      2008
                    
                    
                    2007
                      As
      AdjustedBuildings
      and improvements
                    
                    $
                    1,558,524
                    
                    
                    $
                    6,923,475Office
      equipment
                    
                    
                    383,678
                    
                    
                    
                    405,277Computer
      equipment and software
                    
                    
                    2,900,333
                    
                    
                    
                    2,678,312Machinery
      and equipment
                    
                    
                    12,835,301
                    
                    
                    
                    11,333,473Automobiles
                    
                    
                    4,145,367
                    
                    
                    
                    5,188,650Total
                    
                    
                    21,823,203
                    
                    
                    
                    26,529,187Less:
      accumulated depreciation
                    
                    
                    (11,548,560
                    )
                    
                    
                    (10,457,287
                    )Property,
      plant and equipment, net
                    
                    $
                    10,274,643
                    
                    
                    $
                    16,071,900
 
 
 Depreciation
expense for the years ended December 31, 2008 and 2007 amounted to $2,681,167
(including depreciation of $274,799 recorded in Tiens Yihai) and $2,898,586,
respectively.
 
 See Note
12 regarding related party sale of property.
 
 Note
9 - Intangible assets
 
 Intangible
assets consisted of the following:
 
 December
      31,December
      31,
                      2008
                    
                    
                    2007
                      As
      AdustedLand
      use rights
                    
                    $
                    13,498,149
                    
                    
                    $
                    9,402,699Other
      intangible assets
                    
                    
                    343,426
                    
                    
                    
                    328,873Less
      accumulated amortization
                    
                    
                    (704,380
                    )
                    
                    
                    (484,693
                    )Intangible
      assets, net
                    
                    $
                    13,137,195
                    
                    
                    $
                    9,246,879
 
 
 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, 2008 and 2007 amounted to $323,276
(including amortization of $53,180 recorded in Tiens Yihai) and $384,464
respectively.
 
 The
estimated amortization expense for the next five years is as
follows:
  F-26
 
 Estimated
      amortization expense forthe
      year ending December 31,
                    
                    Amount2009
                    
                    $
                    304,5622010
                    
                    $
                    304,1772011
                    
                    $
                    304,1772012
                    
                    $
                    297,6822013
                    
                    $
                    286,615
 
 
 Note
10 – Investment in 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 December 31, 2008, the Company had accrued $458,593 of
interest receivable which was added to the loan and included in other
assets.
  F-27
  
 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, 2008, Local Government had paid
the Company RMB 4,057,913 (or US $ 592,050) 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 has
decided to suspend the development of the property as an industrial park and was
considering alternative uses for the land, including a possible sale to a
related party. 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.
 
 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%.
 
 Note
11 – Assets held for sale
 
 Due to
the continued uncertainty relating to the Tiens Yihai project, the Company plans
to sell Tiens Yihai in 2009. Tianshi
Holdings, Tianshi Pharmaceuticals and Tianshi Group entered into a letter of
intent on December 31, 2008, pursuant to which Tianshi Pharmaceuticals agreed to
buy Tianshi Holdings' 96% share of Tiens Yihai, with Tianshi Group guaranteeing
payment.
  The
assets and liabilities of Tiens Yihai have been classified as assets held for
sale and liabilities directly associated with assets classified as held for sale
respectively for the consolidated balance sheets presented herein. The assets
and liabilities of Tiens Yihai as of December 31, 2008 were as
follows:
  F-28
  
 December
      31, 2008Cash
                    
                    
                    
                    
                    $
                    23,861,938Other
      receivables-third parties
                    
                    
                    
                    
                    
                    6,126Employee
      advances
                    
                    
                    
                    
                    
                    1,341Property,
      plant, and equipment, net
                    
                    
                    
                    
                    
                    
                    548,717Construction
      In Progress
                    
                    
                    
                    
                    
                    
                    2,462,108Intangible
      assets, net
                    
                    
                    
                    
                    
                    
                    2,596,029Long-term
      prepaid Expense
                    
                    
                    
                    
                    
                    
                    5,290,521Assets
      held for sale
                    
                    
                    
                    
                    
                    $
                    34,766,780Accounts
      payable
                    
                    
                    
                    
                    
                    
                    3,312Wages
      and benefits payable
                    
                    
                    
                    
                    
                    
                    88,648Other
      taxes payable
                    
                    
                    
                    
                    
                    
                    2Other
      payables
                    
                    
                    
                    
                    
                    
                    29,898Other
      payables - related parties
                    
                    
                    
                    
                    
                    
                    187Liabilities
      directly associted with assets
      classified as held for sale
                    
                    
                    
                    
                    
                    $
                    122,047
 
 
 Note
12 – 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 $4,785,520) to Biological in 2009. This transaction resulted in a loss of RMB
1,912,983 (or US $274,762) for Biological.
 
 On
January 1, 2009, Biological and Life Resources entered two Lease Agreements 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 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.
 
 Note 13 – Other related party transactions and
balances
 
 During
the years 2008 and 2007, 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-29
  
  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 2008 and 2007.
  
 2008
                        
                        
                        2007Revenue-related
      parties
                        
                        $
                        77,247,898
                        
                        
                        $
                        54,900,060
  
 December
      31,
                        2008
                      
                      
                      December
      31, 2007
                        As
      AdjustedAccounts
      receivable, trade – related parties, net of allowance for doubtful
                        accounts
      of $1,108,789 and $71,700 as of December 31, 2008 and 2007,
      respectively
                      
                      $
                      23,941,431
                      
                      
                      $
                      14,268,229Other
      receivables – related parties
                      
                      $
                      15,729,076
                      
                      
                      $
                      13,887,138Advances
      from customers – related parties
                      
                      $
                      3,239,650
                      
                      
                      $
                      1,700,838Other
      payables – related parties
                      
                      $
                      6,373,900
                      
                      
                      $
                      7,938,205Current
      portion of long-term debt - related party
                      
                      $
                      2,130,000
                      
                      
                      $
                      2,130,000Long
      term debt – related party
                      
                      $
                      2,137,742
                      
                      
                      $
                      4,267,742
  
  Revenue -related
parties
  The
details of revenue-related parties are as follows:
 2008
                
                
                2007Tianshi
      Engineering
                
                $
                33,711,474
                
                
                $
                22,476,135Overseas
      Related Companies
                
                
                43,536,424
                
                
                
                32,423,925Total
                
                $
                77,247,898
                
                
                $
                54,900,060
  
  The
Company markets all of its products through various domestic and international
business entities that are related to the Company through common ownership. As a
result, all of the Company’s total consolidated sales in 2008 and 2007 were to
related parties.
  F-30
  
 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.
  Accounts receivable, trade
-related parties
  The
details of accounts receivable, trade-related parties are as
follows:
 December
      31, 2008
                    
                    
                    December
      31, 2007Tianshi
      Engineering
                    
                    $
                    4,362,355
                    
                    
                    $
                    2,062,333Overseas
      Related Companies
                    
                    
                    20,687,865
                    
                    
                    
                    12,277,596Allowance
      for Doubtful Accounts
                    
                    
                    (1,108,789
                    )
                    
                    
                    (71,700
                    )Total
                    
                    $
                    23,941,431
                    
                    
                    $
                    14,268,229
  
  On
December 31, 2008, 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:
  F-31
  
 December
      31,December
      31,
                      2008
                    
                    
                    2007
                      As
      AdjustedTianshi
      Engineering
                    
                    $
                    11,636,208
                    
                    
                    $
                    9,460,811Tianshi
      Group
                    
                    
                    4,018,078
                    
                    
                    
                    2,347,489Tianshi
      Yinshi Hotel
                    
                    
                    36,475
                    
                    
                    
                    -Tianjin
      Xingda Travel Co., Ltd
                    
                    
                    12,932
                    
                    
                    
                    1,939Tianshi
      Pharmaceuticals
                    
                    
                    5,922
                    
                    
                    
                    5,065Shanghai
      Tianshi Jinquan Investment Co.
                    
                    
                    1,846
                    
                    
                    
                    874Shengshi
      Real Estate Development
                    
                    
                    1,657
                    
                    
                    
                    2,238Beijin
      Xingda Travel Co., Ltd
                    
                    
                    1,195
                    
                    
                    
                    5,959Tianjin
      Xiongshi Construction and
                      Decoration
      Co., Ltd
                    
                    
                    -
                    
                    
                    
                    2,062,763Others
                    
                    
                    14,763
                    
                    
                    
                    -Total
                    
                    $
                    15,729,076
                    
                    
                    $
                    13,887,138
  
  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. In 2008, Tianshi
Engineering paid its accounts receivables due to the Company timely, and
therefore no account receivables due from Tianshi Engineering were converted to
interest bearing other receivables. For the year ended December 31, 2008 and
2007, the interest income from the other receivables - related parties amounted
to $0 and $435,913,
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.
 
 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 RMB 32,800,000 (or US $4,785,520) (See Note 12). As of December 31,
2008, the remaining balance due from Tianshi Group for the purchase of the four
buildings amounted to RMB 32,800,000 (or US $4,785,520).
 
 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, 2008 and
2007, the amounts transferred to Xiongshi Construction and changed to RMB were
$12,500,000 and $21,028,671, respectively.
  F-32
  
  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, 2008 and December 31, 2007, advances from
related party customers amounted to $3.2 million and $1.7 million,
respectively.
  Other payables-related
parties
  The
details of other payables-related parties are as follows:
 December
      31,
                      2008
                    
                    
                    December
      31,
                      2007
                      As
      adjustedTianshi
      Investment
                    
                    $
                    6,080,385
                    
                    
                    $
                    7,490,136Tianshi
      Germany Co., Ltd.
                    
                    
                    105,553
                    
                    
                    
                    109,233Tianyuan
      Capital Development Co. Ltd. ("Capital")
                    
                    
                    84,359
                    
                    
                    
                    84,359Beijin
      Xingda Travel Co., Ltd.
                    
                    
                    80,245
                    
                    
                    
                    -Tianjin
      Tianshi Global International Trade Co., Ltd.
                    
                    
                    23,344
                    
                    
                    
                    -Tianshi
      Administrative Committee of Industrial Park
                    
                    
                    14
                    
                    
                    
                    13Tianshi
      Engineering
                    
                    
                    -
                    
                    
                    
                    244,980Tianshi
      Pharmaceuticals
                    
                    
                    -
                    
                    
                    
                    9,308Tianshi
      Shanghai Co., Ltd.
                    
                    
                    -
                    
                    
                    
                    176Total
                    
                    $
                    6,373,900
                    
                    
                    $
                    7,938,029
  
 These
amounts arose primarily from previous cash advances from related parties such as
management fees due to related parties and various non-operational transactions
incurred with related parties.
 
 On
December 21, 2007, Tianshi Holdings and Tianshi Investment entered a Capital
Contribution Agreement, pursuant to which Tianshi Investment agreed to fund a
capital increase of Life Resources in the amount of $7.5 million. Tianshi
Holdings agreed to pay back the $7.5 million to Tianshi Investment within five
days of the date of the government approval of the transfer of the shares of
Life Resources to Tianshi Holdings. The approval was received on March 13, 2008
and the $7.5 million was paid back on March 18, 2008, by canceling $7.5 million
of accounts receivable owed to the Company by Tianshi Engineering (see Note
4).
 
 On
January 21, 2008, Life Resources and Tianshi Investment entered a loan
agreement, pursuant to which Tianshi Investment agreed to provide a loan to Life
Resources for $6.5 million without interest. The loan was due on June 30, 2008.
On June 30, 2008, the parties extended the loan to December 31, 2008. In
November 2008, the Company has paid approximately $420,000 to Tianshi
Investment. The remaining loan was extended to June 30, 2009 by the parties on
December 31, 2008.
  F-33
  
  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 $266,273 and $399,543 was paid for the years ended
December 31, 2008 and 2007, respectively, and six installment payments had been
made by the end of December, 2008.
 
 The loan
balance at December 31, 2008 and 2007 consisted of the following:
 
 December
      31,
                      2008
                    
                    
                    December
      31,
                      2007Note
      payable to Tianyuan CapitalDevelopment
      Corp. Ltd., related party
                    
                    $
                    4,267,742
                    
                    
                    $
                    6,397,742Less
      current portion of long term debt
                    
                    
                    (2,130,000
                    )
                    
                    
                    (2,130,000
                    )Total
                    
                    $
                    2,137,742
                    
                    
                    $
                    4,267,742
 
 
 Total
principal payments for the remaining three years on all long-term debt-related
parties are as follows:
 
 
 Year
      Ending December 31,
                    
                    Amount2009
                    
                    $
                    2,130,0002010
                    
                    $
                    2,130,0002011
                    
                    $
                    7,742
 
 
 Other transactions with
Tianshi Engineering
 
 On
December 31, 2005, Biological entered four lease agreements with Tianshi
Engineering which enabled Tianshi Engineering to share the use of certain of
Biological’s production workshops and equipment 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. Rent revenue from these
leases amounted to $326,956 and $379,083 for the years ended 2008 and 2007,
respectively.
  F-34
  
 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 $545,192 and $522,318 for the
years ended December 31, 2008 and 2007, respectively.
 
 
 Othertransactions 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 the registered share
capital of Life Resources from Tianshi Investment for RMB474,674,415
($64,247,182). The closing of the transaction was subject to government approval
of the transfer of Life Resources to Tianshi Holdings. On March 13, 2008, the
government approved the transfer.
 
 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 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.
 
 Note
14 – Commitments and contingencies
 
 Capital
commitments
 
 Capital
commitments not provided for in the consolidated financial statements include
the followings:
  F-35
  
 2008
                    
                    
                    2007Purchases
      of machinery and equipment
                    
                    $
                    89,524
                    
                    
                    $
                    267,404Construction
      of premises
                    
                    $
                    54,685,540
                    
                    
                    $
                    35,465,474Total
                    
                    $
                    54,775,064
                    
                    
                    $
                    35,732,878
 
 
 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, 2008.
  Payments
      due by periodLess
      than
                      1
      year
                    
                    
                    1-3
      years
                    
                    
                    3-5
      years
                    
                    
                    More
      than
                      5
      years
                    
                    
                    TotalOperating
      Lease Obligations
                    
                    $
                    115,144
                    
                    
                    $
                    0
                    
                    
                    $
                    0
                    
                    
                    $
                    0
                    
                    
                    $
                    115,144Long-term
      Debt Obligations
                    
                    $
                    2,130,000
                    
                    
                    $
                    2,137,742
                    
                    
                    $
                    0
                    
                    
                    $
                    0
                    
                    
                    $
                    4,267,742Total
      fixed contractual obligations
                    
                    $
                    2,245,144
                    
                    
                    $
                    2,137,742
                    
                    
                    $
                    0
                    
                    
                    $
                    0
                    
                    
                    $
                    4,382,886
 
 
 (1) 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
2008 under this lease was $545,192.
 
 (2) 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 in 2008 under this lease was $37,784.
 
  F-36
  
 Note 15 – Minority interest and
distribution
 
 The roll
forward of Minority Interest balance in the balance sheet is shown
below:
 
 Biological
                
                
                
                
                
                YihaiMinority
                
                
                
                
                
                Minority
                
                
                TotalBiological
                
                
                Owners
                
                
                Tiens
      Yihai
                
                
                Owners
                
                
                MinorityUSD
                
                
                (20%)
                
                
                USD
                
                
                (0.6%)
                
                
                InterestDecember
      31, 2006
                
                $
                58,499,962
                
                
                $
                11,699,992
                
                
                $
                30,555,046
                
                
                $
                183,331
                
                
                $
                11,883,323Net
      income (loss)
                
                
                24,840,180
                
                
                
                4,968,036
                
                
                
                (273,217
                )
                
                
                (1,639
                )
                
                
                4,966,397Other
      comprehensive Income
                
                
                2,947,667
                
                
                
                589,533
                
                
                
                2,019,327
                
                
                
                12,116
                
                
                
                601,649Paid-in-capital
                
                
                86,381
                
                
                
                17,276
                
                
                
                -
                
                
                
                -
                
                
                
                17,276Dividend
      distribution
                
                
                (56,622,912
                )
                
                
                (11,324,582
                )
                
                
                -
                
                
                
                -
                
                
                
                (11,324,582
                )December
      31, 2007
                
                
                29,751,278
                
                
                
                5,950,255
                
                
                
                32,301,156
                
                
                
                193,808
                
                
                
                6,144,063Net
      income (loss)
                
                
                11,570,959
                
                
                
                2,314,192
                
                
                
                170,577
                
                
                
                1,023
                
                
                
                2,315,215Other
      comprehensive Income
                
                
                2,180,509
                
                
                
                436,103
                
                
                
                2,171,544
                
                
                
                13,029
                
                
                
                449,132Paid-in-capital
                
                
                490,142
                
                
                
                98,028
                
                
                
                -
                
                
                
                -
                
                
                
                98,028December
      31, 2008
                
                $
                43,992,888
                
                
                $
                8,798,578
                
                
                $
                34,643,277
                
                
                $
                207,860
                
                
                $
                9,006,438
 
 Effective
from January 1, 2009, the share of Tiens Yihai held by minority shareholder
increased from 0.6% to 4%.
 
 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 minority ownership percentages. The table below shows the
outstanding dividends payable of Biological, as well as the allocation of
dividends between Tianshi Holdings and the minority
shareholder.
  F-37
  
 Tianshi
                    
                    
                    MinorityDate
                    
                    Holding
                    
                    
                    Shareholder
                    
                    
                    TotalsDividends
      outstanding, December 31, 2006 Balance
                    
                    $
                    45,978,854
                    
                    
                    $
                    238,311
                    
                    
                    $
                    46,217,165Dividends
      declared
                    
                    
                    45,298,330
                    
                    
                    
                    11,324,582
                    
                    
                    
                    56,622,912Dividends
      paid
                    
                    
                    (86,747,565
                    )
                    
                    
                    (6,676,102
                    )
                    
                    
                    (93,423,667
                    )Accumulated
      other comprehensive income (loss)
                    
                    
                    3,900,013
                    
                    
                    
                    15,838
                    
                    
                    
                    3,915,851Dividends
      outstanding, December 31, 2007 Balance
                    
                    $
                    8,429,632
                    
                    
                    $
                    4,902,629
                    
                    
                    $
                    13,332,261Dividends
      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
                    
                    
                    $
                    -
                    
                    
                    $
                    6,873,995
  As
Biological declares dividends in RMB, and the RMB has appreciated against the
dollar since 2005, dividends outstanding generated comprehensive income to
Tianshi Holdings and the minority shareholder. Comprehensive income to Tianshi
Holdings for the years ended December 31, 2008 and 2007 amounted to $542,975 and
$3,900,013 respectively. Comprehensive income to minority shareholders for the
years ended December 31, 2008 and 2007 amounted to $167,462 and $15,838,
respectively.
 
 Note
16 – Accumulated other comprehensive income
 
 Life
                    
                    
                    TianshiBiological
                    
                    
                    Tiens
      Yihai
                    
                    
                    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
                    
                    
                    $
                    23,851,062
 
 
 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.
  F-38
  
 Note
17 – Statutory reserves
 
 The
      laws and regulations of the People’s Republic of China require that before
      a Sino-foreign cooperative joint venture enterprise distributes profits to
      its partners, it must first satisfy all tax liabilities, provide for
      losses in previous years, and make allocations, in proportions determined
      at the discretion of the board of directors, after the statutory reserve.
      The statutory reserves include the surplus reserve fund, the common
      welfare fund, and the enterprise
fund.
 
 Statutory reserve
fund
 
 The
      Company is required to transfer 10% of its net income, as determined in
      accordance with the PRC accounting rules and regulations, to a statutory
      surplus reserve fund until such reserve balance reaches 50% of the
      Company’s registered capital. As of December 31, 2005, the Company's
      statutory reserve fund had reached 50% of the Company's registered
      capital, so no statutory reserve was required
  thereafter.
 
 The
      transfer to this reserve must be made before distribution of any dividend
      to shareholders.   For the years ended December 31, 2008
      and 2007, the Company did not transfer any net income to this reserve and
      the amount of this reserve remained at
  $2,455,269.
 
 The
      surplus reserve fund is non-distributable other than during liquidation
      and can be used to fund previous years’ losses, if any, and may be
      utilized for business expansion or converted into share capital by issuing
      new shares to existing shareholders in proportion to their shareholding or
      by increasing the par value of the shares currently held by them, provided
      that the remaining reserve balance after such issue is not less than 25%
      of the registered capital.
 
 Common welfare
fund
 
 The
      Company is required to transfer 5% to 10% of its net income, as determined
      in accordance with the PRC accounting rules and regulations, to the
      statutory common welfare fund. This fund can only be utilized on capital
      items for the collective benefit of the Company’s employees, such as
      construction of dormitories, cafeteria facilities, and other staff welfare
      facilities. This fund is non-distributable other than upon liquidation.
      The transfer to this fund must be made before distribution of any dividend
      to shareholders. For the years ended December 31, 2008 and 2007, the
      directors authorized, subject to shareholders’ approval, that no funds be
      transferred to this reserve. The amount of the statutory common welfare
      fund reserve at December 31, 2008 was
  $4,709,499.
 
 Enterprise
fund
 
 The
      enterprise fund may be used to acquire fixed assets or to increase the
      working capital to expend on production and operation of the
      business.  No minimum contribution is required.  For
      the years ended December 31, 2008 and 2007, 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, 2008 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.
  F-39
  
 Note
18 – Additional product sales information
 
 The
Company has a single operating segment. All of the Company's revenues were
generated from related parties for the years ended December 31, 2008 and 2007.
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:
 
 2008
                    
                    
                    2007China
                    
                    $
                    33,711,474
                    
                    
                    $
                    22,476,135Indonesia
                    
                    
                    15,045,703
                    
                    
                    
                    9,084,438Russia
                    
                    
                    9,105,228
                    
                    
                    
                    4,611,258Ukraine
                    
                    
                    3,060,220
                    
                    
                    
                    3,782,073Other
                    
                    
                    16,325,273
                    
                    
                    
                    14,946,156Total
                    
                    $
                    77,247,898
                    
                    
                    $
                    54,900,060
 
 Revenue
by Product Group:
 
 2008
                    
                    
                    2007Wellness
      products
                    
                    $
                    70,772,304
                    
                    
                    $
                    49,609,410Dietary
      supplement products
                    
                    
                    6,432,355
                    
                    
                    
                    4,928,181Personal
      care products
                    
                    
                    43,239
                    
                    
                    
                    362,469Total
                    
                    $
                    77,247,898
                    
                    
                    $
                    54,900,060
 
 
 Note
19 - Income taxes
 
 The
Company is subject to income taxes on an entity basis on income arising in or
derived from the tax jurisdiction in which each entity is domiciled. The
Company's subsidiary, Tianshi Holdings, was incorporated in the British Virgin
Islands and is not liable for income taxes.
 
 The
Company's subsidiaries, Biological, Tiens Yihai and Life Resources, are
Sino-Foreign Joint Ventures incorporated in the PRC. According to US GAAP, the
following are the income tax credits granted by the Chinese government, which
are significant components of income taxes associated with continuing operations
required to be disclosed by FAS 109.
 
 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, the temporary difference between consolidated pretax income and
taxable income is none.
  F-40
  
 
 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 not have 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 year of 2008, Biological was required by the local tax
authority to prepay income tax at a tax rate of 25%.
 
 According
to the new EIT, Life Resources could still be fully exempt from PRC income taxes
for two years starting from January 1, 2008, followed by a 12.5% reduced tax
rate for the next three years. However, before the tax exemption
qualification of Life Resources was approved by the tax authority, Life
Resources was required by local tax authority to prepay income tax at a tax rate
of 25%. On October 10, 2008 the approval was issued and the prepaid income
tax in Life Resources could be refunded in 2009. The prepaid income tax in Life
Resources of $685,475 is treated as prepaid income taxes in the consolidated
financial statements of the Company.
 
 Provisions
for income taxes were all current income tax expenses and for the years ended
December, 2008 and 2007 were $2,345,474 and $2,026,875,
respectively.
  F-41
  
 
 The
following table reconciles the U.S. statutory rates to the Company's effective
tax rate:
 
 2008
                    
                    
                    2007U.S.
      Statutory rate
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %Foreign
      income not recognized in USA
                    
                    
                    (34.0
                    )
                    
                    
                    (34.0
                    )China
      income taxes
                    
                    
                    25.0
                    
                    
                    
                    33.0Effect
      of reduced tax rate
                    
                    
                    -
                    
                    
                    
                    (25.5
                    )Total
      provision for income taxes
                    
                    
                    25.0
                    %
                    
                    
                    7.5
                    %
 
 The
estimated tax savings due to the reduced tax rate for the years ended December
31, 2008 and 2007 amounted to $8,052,908 and $6,851,099, 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, 2008 and 2007 by $0.11 and
$0.08, respectively
 
  Note
20 – Retirement plan
 
 Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all employees. All Biological employees are entitled to a
retirement pension amount calculated based upon their 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.
 
 Biological
is required to make contributions to the state retirement plan at 20% of the
employees' monthly salary. Employees are required to contribute 8% of their
salary to the plan. Total pension expense incurred by the Company amounted to
$795,419 and $604,067 for the years ended December 31, 2008 and 2007,
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 $79,976 and $60,478 for the years ended December
31, 2008 and 2007, 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 $407,992 and $329,203 for the years ended December 31, 2008
and 2007, respectively.