UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For the
quarterly period ended December 31, 2010





 ̈
            TRANSITION REPORT UNDER SECTION
      13 OR 15(d) OF THE EXCHANGE
ACT





For the
transition period from ______________ to _____________





Commission
file number: 000-51060





CHINA
HEALTH INDUSTRIES HOLDINGS, INC.


(Exact
name of registrant as specified in its charter)





Delaware
                (State
      or other jurisdiction of incorporation or
                organization)
              
              86-0827216
                (I.R.S.
      Employer Identification No.)168
      Binbei Street, Songbei District, Harbin City
                Heilongjiang
      Province, People’s Republic of China
                (Address
      of principal executive offices)
              
              150000
                (Zip
      Code)





86-451-51719407


(Registrant’s
telephone number, including area code)





Not
Applicable


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





Indicate
by check mark whether the registrant (1) has filed 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. Yesx   No ̈





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





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





Large
      accelerated filer   ̈
              
              Accelerated
      filer   ̈Non-accelerated
      filer   ̈
              
              Smaller
      reporting company x





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





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes  ̈    No
 ̈





APPLICABLE
ONLY TO CORPORATE ISSUERS





Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date:





As of
February 11, 2011, there were 62,239,737 shares of $0.0001 par value common
stock issued and outstanding.





FORM
10-Q


CHINA
HEALTH INDUSTRIES HOLDINGS, INC.


INDEX





PagePART
      I
                FINANCIAL
      INFORMATIONItem
      1. Financial Statements (Unaudited).
                
                3Consolidated
      Balance Sheets as of December 31, 2010 (Unaudited) and June 30,
      2010.
                
                3Consolidated
      Statements of Operations for the three and six months ended December 31,
      2010 and 2009 (Unaudited).
                
                4Consolidated
      Statements of Cash Flows for the six months ended December 31, 2010 and
      2009 (Unaudited).
                
                5Consolidated
      Statement Stockholders’ Equity (Unaudited).
                
                6Notes
      to Financial Statements.
                
                7Item
      2. Management’s Discussion and Analysis of Financial Condition and results
      of Operations.
                
                20Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                
                31Item
      4. Controls and Procedures.
                
                31PART
      II
                OTHER
      INFORMATIONItem
      1. Legal Proceedings.
                
                33Item
      1A. Risk Factors.
                
                33Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
                
                33Item
      3. Defaults Upon Senior Securities.
                
                33Item
      4. (Removed and Reserved).
                
                33Item
      5. Other Information.
                
                33Item
      6. Exhibits.
                
                33


2


PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements (Unaudited)


CHINA
HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 December 31,
                            2010 (Unaudited)
                          
                          
                          June 30, 2010
                            (Audited)ASSETSCurrent
      assetsCash
      and cash equivalents
                          
                          $
                          19,716,525
                          
                          
                          $
                          13,344,531Accounts
      receivable
                          
                          
                          5,862
                          
                          
                          
                          5,693Inventory
                          
                          
                          311,243
                          
                          
                          
                          184,522Notes
      receivable
                          
                          
                          3,024,895
                          
                          
                          
                          2,992,893Prepaid
      expenses
                          
                          
                          860,899
                          
                          
                          
                          764,738Deposit
                          
                          
                          3,182,502
                          
                          
                          
                          3,084,335Total
      current assets
                          
                          
                          27,101,926
                          
                          
                          
                          20,376,712Property
      and equipment – net
                          
                          
                          1,154,307
                          
                          
                          
                          987,310Intangible
      Assets – net
                          
                          
                          849,924
                          
                          
                          
                          835,183Construction-in-progress
                          
                          
                          -
                          
                          
                          
                          163,323Total
      assets
                          
                          $
                          29,106,157
                          
                          
                          $
                          22,362,528LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable and accrued expenses
                          
                          $
                          179,495
                          
                          
                          $
                          228,629Customer
      deposits
                          
                          
                          12,828
                          
                          
                          
                          363Related
      party debt
                          
                          
                          88,009
                          
                          
                          
                          85,408Wages
      payable
                          
                          
                          718,076
                          
                          
                          
                          291,885Self-insured
      reserve
                          
                          
                          222,782
                          
                          
                          
                          216,343Tax
      payable
                          
                          
                          3,597,140
                          
                          
                          
                          3,629,951Total
      current liabilities
                          
                          
                          4,818,330
                          
                          
                          
                          4,452,579Commitments
      and contingencies
                          
                          
                          820,233
                          
                          
                          
                          968,484STOCKHOLDERS’
      EQUITYCommon
      stock ($0.0001 par value, 300,000,000 shares authorized, 62,239,737 and
      62,234,737 issued and outstanding, respectively)
                          
                          
                          6,224
                          
                          
                          
                          6,224Additional
      paid-in capital
                          
                          
                          1,437,246
                          
                          
                          
                          1,434,910Accumulated
      other comprehensive income
                          
                          
                          564,898
                          
                          
                          
                          589,618Retained
      earnings
                          
                          
                          22,279,459
                          
                          
                          
                          15,879,197Total
      Stockholders' equity
                          
                          
                          24,287,827
                          
                          
                          
                          17,909,949TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                          
                          $
                          29,106,157
                          
                          
                          $
                          22,362,528
 
 See
accompanying notes to the consolidated financial statements
  3
  CHINA
HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
  For the Three Months Ended
                        
                        
                        For the Six Months EndedDecember
                          31,2010
                        
                        
                        December
                          31,2009
                        
                        
                        December
                          31,2010
                        
                        
                        December
                          31,2009REVENUE
                        
                        $
                        13,363,093
                        
                        
                        $
                        9,374,937
                        
                        
                        $
                        24,980,486
                        
                        
                        $
                        19,621,543COST
      OF GOODS SOLD
                        
                        
                        6,708,036
                        
                        
                        
                        4,035,362
                        
                        
                        
                        12,693,331
                        
                        
                        
                        8,521,728Gross
      Profit
                        
                        
                        6,655,057
                        
                        
                        
                        5,339,575
                        
                        
                        
                        12,287,155
                        
                        
                        
                        11,099,815OPERATING
      EXPENSESSelling,
      general & administrative expenses
                        
                        
                        1,227,027
                        
                        
                        
                        1,999,220
                        
                        
                        
                        2,488,419
                        
                        
                        
                        2,515,545Depreciation
      and amortization expenses
                        
                        
                        20,099
                        
                        
                        
                        35,965
                        
                        
                        
                        39,796
                        
                        
                        
                        56,296Research
      & development
                        
                        
                        34,115
                        
                        
                        
                        -
                        
                        
                        
                        771,543
                        
                        
                        
                        -Total
      operating expenses
                        
                        
                        1,281,241
                        
                        
                        
                        2,035,185
                        
                        
                        
                        3,299,758
                        
                        
                        
                        2,571,841Operating
      profit
                        
                        
                        5,373,816
                        
                        
                        
                        3,304,390
                        
                        
                        
                        8,987,397
                        
                        
                        
                        8,527,974OTHER
      INCOME (EXPENSES)Interest
      expenses
                        
                        
                        (1,168
                        )
                        
                        
                        (4,936
                        )
                        
                        
                        (2,336
                        )
                        
                        
                        (20,835
                        )Interest
      income
                        
                        
                        39,282
                        
                        
                        
                        -
                        
                        
                        
                        78,637
                        
                        
                        
                        5Other
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      other income (expense)
                        
                        
                        38,113
                        
                        
                        
                        (4,936
                        )
                        
                        
                        76,300
                        
                        
                        
                        (20,830
                        )INCOME
      (LOSS) BEFORE INCOME TAXES
                        
                        
                        5,411,930
                        
                        
                        
                        3,299,454
                        
                        
                        
                        9,063,698
                        
                        
                        
                        8,507,144Income
      taxes
                        
                        
                        1,548,022
                        
                        
                        
                        831,363
                        
                        
                        
                        2,663,436
                        
                        
                        
                        2,149,396Net
      income (loss)
                        
                        $
                        3,863,908
                        
                        
                        $
                        2,468,091
                        
                        
                        $
                        6,400,262
                        
                        
                        $
                        6,357,748OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation gain (loss)
                        
                        $
                        (23,552
                        )
                        
                        $
                        642
                        
                        
                        $
                        201,001
                        
                        
                        $
                        185,097Comprehensive
      income
                        
                        $
                        3,840,356
                        
                        
                        $
                        2,468,733
                        
                        
                        $
                        6,601,263
                        
                        
                        $
                        6,542,845Basic
      and diluted net loss per share
                        
                        
                        0.06
                        
                        
                        
                        0.04
                        
                        
                        
                        0.10
                        
                        
                        
                        0.10Weight
      average shares outstanding
                        
                        
                        62,239,737
                        
                        
                        
                        62,234,737
                        
                        
                        
                        62,239,737
                        
                        
                        
                        62,234,737
 
 See
accompanying notes to the consolidated financial statements
  4
  CHINA
HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 For the Six Months Ended
                                          December 312010
                                        
                                        
                                        2009Cash
      flows from operating activities:Net
      income (loss)
                                        
                                        $
                                        6,400,262
                                        
                                        
                                        $
                                        6,357,748Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activitiesDepreciation
      & amortization
                                        
                                        
                                        39,797
                                        
                                        
                                        
                                        56,296Imputed
      interest
                                        
                                        
                                        2,336
                                        
                                        
                                        
                                        20,835Changes
      in assets and liabilities -(Increase)
      decrease in:Accounts
      receivables and other receivables
                                        
                                        
                                        (98,337
                                        )
                                        
                                        
                                        15,841Inventory
                                        
                                        
                                        (126,721
                                        )
                                        
                                        
                                        (47,572
                                        )Prepaid
      expense
                                        
                                        
                                        (96,161
                                        )
                                        
                                        
                                        (29,013
                                        )Accounts
      payable and other payables
                                        
                                        
                                        363,150
                                        
                                        
                                        
                                        564,380Net
      cash provided by (used in) operating activities
                                        
                                        
                                        6,484,326
                                        
                                        
                                        
                                        6,938,515Cash
      flows from investing activities:Purchases/
      (transfer) of fixed assets
                                        
                                        
                                        (163,323
                                        )
                                        
                                        
                                        (33,936
                                        )Prepayment
      on acquisition
                                        
                                        
                                        
                                        
                                        
                                        
                                        (8,044,229
                                        )Prepayment
      on land use right
                                        
                                        
                                        
                                        
                                        
                                        
                                        (3,071,253
                                        )Notes
      receivable
                                        
                                        
                                        (32,002
                                        )
                                        
                                        
                                        -construction-in-progress
                                        
                                        
                                        163,323
                                        
                                        
                                        
                                        (152,121
                                        )Net
      cash provided by investing activities
                                        
                                        
                                        (32,002
                                        )
                                        
                                        
                                        (11,301,539
                                        )Cash
      flows from financing activities:Proceeds
      from related party debt
                                        
                                        
                                        2,601
                                        
                                        
                                        
                                        (604,250
                                        )Net
      cash provided by financing activities
                                        
                                        
                                        2,601
                                        
                                        
                                        
                                        (604,250
                                        )Effect
      of exchange rates on cash
                                        
                                        
                                        (82,931
                                        )
                                        
                                        
                                        185,097Net
      increase (decrease) in cash and cash equivalents
                                        
                                        
                                        6,371,992
                                        
                                        
                                        
                                        (4,782,177
                                        )Cash
      and cash equivalents, at beginning of year
                                        
                                        
                                        13,344,531
                                        
                                        
                                        
                                        7,394,270Cash
      and cash equivalents, at end of year
                                        
                                        $
                                        19,716,525
                                        
                                        
                                        $
                                        2,612,093Supplemental
      cash flow informationCash
      paid for income tax
                                        
                                        $
                                        2,408,152
                                        
                                        
                                        $Noncash
      investing and financing activitiesAdjustment
      of fixed asset value for wrote off
                                        
                                        $
                                        -
                                        
                                        
                                        $
 See
accompanying notes to the consolidated financial statements
  5
  CHINA
HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 Common sharesShares
                        
                        
                        Amount
                        
                        
                        Additional
                          Paid-in
                          Capital
                        
                        
                        Retained
                          Earnings
                          (Accumulated
                          Deficit)
                        
                        
                        Accumulated
                          Other
                          Comprehensive
                          Income
                        
                        
                        Stockholders'
                          EquityBalances,
      June 30, 2010
                        
                        
                        62,239,737
                        
                        
                        $
                        6,224
                        
                        
                        $
                        1,434,910
                        
                        
                        $
                        15,879,197
                        
                        
                        $
                        589,618
                        
                        
                        $
                        17,909,949Imputed
      interest on shareholder loan
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2,336
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2,336Net
      income for the six months ended December 31, 2010
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        6,400,262
                        
                        
                        
                        
                        
                        
                        
                        6,400,262Other
      comprehensive income-Translation adjustment
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (24,720
                        )
                        
                        
                        (24,720
                        )Balances,
      December 31, 2010
                        
                        
                        62,239,737
                        
                        
                        $
                        6,224
                        
                        
                        $
                        1,437,246
                        
                        
                        $
                        22,279,459
                        
                        
                        $
                        564,898
                        
                        
                        $
                        24,287,827
 
 See
accompanying notes to the consolidated financial statements
  6
  CHINA
HEALTH INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 Note
1 - ORGANIZATION AND BUSINESS BACKGROUND
 
 We were
incorporated in the state of Arizona on July 11, 1996 and were the successor of
the business known as Arizona Mist, Inc. which began in 1989. On May 9, 2005, we
entered into a Stock Purchase Agreement and Share Exchange (effecting a reverse
merger) with Edmonds 6, Inc. (Edmonds 6) and our name was changed to
Universal Fog, Inc. Edmonds 6 was incorporated on August 19, 2004 under the laws
of the State of Delaware to engage in any lawful corporate undertaking,
including, but not limited to, selected mergers and acquisitions. Pursuant to
this agreement, Universal Fog, Inc. (which has been in continuous operation
since 1996) became a wholly-owned subsidiary of Edmonds 6.
 
 China
Health Industries Holdings Limited ("China Health") was incorporated on July 20,
2007 in Hong Kong under the Companies Ordinance as a limited liability company.
China Health was formed for the purpose of seeking and consummating a merger or
acquisition with a business entity organized as a private corporation,
partnership, or sole proprietorship as defined by Statement of Financial
Accounting Standards (SFAS) No. 7.
 
 Harbin
Humankind Biology Technology Co., Limited ("Humankind") was incorporated in
Harbin City, Heilongjiang Province, the People's Republic of China (the "PRC")
on December 14, 2003, as a limited liability company under the Company Law of
PRC. Humankind is
engaged in the business of production and distribution of health
food.
 
 On August
20, 2007, the sole shareholder of China Health entered into a Share Purchase
Agreement with the owners of Humankind. Pursuant to the Agreement, China Health
purchased 100% of the ownership in Humankind for a cash consideration of
$60,408. Subsequent to completion of the Agreement, Humankind became a
wholly-owned subsidiary of China Health. The share purchase transaction is being
accounted for as a “reverse merger,” since the owner of Humankind owns a
majority of the outstanding shares of China Health’s common stock immediately
following the execution of the Agreement. Humankind is deemed to be the acquirer
in the reverse merger. Consequently, the assets and liabilities and the
historical operations that will be reflected in the financial statements for
periods prior to the Agreement will be those of Humankind and will be recorded
at the historical cost basis. After completion of the Agreement, China Health’s
consolidated financial statements will include the assets and liabilities of
both China Health and Humankind, the historical operations of Humankind and the
operations of China Health and its subsidiaries from the closing date of the
Agreement.
 
 On
October 14, 2008, Humankind set up a 99% owned subsidiary Harbin Huimeijia
Medicine with its primary business being manufacturing and distributing
medicine. Mr. Xin Sun, the Company’s majority owner, owns 1% of this subsidiary.
The subsidiary is consolidated in the consolidated financial statements of the
Company.
 
 On
December 31, 2008, China Health closed a reverse merger with Universal Fog, Inc;
a U.S. public traded shell company. China Health is the accounting acquirer in
the transaction and the transaction is treated as a recapitalization of the
Company. After the transaction and a 1:20 reverse stock split, Xin Sun owned
61,203,088 shares of common stock, representing 98.3% of the 62,234,737 total
outstanding shares of common stock of the Company. On April 7, 2009, Mr.
Sun transferred 28,200,000 shares of common stock to 296 individuals, leaving
him with 33,003,088 shares of common stock of the Company, or approximately
53.03%. We changed our name from "Universal Fog, Inc." to "China Health
Industries Holdings, Inc." on February 19, 2009.
 
 Note
2 - SIGNIFICANT ACCOUNTING POLICIES
 
 Principals
of Consolidation
 
 The
accompanying consolidated financial statements include China Health Industries
Holdings, Inc. and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in
consolidation.
  7
 
 Basis
of Presentation
 
 The
accompanying financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America (“US GAAP”). This
basis of accounting differs from that used in the statutory accounts of China
Health, which are prepared in accordance with the “Accounting Principles of
China” (“PRC GAAP”).
 
 Translation
of Foreign Currencies
 
 China
Health maintains its books and accounting records in PRC currency “Renminbi”
(“RMB”), which is determined as the functional currency. Transactions
denominated in currencies other than RMB are translated into RMB at the exchange
rates quoted by the People’s Bank of China (“PBOC”) prevailing at the date of
the transactions. Foreign currency exchange gain and losses resulting from these
transactions are included in operations.
 
 China
Health’s financial statements are translated into the reporting currency, the
United States Dollar (“US$”). Assets and liabilities of China Health are
translated at the prevailing exchange rate at each reporting period end.
Contributed capital accounts are translated using the historical rate of
exchange when capital is injected. Income and expense accounts are
translated at the average rate of exchange during the reporting period.
Translation adjustments resulting from translation of these financial statements
are reflected as accumulated other comprehensive income (loss) in the
shareholders’ equity.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and judgments that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. China Health bases its estimates and judgments on
historical experience and on various other assumptions and information that are
believed to be reasonable under the circumstances. Estimates and assumptions
about future events and their effects cannot be perceived with certainty and,
accordingly, these estimates may change as new events occur, as more experience
is acquired, as additional information is obtained and as our operating
environment changes. While China Health believes that the estimates and
assumptions used in the preparation of the financial statements are appropriate,
actual results could differ from those estimates.
  Earnings
per share
 
 Basic
earnings per common share is computed by dividing net earnings applicable to
common shareholders by the weighted-average number of common shares outstanding
during the period. When applicable, diluted earnings per common share is
determined using the weighted-average number of common shares outstanding during
the period, adjusted for the dilutive effect of common stock equivalents,
consisting of shares that might be issued upon exercise of common stock options
and warrants.
 
 Potential
common shares issued are calculated using the treasury stock method, which
recognizes the use of proceeds that could be obtained upon the exercise of
options and warrants in computing diluted earnings per share. It assumes that
any proceeds would be used to purchase common stock at the average market price
of the common stock during the period.
 
 Cash
and Cash Equivalents
 
 Cash and
cash equivalents include cash on hand, deposits in banks with maturities of
three months or less, and all highly liquid investments which are unrestricted
as to withdrawal or use, and which have original maturities of three months or
less at the time of purchase.
  8
 
 Accounts
Receivable
 
 Accounts
receivable are recorded at the invoiced amount and do not bear interest. China
Health extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customer’s current
credit worthiness, and the economic environment.
 
 Concentrations
of Credit Risk
 
 Financial
instruments that subject China Health to concentrations of credit risk consist
primarily of cash and cash equivalents. China Health maintains its cash and cash
equivalents with high-quality institutions. Deposits held with banks may exceed
the amount of insurance provided on such deposits. Generally these deposits may
be redeemed upon demand and therefore bear minimal risk.
 
 Self-Insured
Reserve and Allowance
 
 The
Company is self-insured for all risks and carries no general liability or
product insurance coverage of any kind. This account requires the use of
estimates and judgment. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. The Company believes that such estimates are made with consistent
and appropriate methods. Actual results may differ from these estimates under
different assumptions or conditions.
 
 Fair
Value of Financial Instruments
 
 The
carrying value of financial instruments including cash and cash equivalents,
receivables, accounts payable and accrued expenses, approximates their fair
value at December 31, 2010 and 2009 due to the relatively short-term nature of
these instruments.
 
 Prepaid
Expenses
 
 Prepaid
expenses principally include advances to raw material suppliers.
 
 Inventory
 
 Inventories
are stated at the lower of cost or market using the weighted average method.
China Health reviews its inventory on a regular basis for possible obsolete
goods or to determine if any reserves are necessary for potential obsolescence.
No reserve was made in the six months ended December 31, 2010 and 2009,
respectively.
 
 Impairment
of Long–Lived Assets
 
 China
Health reviews all of its long-lived assets, including tangible and intangible
long-lived assets, for impairment indicators at least annually and performs
detailed impairment testing for all long-lived assets whenever impairment
indicators are present. When necessary, China Health records charges for
impairments of long-lived assets for the amount by which the present value of
future cash flows, or some other fair value measure, is less than the carrying
value of these assets.
 
 Property,
Plant and Equipment
 
 Property,
plant and equipment are carried at cost. Maintenance, repairs and minor renewals
are expensed as incurred; major renewals and improvements that extend the lives
or increase the capacity of plant assets are capitalized.
 
 When
assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts, and any resulting gains or losses are included in
income in the reporting period of disposition.
  9
 
 Depreciation
is calculated on a straight-line basis over the estimated useful life of the
assets... The percentages or depreciable life applied are:
 
 Building,
      warehouse and Improvements
                
                20
      to 30 yearsLand
      use rights
                
                50
      yearsFurniture
      & Equipment
                
                5
      to 7 yearsTransportation
      Equipment
                
                5
      to 15 yearsMachinery
      and Equipment
                
                7
      to 15 years
 
 Property
and equipment are evaluated for impairment in value whenever an event or change
in circumstances indicates that the carrying values may not be recoverable. If
such an event or change in circumstances occurs and potential impairment is
indicated because the carrying values exceed the estimated future undiscounted
cash flows of the asset, the Company will measure the impairment loss as the
amount by which the carrying value of the asset exceeds its fair
value.
 
 Intangible
assets
 
 Intangible
assets consist of patents and goodwill. Patent costs are amortized over an
estimated life of ten years.
 
 Intangible
assets are accounted for in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill
and Other Intangible Assets (“SFAS 142”).  Intangible assets with
finite useful lives are amortized while intangible assets with indefinite useful
lives are not amortized. As prescribed by SFAS 142, goodwill and intangible
assets are tested periodically for impairment. The Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long- Lived Assets," effective
January 1, 2002. Accordingly, the Company reviews its long-lived assets,
including property and equipment and finite-lived intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the probability
that future undiscounted net cash flows will be less than the carrying amount of
the assets. Impairment costs, if any, are measured by comparing the carrying
amount of the related assets to their fair value. The Company recognizes an
impairment loss based on the excess of the carrying amount of the assets over
their respective fair values. Fair value is determined by discounted future cash
flows, appraisals or other methods. If  the assets determined to be
impaired are to be held and used, the Company recognizes an impairment loss thru
a charge to operating results to the extent the present value of anticipated
cash flows attributable to the assets are less than the asset’s carrying value.
The Company would depreciate the remaining the remaining value over the
remaining estimated useful life of the asset to operating results.
 
 Pharmaceutical
Patents
 
 On June
9, 2007, China Health entered into a Purchase Agreement, pursuant to which China
Health agreed to purchase pharmaceutical patents from a third party for $410,792
(RMB ¥ 3,180,000).
 
 China
Health recorded the pharmaceutical patents at the purchase price and amortizes
the costs over their estimated beneficial period, 10 years, using the
straight-line method as of June 30, 2008. The Company recognizes an impairment
loss based on the excess of the carrying amount of the assets over their
respective fair values. Fair value is determined by discounted future cash
flows, appraisals or other methods. If  the assets determined to be
impaired are to be held and used, the Company recognizes an impairment loss thru
a charge to operating results to the extent the present value of anticipated
cash flows attributable to the assets are less than the asset’s carrying value.
The Company would depreciate the remaining the remaining value over the
remaining estimated useful life of the asset to operating results.
 
 There
were no impairments during the six months ended December 31, 2010 and
2009.
 
 Land
Use Right
 
 All land
belongs to the State in PRC. Enterprises and individuals can pay the State a fee
to obtain a right to use a piece of land for commercial purpose or residential
purpose for an initial period of 50 years or 70 years, respectively. The land
use right can be sold, purchased, and exchanged in the market. The successor
owner of the land use right will reduce the amount of time which has been
consumed by the predecessor owner. On June 7, 2004, China Health enter into a
Purchase Contract with the local government, pursuant to which China Health
agreed to purchase the right to use a piece of land, approximately 8 acres,
located in the Harbin County, Heilongjiang Province for commercial purpose over
a fifty-year period from June 7, 2004 through June 6, 2054, for $637,261 (RMB
5,248,000), which China Health has fully paid to the seller on June 13, 2004.
The Department of Housing and Urban Development (“HUD”) of Harbin City approved
this transaction. China Health recorded the land use right at its purchase
price. The cost of the land use right is amortized over its prospective
beneficial period, using the straight-line method with no residual value. China
Health’s production facilities and office are located in this piece of land. As
of December 31, 2010, the land use right and improvement have net balance of
$849,924.
  10
 
 Customer
Deposits
 
 Customer
Deposit represents the money the Company has received from customers in advance
for the purchase of goods. The Company considers customer deposits as a
liability until the title of goods have been transferred at which point the
balance will be credited to sales revenue.
 
 Revenue
Recognition
 
 China
Health recognizes revenue when it is both earned and realized or realizable. The
Company’s policy is to recognize revenue when title to the product, ownership
and risk of loss have transferred to the customer, persuasive evidence of an
arrangement exits and collection of the sales proceeds is reasonably assured,
all of which generally occur upon shipment of goods to customers. The majority
of the Company’s revenue relates to the sale of inventory to customers, and
revenue is recognized when title and the risks and rewards of ownership pass to
the customer. Given the nature of the Company’s business and the applicable
rules guiding revenue recognition, the Company’s revenue recognition practices
do not contain estimates that materially affect the results of operations, with
the exception of estimated returns and credit memos. The Company allows its
customers to return product for exchange or credit subject to certain
limitations. A provision for such returns is recorded based upon historical
experience. As of December 31, 2010 and 2009, the Company had a reserve of $nil
and $nil, respectively.
 
 Sales Incentives— The
Company accounts for cash consideration (such as sales incentives and cash
discounts) given to its customers or resellers as a reduction of revenue rather
than an operating expense.
 
 Research
and Development Costs
 
 Research
and development costs relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed when incurred.
 
 The
Company recognizes in-process research and development in accordance with FASB
Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Methodand
theAICPA
Technical Practice Aid, Assets Acquired in a Business Combination to be used in
Research and Development Activities:  A Focus on Software, Electronic
Devices, and Pharmaceutical Industries. Assets to be used in research and
development activities, specifically, compounds that have yet to receive new
drug approval and would have no alternative use, should approval not be given,
are immediately charged to expense when acquired. Certain assets and high
technologies acquired that has a foreseeable future cash flows are capitalized
as intangible assets. Such intangible assets are amortized starting from the
year revenue is generated and amortize over a period of 10 years.
 
 For the
six months ended December 31, 2010, the Company incurred $771,543 in research
and development costs. There was $nil research and development costs for the six
months ended December 31, 2009.
 
 Advertising
Costs
 
 Advertising
costs are expensed as incurred and included as part of selling and marketing
expenses in accordance with the American Institute of Certified Public
Accountants (“AICPA”) Statement of Position 93-7, “Reporting for Adverting
Costs”. Advertising costs were immaterial for the six months ended December 31,
2010 and 2009, respectively.
  11
 
 Income
Taxes
 
 China
Health accounts for income tax using SFAS No. 109 “Accounting for Income Taxes”,
which requires the asset and liability approach for financial accounting and
reporting for income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
 
 Enterprise income
tax
 
 Under the
Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated
by the PRC, income tax is payable by enterprises at a rate of 25% of their
taxable income. Preferential tax treatment may, however, be granted pursuant to
any law or regulations from time to time promulgated by the State
Council.
 
 Value added
tax
 
 The
Provisional Regulations of PRC Concerning Value Added Tax promulgated by the
State Council came into effect on January 1, 1994. Under these regulations and
the Implementing Rules of the Provisional Regulations of the PRC Concerning
Value Added Tax, value added tax is imposed on goods sold in, or imported into,
the PRC and on processing, repair and replacement services provided within the
PRC.
 
 Value
added tax payable in the PRC is charged on an aggregated basis at a rate of 13%
or 17% (depending on the type of goods involved) on the full price collected for
the goods sold or, in the case of taxable services provided, at a rate of 17% on
the charges for the taxable services provided, but excluding, in respect of both
goods and services, any amount paid in respect of value added tax included in
the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and services in the same financial
year.
 
 According
to “Agriculture Product Value Added Tax Rate Adjustment and Certain Items’ Value
Added Tax Waiver” published by the Ministry of Finance and the National Tax
Affairs Bureau, the value added tax for agriculture related products is to be
taxed at 13%. Furthermore, traditional Chinese medicine and medicinal plant are
by definition agriculture related products.
 
 Accounting for uncertainty in income
taxes –In June 2006, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109(FIN 48). FIN 48 is
intended to clarify the accounting for uncertainty in income taxes recognized in
a company’s financial statements and prescribes the recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
 
 Under FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50% likely of being realized upon ultimate settlement.
 
 Tax
positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent period in which the
threshold is met. Previously recognized tax positions that no longer meet the
more-likely-than-not criteria should be de-recognized in the first subsequent
financial reporting period in which the threshold is no longer met.
 
 The
adoption of FIN 48 did not have a material effect on the Company’s results of
operations and financial position.
  12
 
 Sales
Taxes and Sales-related Taxes
 
 Pursuant
to the tax law and regulations of PRC, China Health is obligated to pay totally
6.66% of gross sales as sales tax and sales-related taxes.
 
 Comprehensive
Income
 
 Statement
of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive
Income,” establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Accumulated comprehensive
income, as presented in the accompanying statements of changes in shareholders’
equity consists of changes in cumulative foreign currency translation
adjustment
 
 Pension
and Employee Benefits
 
 Full time
employees of the PRC entities participate in a government mandated
multi-employer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to employees. Chinese labor regulations require
China Health to accrue for these benefits based on certain percentages of the
employees’ salaries. The Management believes full time employees who have passed
the probation period are entitled to such benefits. The total provisions for
such employee benefits were $5,407 and $6,674 for the six months ended December
31, 2010 and 2009, respectively.
 
 Statutory
Reserves
 
 Pursuant
to the applicable laws in PRC, PRC entities are required to make appropriations
to three non-distributable reserve funds, the statutory surplus reserve,
statutory public welfare fund, and discretionary surplus reserve, based on
after-tax net earnings as determined in accordance with the PRC GAAP, after
offsetting any prior years ’ losses. Appropriation to the statutory surplus
reserve should be at least 10% of the after-tax net earnings until the
reserve is equal to 50% of China Health’s registered capital. Appropriation to
the statutory public welfare fund is 5% to 10% of the after-tax net earnings.
The statutory public welfare fund is established for the purpose of providing
employee facilities and other collective benefits to the employees and is
non-distributable other than in liquidation. No appropriations to the
discretionary surplus reserve are made at the discretion of the Board of
Directors. Since China Health has been accumulating deficiency until June 30,
2009, no statutory surplus reserve fund or statutory public welfare reserve fund
have been made since its inception. (Refer to Note 14)
 
 Segment
Reporting
 
 SFAS No.
131 “Disclosures about Segments of an Enterprise and Related Information”
establishes standards for reporting information about operating segments on a
basis consistent with China Health’s internal organization structure as well as
information about geographical areas, business segments and major customers in
financial statements. China Health currently operates in one principal business
segment; therefore segment disclosure is not presented.
 
 Recent
Accounting Pronouncements
 
 In April
2010, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2010-17, Revenue Recognition—Milestone Method
(Topic 605) – Revenue Recognition (ASU 2010-17). ASU 2010-17 provides guidance
on defining the milestone and determining when the use of the milestone method
of revenue recognition for research or development transactions is appropriate.
It provides criteria for evaluating if the milestone is substantive and
clarifies that a vendor can recognize consideration that is contingent upon
achievement of a milestone as revenue in the period in which the milestone is
achieved, if the milestone meets all the criteria to be considered substantive.
ASU 2010-17 is effective for us in fiscal 2012 and should be applied
prospectively. The adoption of this ASU will not have a material impact on the
Company’s consolidated financial statements.
  13
  In
October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update
addressed the accounting for multiple-deliverable arrangements to enable vendors
to account for products or services (deliverables) separately rather than a
combined unit and will be separated in more circumstances that under existing US
GAAP. This amendment has eliminated that residual method of allocation.
Effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. The Company does not expect the provisions of ASU 2009-13 to have a
material effect on the financial position, results of operations or cash flows
of the Company.
 
 In
September 2009, the FASB issued Accounting Standards Update 2009-12, Fair Value
Measurements and Disclosures (Topic 820): Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent). This update provides
amendments to Topic 820 for the fair value measurement of investments in certain
entities that calculate net asset value per share (or its equivalent). It is
effective for interim and annual periods ending after December 15,
2009.
 
 In June
2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting
Standards Codification (“ASC”) as the single source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities in preparation
of financial statements in conformity with U.S. GAAP. The ASC supersedes
existing FASB, American Institute of Certified Public Accountants (“AICPA”),
Emerging Issues Task Force (“EITF”) and related literature. While the adoption
of the ASC as of July 1, 2009 changes how we reference accounting standards, the
adoption did not have an impact on our consolidated financial position, results
of operations or cash flows.
 
 In
January 2010, the FASB issued accounting standards update related to fair
value measurements and disclosures. This update provides amendments to related
guidance within U.S. GAAP to require disclosure of the transfers in and out of
Levels 1 and 2 and a schedule for Level 3 that separately identifies purchases,
sales, issuances and settlements and requires more detailed disclosures
regarding valuation techniques and inputs. We adopted this new standard
effective January 1, 2010. Early application is permitted and, in the
period of initial adoption, entities are not required to provide the amended
disclosures for any previous periods presented for comparative purposes. The
adoption of this guidance did not have a significant impact on the Group’s
financial statements.
 
 In
February 2010, the FASB issued an accounting standard update related to the
disclosure requirements for subsequent events. This update provides amendments
to the subsequent event guidance within U.S. GAAP to clarify that an SEC filer
is required to evaluate subsequent events through the date the financial
statements are issued, but disclosure of this date is no longer required.
 We adopted this new guidance upon issuance of the accounting standard
update.
 
 Note
3 – CASH AND CASH EQUIVALENTS
 
 The
company maintains cash and cash equivalents balance at several financial
institutions. Only accounts at US financial institutions are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of December 31,
2010, the Company’s uninsured bank balances totaled $19,712,216.
 
 Note
4 - CONTROL BY PRINCIPAL OWNERS
 
 The
directors, executive officers, their affiliates and related parties own,
beneficially and in the aggregate, the majority of the voting power of the
outstanding capital of China Health. Accordingly, directors, executive officers
and their affiliates, if they voted their shares uniformly, would have the
ability to control the approval of most corporate actions, including approving
significant expenses, increasing the authorized capital stock and the
dissolution, merger or sale of China Health's assets.
  14
 
 Note
5 – NOTES RECEIVABLE
 
 Notes
receivable consist of the following:
 
 December
                          31,2010
                        
                        
                        June30,
                          2010Advances
      to employees
                        
                        
                        -
                        
                        
                        
                        55,432Notes
      receivable -Tiefeng
                        
                        
                        3,024,895
                        
                        
                        
                        2,937,461Total 
      notes  receivable
                        
                        $
                        3,024,895
                        
                        
                        $
                        2,992,893
 
 The
advances to employees are unsecured, non-interest bearing and have no fixed
terms of repayment, therefore, deemed payable on demand.
 
 On April
9, 2009, the Company’s wholly-owned subsidiary, Harbin Humankind Biology
Technology Co., Limited (“Humankind”), entered into a letter of intent with the
shareholders of Heilongjiang Tiefeng Rice Company Limited (“Tiefeng”) to
purchase all the equity interest of Tiefeng (“the Share Transfer
Agreement”). On July 23, 2009, the amount of $746,480 (RMB 5,000,000) were paid
as retaining fees. The purchase agreement was signed on August 18, 2009; the
amount of $7,312,507 (RMB 50,000,000) was prepaid to Tiefeng on August 19,
2009.
 
 As of
March 31, 2010, Tiefeng did not get the crucial certified documents from local
government agencies. Based on the amended agreement, the deal is thus voided.
Tiefeng paid back approximately $1.46 million (RMB 10,000,000) to the Company on
March 31, 2010, the additional $1.46 million (RMB 10,000,000) was paid on April
30, 2010 as part of the deposit refund. Another $1.46 million (RMB 10,000,000)
was paid on May 31, 2010. The balance of $2,985,921 (RMB 20,000,000) is
converted as loans to Tiefeng with two years term starting from May 5, 2010.
Interest is charged semi-yearly by using the current Chinese bank borrowing rate
of 5.31%.  For the six months ended December 31, 2010, accrued interest
income on the Tiefeng loan totals $78,637.
 
 Note
6 - INVENTORIES
 
 Inventories
consist of following:
 
 December
                        31,2010
                      
                      
                      June30,2010Finished
      goods
                      
                      $
                      127,962
                      
                      
                      $
                      74,478Work-in-process
                      
                      
                      129,695
                      
                      
                      
                      75,498Raw
      materials
                      
                      
                      33,451
                      
                      
                      
                      17,836Supplies
      and packing materials
                      
                      
                      20,135
                      
                      
                      
                      14,972Total
      inventory
                      
                      $
                      311,243
                      
                      
                      $
                      184,522
 
 Note
7 - PREPAID EXPENSES
 
 Prepaid
expenses consist of the following:
 
 December31,
                            2010
                          
                          
                          June30,
                            2010Advances
      on raw materials
                          
                          
                          854,873
                          
                          
                          
                          764,738Prepaid
      services
                          
                          
                          6,026Total
      prepaid expenses
                          
                          $
                          860,899
                          
                          
                          $
                          764,738
  15
  The
Company periodically makes advances to certain vendors for purchases of raw
materials, and records those advances as prepaid expense. Advances to vendors as
of December 31, 2010 amounted to $860,899.  The majority balance in the
amount of $756,224 (RMB 5,000,000) is converted from retaining fees paid to
Tiefeng on July 23, 2009 to advances to Tiefeng for future purchasing of its
inventory after cancelling the acquisition contract on May 5, 2010.
 
 Note
8 - DEPOSIT
 
 The
Company paid $3,176,140 (RMB 21,000,000) to Harbin Songbei District Development
and Construction Committee as the prepayment for the acquisition of the land use
rights. The Company is in the process of going through a full range of
procedures before the land use rights can be granted to the
Company.
 
 Note
9 - PROPERTY, PLANT AND EQUIPMENT
 
 The
following is a summary of property, plant and equipment:
 
 December
                        31,2010
                      
                      
                      June30,
                        2010Building
      and warehouses
                      
                      $
                      1,051,754
                      
                      
                      $
                      858,030Machinery
      and equipment
                      
                      
                      179,555
                      
                      
                      
                      174,365Office
      equipment
                      
                      
                      32,151
                      
                      
                      
                      29,963Vehicles
                      
                      
                      92,091
                      
                      
                      
                      89,428Other
                      
                      
                      25,560
                      
                      
                      
                      24,822Less:
      Accumulated depreciation
                      
                      
                      (226,804
                      )
                      
                      
                      (189,298
                      )Total
                      
                      $
                      1,154,307
                      
                      
                      $
                      987,310
 
 Depreciation
expense charged to operations was $30,448 and $45,998 for the six months ended
December 31, 2010 and 2009, respectively.
 
 Note
10 - LAND USE RIGHT
 
 The
following is a summary of the land use right:
 
 December
                        31,2010
                      
                      
                      June30,
                        2010Land
      use right
                      
                      $
                      957,249
                      
                      
                      $
                      930,879Less:
      Accumulated amortization
                      
                      
                      (107,325
                      )
                      
                      
                      (95,696
                      )$
                      849,924
                      
                      
                      $
                      835,183
 
 Amortization
expense charged to operations was $9,349 and $10,298 for the six months ended
December 31, 2010 and 2009 respectively.
  Note
11 - RELATED PARTY DEBT
 
 “Related
party debt" represents temporary short-term loans from majority owner, Mr. Xin
Sun, a People Republic China citizen. These loans are unsecured, non-interest
bearing and have no fixed terms of repayment, therefore, deemed payable on
demand. Cash flows classified as due to majority owner are classified as cash
flows from financing activities. The total borrowings from Mr. Sun were $88,009
and $264,302 as of December 31, 2010 and 2009, respectively.
  16
 
 Interest
was imputed on the loans using the Chinese bank borrowing rate of 5.31% for the
six months ended December 31, 2010. The total imputed interest expense was
$2,336 and $15,215 for the six months ended December 31, 2010 and 2009
respectively.
 
 Note
12 – TAXES PAYABLE
 
 The
following is a summary of taxes payable:
 
 December
                        31, 2010
                      
                      
                      June 30,
                        2010Income
      taxes payable
                      
                      $
                      2,730,953
                      
                      
                      $
                      2,421,843VAT
      taxes payable
                      
                      
                      685,380
                      
                      
                      
                      781,962City
      and Supplement taxes
                      
                      
                      47,975
                      
                      
                      
                      371,430Payroll
      taxes payable & other taxes
                      
                      
                      132,832
                      
                      
                      
                      54,716$
                      3,597,140
                      
                      
                      $
                      3,629,951
 
 Note
13 - INCOME TAX
 
 On March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law reduces
the corporate income tax rate from 33% to 25% with effect from January 1, 2008.
All Chinese enterprises are governed by the PRC Income Tax Law and various local
income tax laws, pursuant to which a company generally is subject to an income
tax at a statutory rate of 25% for the six months ended December 31, 2010 and
2009.
 
 The
provision for income taxes consisted of the following:
 
 December
      31,
                                          
                                          
                                          June 30,2010
                                          
                                          
                                          2010Provision
      for PRC income tax - current taxes
                                          
                                          $
                                          2,663,436
                                          
                                          
                                          $
                                          4,447,467Provision
      for PRC income tax - deferred taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Total
      provision for income taxes
                                          
                                          $
                                          2,663,436
                                          
                                          
                                          $
                                          4,447,467
 
 The
following table reconciles the PRC statutory rates to China Health’s effective
tax rate:
 
 December 31
                                
                                
                                June 302010
                                
                                
                                2010Pretax
      Income( loss )
                                
                                $
                                9,063,698
                                
                                
                                $
                                17,701,638Statutory
      tax rate
                                
                                
                                25
                                %
                                
                                
                                25
                                %PRC
      enterprise income tax at statutory rate
                                
                                
                                2,265,925
                                
                                
                                
                                4,425,410Expenses
      not deductible for taxes – temporary difference
                                
                                
                                258,188
                                
                                
                                
                                -109,343Expenses
      not deductible for taxes – permanent difference
                                
                                
                                129,974
                                
                                
                                
                                112,219Increase
      in valuation allowance related to deferred tax assets
                                
                                
                                9,349
                                
                                
                                
                                19,182Total
      provision for income taxes
                                
                                $
                                2,663,436
                                
                                
                                $
                                4,447,467
  17
 
 Deferred
tax assets (liabilities) as of December 31, 2010 and 2009 are composed of the
following:
  December 312010
                                
                                
                                2009PRCNoncurrent
      deferred tax assets :Amortization
      of land use right and other intangible assets
                                
                                $
                                9,349
                                
                                
                                $
                                19,182Valuation
      allowance
                                
                                
                                (9,349
                                )
                                
                                
                                (19,182
                                )$
                                -
                                
                                
                                $
                                -
 
 Note
14 - COMMITMENTS AND CONTINGENCIES
 
 China
Health’s assets are located in PRC and revenues are derived from operations in
PRC.
 
 In terms
of industry regulations and policies, the economy of PRC has been transitioning
from a planned economy to market oriented economy. Although in recent years the
Chinese government has implemented measures emphasizing the utilization of
market forces for economic reforms, 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 PRC are
still owned by the Chinese government. For example, all lands are state owned
and are leased to business entities or individuals through governmental granting
of Land Use Rights. The granting process is typically based on government
policies at the time of granting and it could be lengthy and complex. This
process may adversely affect our company’s future manufacturing expansions.
The Chinese government also exercises significant control over PRC’s economic
growth through the allocation of resources and providing preferential treatment
to particular industries or companies. Uncertainties may arise with changing of
governmental policies and measures.
  China
Health faces a number of risks and challenges not typically associated with
companies in North America and Western Europe, since its assets exist solely in
the PRC, and its revenues are derived from its operations therein. The PRC is a
developing country with an early stage market economic system, overshadowed by
the state. Its political and economic systems are very different from the more
developed countries and are in a state of change. The PRC also faces many
social, economic and political challenges that may produce major shocks and
instabilities and even crises, in both its domestic arena and in its
relationships with other countries, including the United States. Such shocks,
instabilities and crises may in turn significantly and negatively affect China
Health’s performance.
 
 The
Company is not involved in any legal matters arising in the normal course of
business. While incapable of estimation, in the opinion of the management, the
individual regulatory and legal matters in which the Company might be involved
in the future are not expected to have a material adverse effect on the
Company’s financial position, results of operations, or cash flows.
 
 Rental
expense is approximately $88,500 and $43,850 for each of the six months ended
December 31, 2010 and 2009 respectively. The remaining rental commitment for the
fiscal year 2011 is nil.
 
 STATUTORY
RESERVE COMMITMENT
 
 In
compliance with PRC laws, the Company is required to appropriate a portion of
its net income to its statutory reserve up to a maximum of 50% of an
enterprise’s registered capital in the PRC. No appropriations to the
discretionary surplus reserve are made at the discretion of the Board of
Directors. Since China Health has been accumulating deficiency until June 30,
2009, no statutory surplus reserve fund or statutory public welfare reserve fund
have been made since its inception.
  18
 
 The
Company had future unfunded commitments, as provided below.
 
 December
                        31, 2010
                      
                      
                      June 30,
                        2010PRC
      Subsidiaries Registered CapitalHarbin
      Humankind Biology
                      
                      $
                      1,640,465
                      
                      
                      $
                      1,584,467Harbin
      Huimeijia Medicine (Company has accumulating deficiency, no reserve
      commitment required)
                      
                      
                      151,245
                      
                      
                      
                      146,873Statutory
      Reserve Ceiling based on 50% of PRC Registered Capital of Harbin
      Humankind Biology or at least 10% of the after-tax net earnings until the
      reserve are equal to 50% of its registered capital.
                      
                      
                      820,233
                      
                      
                      
                      792,234Less:  Retained
      Earnings appropriated to Statutory  Reserve
                      
                      
                      -
                      
                      
                      
                      -Reserve
      Commitment Outstanding
                      
                      $
                      820,233
                      
                      
                      $
                      792,234
 
 Total commitments as of December 31,
2010 and June 30, 2010 are composed of the following:
 
 December
                            31,2010
                          
                          
                          June30,
                            2010Rental
      Commitment
                          
                          $
                          
                          
                          
                          $
                          176,250Statutory
      Reserve Commitment
                          
                          
                          820,233
                          
                          
                          
                          792,234Total
      commitments
                          
                          $
                          820,233
                          
                          
                          $
                          968,484
  19




Item
2.  Management’s Discussion and Analysis of Financial Condition and Results
of Operations.





FORWARD
LOOKING STATEMENTS





The
following discussion should be read in conjunction with the information
contained in the consolidated financial statements of the Company and the notes
thereto appearing elsewhere herein and in the risk factors and “Forward Looking
Statements” summary set forth in the forepart of our Quarterly Report for the
quarter ended December 31, 2010. This quarterly report on Form 10-Q contains
forward-looking statements and is afforded the safe harbor provisions of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended. Readers should carefully review the risk factors disclosed in
our Annual Report for the year ended June 30, 2010 and other documents filed by
us with the SEC.





DISCUSSION





We make
certain forward-looking statements in this report. Statements concerning our
future operations, prospects, strategies, financial condition, future economic
performance (including growth and earnings), demand for our services, and other
statements of our plans, beliefs, or expectations, including the statements
contained under the captions “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Business,” as well as captions elsewhere
in this document, are forward-looking statements. In some cases these statements
are identifiable through the use of words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,”
“may,” “should,” “will,” “would,” and similar expressions. We intend such
forward-looking statements to be covered by the safe harbor provisions contained
in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”)
and in Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). The forward-looking statements we make are not guarantees of
future performance and are subject to various assumptions, risks, and other
factors that could cause actual results to differ materially from those
suggested by these forward-looking statements. Because such statements are
subject to risks and uncertainties, actual results may differ materially from
those expressed or implied by the forward-looking statements. Indeed, it is
likely that some of our assumptions will prove to be incorrect. Our actual
results and financial position will vary from those projected or implied in the
forward-looking statements and the variances may be material. You are cautioned
not to place undue reliance on such forward-looking statements. These risks and
uncertainties, together with the other risks described from time to time in
reports and documents that we file with the SEC should be considered in
evaluating forward-looking statements.





The
nature of our business makes predicting the future trends of our revenue,
expenses, and net income difficult. Thus, our ability to predict results or the
actual effect of our future plans or strategies is inherently uncertain. The
risks and uncertainties involved in our business could affect the matters
referred to in any forward-looking statements and it is possible that our actual
results may differ materially from the anticipated results indicated in these
forward-looking statements. Important factors that could cause actual results to
differ from those in the forward-looking statements include, without limitation,
the following:





·
            the effect of political,
      economic, and market conditions and geopolitical
      events;





·
            legislative and regulatory
      changes that affect our
business;





·
            the availability of funds and
      working capital;





·
            the actions and initiatives of
      current and potential
competitors;





·
            investor sentiment;
      and





·
            our
      reputation.





We do not
undertake any responsibility to publicly release any revisions to these
forward-looking statements to take into account events or circumstances that
occur after the date of this report. Additionally, we do not undertake any
responsibility to update you on the occurrence of any unanticipated events which
may cause actual results to differ from those expressed or implied by any
forward-looking statements.


20


The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto as filed with
the SEC and other financial information contained elsewhere in this
Report.





Except as
otherwise indicated by the context, references in this Form 10-Q to “we,” “us,”
“our,” “the Registrant”, “our Company,” or “the Company” are to China Health
Industries Holdings, Inc., a Delaware corporation, China Health Industries
Holdings Limited, and its wholly owned subsidiary, Harbin Humankind Biology
Technology Co. Limited. Unless the context otherwise requires, all references to
(i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,”
“$” and “US$” are to United States dollars; (iii) “RMB” are to Yuan Renminbi of
China; (iv) “Securities Act” are to the Securities Act of 1933, as amended; and
(v) “Exchange Act” are to the Securities Exchange Act of 1934, as
amended.





Business
Overview





Our
principal business operations are conducted through our wholly owned subsidiary,
Harbin Humankind Biology Technology Co., Limited (“Humankind”) and Humankind’s
subsidiary, Harbin Huimeijia Medicine Company (“Huimeijia”).





Humankind
was incorporated in the People’s Republic of China on December 14, 2003 and
completed its GMP certification on April 24, 2007. It is in the business of
manufacture and sale of health products, “green” (or organic) food and detection
of disease susceptibility or pre-disposition through genetic
studies.





Huimeijia
was incorporated in the People’s Republic of China on October 14, 2008.
 Huimeijia completed its GMP certification on July 23, 2009 and produces
and sells our medical drugs.





Our
business is conducted through chain-stores and with regard to the sale of our
products, eventually over the internet.





We
presently have, through Huimeijia, the license to manufacture 19 medical drugs
and have obtained a State Drug Approval Issue number for each of these drugs. We
have, through Humankind, the license to manufacture and sell two health
supplement products which have a State Good Health Issue number assigned to each
product (as provided below). In addition, Humankind distributes and sells 52
kinds of health food.





We are
licensed to sell our products, including our medicine drugs only in the People’s
Republic of China.





(i)
            Health
      Supplements





Our
“QunLe” brand Sailuozhi soft capsule, which is made from frog oil, soybean
isoflavone, procyanidine (made from grape seeds) and vitamin C, is for freckle
removal and supplementing the water content of the skin. The certification
number issued by the State Food and Drug Administration on August 29, 2007 is
2007B0837.





On May
12, 2010, we received a patent for this product (200610010394.4) under the name
“Run Chao” (which has now been changed to “Qunle”) with the National Bureau of
Intellectual Property.





Pursuant
to a Technology Transfer Agreement dated October 12, 2007, we purchased one
other health product known as “Kindlink” brand propolis and black ant capsule
made from propolis, black ant, acanthopanax, astragalus root from Beijing
Jindelikang Bio-Technology Co., Ltd. (“Jindelikang”). The change of the
ownership has been approved by the State Food and Drug Administration. This
product is consumed to boost one’s immunity. The certification number issued by
the State Food and Drug Administration on August 20, 2004 for the license to
manufacture the product is GuoShiJianZi G20040906.We have no continuing
obligations under the Technology Transfer Agreement.


21


(ii)
            Health Food and Organic “Green”
      Food





Our
health and organic “green” food products include (i) Abalone, Sea Cucumber and
Frog Oil Soft Capsules (Serial Number 016-2007), (ii) Ganodermalucidum and Aweto
Soft Capsules (Serial Number 017-2007), (iii) Propolis Soft Capsules, (iv) Deep
Sea Fish Oil (Serial Number 012-2006),  (v) Liquid Calcium (Serial
Number 013-2006),  (vi) Multi-Vitamins (Serial
Number  010-2007), (vii) Soybean Isoflavone (Serial Number
012-2006)  and (viii) Royal Jelly (Serial Number 011-2006), (ix)
Sleeping Beauty Capsule, (x) Virility Max Capsule, (xi) Ruddy Granule, (xii)
Blood Cleanser Soft Capsule and (xiii) Colon Cleanser Capsule.





(iii)
            Medical
    Drugs





Huimeijia
purchased a license of Harbin Dong Feng Medicine Company to manufacture 19
medical drugs on September 16, 2008. Huimeijia is now the registered owner of
the license, approved by the Heilongjiang Food and Medicine Supervising
Bureau.





A
description of these 19 medical drugs is as follows:





Serial
                                  No
                                
                                Product
                                
                                Efficacy*1
                                
                                Stomach-Tonic
      Tablets
                                
                                Invigorating
      stomach and relieving pain. Used in the treatment of pain from stomach
      distention, eructation with fetid odor and fecal disorders caused by
      gasterasthenia and dyspeptic retention.2
                                
                                Pediatric
      Compound Sulfamethoxazole  Tablets (0.125g)
                                
                                Used
      in the treatment of 1. Urinary tract infection caused by sensitive strains
      of Escherichia
      coli, Klebsiella, Enterobacter, Proteus mirabilis,
      Bacillus proteus
      and Proteus
      morganli. 2. Acute otitis media in children over 2 years old caused
      by Streptococcus
      pneumoniae or Hemophilus influenza.
      3. Acute episode of adult chronic bronchitis caused by Streptococcus
      pneumoniae or Hemophilus influenza.
      4. Intestinal infection and Shigella infection
      caused by sensitive strains of Shigellaflexneri and
      Shigellasonnei.
      5. Pneumonia caused by Pneumocystis carinii.
      6. Prevention of pneumonia caused by Pneumocystis carinii.
      This  product can be used for patients with a history of
      pneumonia caused by Pneumocystis carinii or
      adult HIV-infected patients whose CD4 lymphocyte count is ≤200/mm3 or is
      less than 20% of lymphocyte count. 7. Turista caused by enterotoxicEscherichia
      coli.3
                                
                                Pediatric
      Compound Sulfamethoxazole  Tablets (0.25g)
                                
                                Same
      as above.4
                                
                                Pipemidic
      Acid Tablets
                                
                                Used
      to treat urinary tract infection and bacterial infection of the intestines
      caused by sensitive gram negative bacilli.5
                                
                                Metamizole
      Sodium Tablets
                                
                                Used
      to relieve fever caused hyperpyrexia and also for headache, migrainous
      headache, courbature, arthralgia, menalgia etc. The product also has
      strong anti-rheumatism effects and can be used for acute rheumatic
      arthritis, but because the product may induce severe adverse reaction, it
      is seldom applied in the treatment of  rheumatic
      diseases.6
                                
                                Paracetamol
      Tablets
                                
                                Used
      for fever caused by common cold or epidemic influenza and also for
      relieving light and moderate pain such as headache, arthralgia, migraines,
      tooth ache, courbature, neuralgia and menalgia.7
                                
                                Pediatric
      Paracetamol, Artificial Cow-bezoar and Chlorphenamine Maleate
      Tablets
                                
                                Used
      to relieve fever, headache, aching pain in extremities, sneezing,
      rhinorrhea, nasal obstruction, pharyngodynia and other symptoms in
      children caused by common cold or epidemic
  influenza.


22





8
                
                Compound
      TheophyllingHydrochloride Tablets
                
                Used
      to treat bronchial asthma.9
                
                Powerful
      Loquat Syrup
                
                Used
      for the treatment of coughing and reduction of sputum caused by
      bronchitis.10
                
                Purple
      Orange Cough Syrup
                
                Relieving
      cough and eliminating sputum. Used to relieve coughing and excessive
      phlegm as well as expectoration.11
                
                Cough
      Syrup of Loquat Leaf
                
                Used
      to clear lungs, relieve coughs and eliminate sputumand excessive
      phlegm.12
                
                Children's
      Cough Syrup
                
                Eliminating
      phlegm and relieving cough. Used to relieve coughs caused by the common
      cold in children.13
                
                Pentoxyverine
      Citrate and Ammonium Chloride Syrup
                
                Used
      for cough and expectoration.14
                
                Schisandra
      Syrup
                
                Tonifying
      vital energy and invigorating the kidneys. Used in the treatment for
      neurastheria, dizziness and insomnia.15
                
                Ginseng
      Oral Liquid
                
                Used
      to nourish renal “qi” and promote fluid production to quench thirst. Used
      to treat fatigue and acratia caused by deficiency of vital energy as well
      as poor appetite, cardiopalmus and shortness of breath, insomnia and
      forgetfulness.16
                
                Compound
      Fluououracil Oral Solution
                
                Used
      in the therapeutic treatment of digestive tract cancer (colon carcinoma
      and gastric carcinoma), mammary adenocarcinoma, primary hepatic
      carcinoma.17
                
                Gossypol,
      Potassium Chloride and Vitamins B Capsules
                
                Used
      in the treatment of uterine bleeding brought on by
    menopause.18
                
                Compound
      Belladonna and Aluminum Hydroxide Powder
                
                Used
      for relieving stomach pain, brash (heartburn) and acid reflux caused by
      gastric hypersecretion.19
                
                Gentian
      and Sodium Bicarbonate Powder
                
                Used
      for anorexia, gastric hypersecretion and
  dyspepsia.





*Tested
for efficacy by the National Food and Medicine Supervising Bureau.





Results
of Operations





Three
months ended December 31, 2010 as compared to three months ended December 31,
2009





December
      31,2010
                          
                          
                          Variance
                          
                          
                          2009REVENUESProduct
      Sales (net of sales allowance)
                          
                          $
                          13,363,093
                          
                          
                          
                          42.54
                          %
                          
                          $
                          9,374,937Total
      revenues
                          
                          $
                          13,363,093
                          
                          
                          
                          
                          
                          
                          
                          9,374,937COST
      OF GOODS SOLDCost
      of goods sold
                          
                          
                          6,708,036
                          
                          
                          
                          66.23
                          %
                          
                          
                          4,035,362Gross
      Profit
                          
                          $
                          6,655,057
                          
                          
                          
                          24.64
                          %
                          
                          $
                          5,339,575


23


Total
revenues increased by 42.54% in the three months ended December 31, 2010
compared to the same period in 2009. The $3,988,156 increase in revenue is
attributable to growth in product sales. This growth in product sales is
attributable to increased sales volume and our efforts to continue to develop
our distribution channels by hiring additional sales agents to ensure that our
products and their associated benefits are seen by those making or influencing
the purchasing decisions.





Our cost
of sales increased $2,672,674, or 66.23% in the three months ended December 31,
2010 compared to the same period in 2009. The costs increased as a result of the
increased sales and the increase of raw material costs.





Our gross
margin decreased 7.16% from 56.96% for the three month period ended December 31,
2009 to 49.80%   for the three month period ended December 31,
2010. This decrease was primarily attributable to an increase in the raw
material costs. Due to high inflation in the People’s Republic of China, the
prices of many of our raw materials have increased. We seek to establish
relationships with more suppliers to lower our raw material costs.





Sales
by Product Line





A
break-down of our sales by major product line for each of the three months ended
December 31, 2010 and 2009 is as follows:





For the Three Months Ended
      December 31,2010
                      
                      
                      
                      
                      
                      
                      
                      
                      2009Product
      Category*
                      
                      Quantity
                        (Unit)
                      
                      
                      Sales US$
                      
                      
                      % of Sales
                      
                      
                      Quantity
                        (Unit)
                      
                      
                      Sales US$
                      
                      
                      % of
                        SalesSleeping
      Beauty Capsule
                      
                      
                      22,758
                      
                      
                      
                      344,334
                      
                      
                      
                      2.58
                      %Ruddy
      Granule
                      
                      
                      33,956
                      
                      
                      
                      1,027,525
                      
                      
                      
                      7.69
                      %Virility
      Max Capsule
                      
                      
                      72,787
                      
                      
                      
                      1,835,474
                      
                      
                      
                      13.74
                      %Blood
      Cleanser Soft Capsule
                      
                      
                      41,107
                      
                      
                      
                      1,243,917
                      
                      
                      
                      9.31
                      %Abalone,
      Sea cucumber and Frog oil soft capsule
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      5,462
                      
                      
                      
                      1,174,849
                      
                      
                      
                      12.53
                      %Ganoderma
      lucidum and Aweto Soft Capsules
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,396
                      
                      
                      
                      945,557
                      
                      
                      
                      10.09
                      %Energy
      Elemental Powder
                      
                      
                      10,379
                      
                      
                      
                      130,864
                      
                      
                      
                      0.98
                      %Propolis
      and Black Ant Capsule
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      18,919
                      
                      
                      
                      1,746,048
                      
                      
                      
                      18.62
                      %Waterlilies
      Soft Capsule(Sailuozhi)
                      
                      
                      67,407
                      
                      
                      
                      6,374,275
                      
                      
                      
                      47.70
                      %
                      
                      
                      16,301
                      
                      
                      
                      3,791,656
                      
                      
                      
                      40.44
                      %Colon
      Cleanser Capsule
                      
                      
                      73,415
                      
                      
                      
                      2,406,704
                      
                      
                      
                      18.01
                      %
                      
                      
                      24,170
                      
                      
                      
                      1,716,827
                      
                      
                      
                      18.31
                      %Total
                      
                      
                      
                      
                      
                      
                      13,363,093
                      
                      
                      
                      100
                      %
                      
                      
                      
                      
                      
                      
                      9,374,937
                      
                      
                      
                      100
                      %





*All of
the products are manufactured by the Company and none of them have been provided
by the Commercial Bureau or other suppliers so far.




24




Operating
Expenses





The
following table summarizes our operating expenses for each of the three months
ended December 31, 2010 and 2009, respectively:





For the Three Months Ended
                        December 31,2010
                      
                      
                      Variance
                      
                      
                      2009Operating
      ExpensesSelling
      , General and Administrative expenses
                      
                      $
                      1,227,027
                      
                      
                      
                      -38.62
                      %
                      
                      $
                      1,999,220Depreciation
      and amortization
                      
                      
                      20,099
                      
                      
                      
                      -44.12
                      %
                      
                      
                      35,965Research
      & Development
                      
                      
                      34,115
                      
                      
                      
                      
                      
                      
                      
                      -Total
      operating expenses
                      
                      $
                      1,281,241
                      
                      
                      
                      -37.05
                      %
                      
                      $
                      2,035,185





Total
operating expenses for the three months ended December 31, 2010 decreased
$753,944 or 37.05% over the same period in 2009. The lower operating expenses
were primarily attributable to lower selling and administrative
expenses.





We
incurred imputed interest expenses in the amount of $1,168 on the loans due to
Mr. Sun Xin, the executive officer and major shareholder of our Company. These
loans are unsecured, non-interest bearing and have no fixed terms of
repayment.





Other
Income (Expenses)





Other
income (expenses) increased approximately $43,000 for the three month period
ended December 31, 2010. The increase was primarily attributable to increased
interest income in the amount of approximately $39,300 from Heilongjiang Tiefeng
Rice Company Limited and the decrease in interest expenses of approximately
$3,800, which was due to repayment of debts in 2009.





Results
of Operations





Six
months ended December 31, 2010 as compared to six months ended December 31,
2009





December
      31,2010
                    
                    
                    Variance
                    
                    
                    2009REVENUESProduct
      Sales (net of sales allowance)
                    
                    $
                    24,980,486
                    
                    
                    
                    27.31
                    %
                    
                    $
                    19,621,543Total
      revenues
                    
                    $
                    24,980,486
                    
                    
                    
                    
                    
                    
                    
                    19,621,543COST
      OF GOODS SOLDCost
      of goods sold
                    
                    
                    12,693,331
                    
                    
                    
                    48.95
                    %
                    
                    
                    8,521,728Gross
      Profit
                    
                    $
                    12,287,155
                    
                    
                    
                    10.70
                    %
                    
                    $
                    11,099,815





Total
revenues increased by 27.31% in the six months ended December 31, 2010 compared
to the same period in 2009. The $5,358,943 increase in revenues was
attributable to growth in product sales. This growth in product sales was
attributable to increased sales volume and our efforts to continue to develop
our distribution channels by hiring additional sales agents to assure that our
products and their associated benefits are seen by those making or influencing
the purchasing decisions.


25


Our cost
of sales increased $4,171,603, or 48.95% in the six months ended December 31,
2010 compared to the same period in 2009. The costs increased as a result of the
increased sales and the increase of raw material costs.





Our gross
margin decreased 7.38% from 56.57% for the six month period ended December 31,
2009 to 49.19%   for the six month period ended December 31,
2010. This decrease was primarily attributable to increase in the raw material
costs. Due to high inflation in the People’s Republic of China, the prices of
many of our raw materials have increased. We seek to establish relationships
with more suppliers to lower our raw material costs.





Sales
by Product Line





A
break-down of our sales by major product line for each of the six months ended
December 31, 2010 and 2009 is as follows:





For the Six Months Ended December
      31,2010
                      
                      
                      
                      
                      
                      
                      
                      
                      2009Product
      Category*
                      
                      Quantity
                        (Unit)
                      
                      
                      Sales US$
                      
                      
                      % of Sales
                      
                      
                      Quantity
                        (Unit)
                      
                      
                      Sales US$
                      
                      
                      % of
                        SalesSleeping
      Beauty Capsule
                      
                      
                      61,251
                      
                      
                      
                      926,608
                      
                      
                      
                      3.71
                      %Ruddy
      Granule
                      
                      
                      59,815
                      
                      
                      
                      1,809,850
                      
                      
                      
                      7.24
                      %Virility
      Max Capsule
                      
                      
                      133,343
                      
                      
                      
                      3,349,307
                      
                      
                      
                      13.41
                      %Blood
      Cleanser Soft Capsule
                      
                      
                      74,910
                      
                      
                      
                      2,266,575
                      
                      
                      
                      9.07
                      %Abalone,
      Sea cucumber and Frog oil soft capsule
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      15,224
                      
                      
                      
                      2,355,885
                      
                      
                      
                      12
                      %Ganoderma
      lucidum and Aweto Soft Capsules
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      12,008
                      
                      
                      
                      1,857,551
                      
                      
                      
                      9.47
                      %Energy
      Elemental Powder
                      
                      
                      28,954
                      
                      
                      
                      365,013
                      
                      
                      
                      1.46
                      %Propolis
      and Black Ant Capsule
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      73,923
                      
                      
                      
                      4,418,273
                      
                      
                      
                      22.52
                      %Waterlilies
      Soft Capsule(Sailuozhi)
                      
                      
                      117,229
                      
                      
                      
                      11,084,551
                      
                      
                      
                      44.37
                      %
                      
                      
                      43,600
                      
                      
                      
                      7,018,270
                      
                      
                      
                      35.77
                      %Colon
      Cleanser Capsule
                      
                      
                      157,989
                      
                      
                      
                      5,178,582
                      
                      
                      
                      20.73
                      %
                      
                      
                      81,830
                      
                      
                      
                      3,958,501
                      
                      
                      
                      20.17
                      %OEM
      Sales
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,063
                      
                      
                      
                      0.07
                      %Total
                      
                      
                      
                      
                      
                      
                      24,980,486
                      
                      
                      
                      100
                      %
                      
                      
                      
                      
                      
                      
                      19,621,543
                      
                      
                      
                      100
                      %





*All of the
products are manufactured by the Company and none of them have been provided by
the Commercial Bureau or other suppliers so far.





Operating
Expenses





The
following table summarizes our operating expenses for each of the six months
ended December 31, 2010 and 2009, respectively:





For the Six Months Ended
      December
                                  31,2010
                                
                                
                                Variance
                                
                                
                                2009Operating
      ExpensesSelling
      , General and Administrative expenses
                                
                                $
                                2,488,419
                                
                                
                                
                                -1.08
                                %
                                
                                $
                                2,515,545Depreciation
      and amortization
                                
                                
                                39,796
                                
                                
                                
                                -29.31
                                %
                                
                                
                                56,296Research
      & Development
                                
                                
                                771,543
                                
                                
                                
                                
                                
                                
                                
                                -Total
      operating expenses
                                
                                $
                                3,299,758
                                
                                
                                
                                28.30
                                %
                                
                                $
                                2,571,841


26


Total
operating expenses for the six months ended December 31, 2010 increased $727,917
or 28.30% over the same period in 2009. The higher operating expenses were
primarily attributable to increased research and development costs.





We
incurred imputed interest expenses in the amount of $2,336 on the loans due to
Mr. Sun Xin, the executive officer and major shareholder of Company. These loans
are unsecured, non-interest bearing and have no fixed terms of
repayment.





Other
Income (Expenses)





Other
income (expenses) increased approximately $97,100 for the six month period ended
December 31, 2010. The increase was primarily attributable to increased interest
income in the amount of approximately $78,700 from Heilongjiang Tiefeng Rice
Company Limited and the decrease in interest expenses of approximately $18,500,
which was due to repayment of debts in 2009.





2011
Outlook





We
anticipate our total revenues in 2011 versus 2010 to increase by 40% or
approximately $17.2 million with growth in all categories of our product sales.
Our gross profit margin in 2011 is expected to be approximately 53% due to
increased raw material costs resulting from inflation. We estimate our overall
2011 net profit margin to be approximately 28%. However, there is no assurance
that these predictions will be reached.





Liquidity
and Capital Resources





The
following table summarizes our cash and cash equivalents position, our working
capital, and our cash flow activity as of December 31, 2010 and 2009 and for
each of the six months then ended:





December 31,
                    2010
                  
                  
                  December 31,
                    2009As
      of  December 31:Cash
      and cash equivalents
                  
                  $
                  19,716,525
                  
                  
                  $
                  2,612,093Working
      capital
                  
                  $
                  22,283,596
                  
                  
                  $
                  8,844,184Inventories
                  
                  $
                  311,243
                  
                  
                  $
                  198,224For
      the Six Months Ended December 31:Cash
      provided by (used in):Operating
      activities
                  
                  $
                  6,484,326
                  
                  
                  $
                  6,938,515Investing
      activities
                  
                  $
                  (32,002
                  )
                  
                  $
                  (11,301,539
                  )Financing
      activities
                  
                  $
                  2,601
                  
                  
                  $
                  (604,250
                  )





As of
December 31, 2010, cash and cash equivalents were $19,716,525 as compared to
$2,612,093 at December 31, 2009. The increased cash and cash equivalents
position was $17,104,432 or 654.82% at December 31, 2010. The increase in cash
and cash equivalents was attributable to the return of purchase price for
Heilongjiang Tiefeng Rice Company Limited and fewer investing
activities.





Our
current ratio was 5.62 versus 2.73 and the quick ratio was 5.56 versus 2.69 at
December 31, 2010 and 2009, respectively. Management endeavors to ensure that
funds are available to take advantage of new investment opportunities and that
funds are sufficient to meet future liquidity and capital
needs.


27


Cash flow
provided by operating activities was $6,484,326 for the six months ended
December 31, 2010 compared to cash flow provided by operation activities of
$6,938,515 for the same period in 2009. The decrease in cash provided by
operating activities of $454,189 is primarily attributable to the decrease in
accounts payable in the amount of $363,150.





Our
working capital position at December 31, 2010 was $22,283,596 compared to
working capital of $8,844,184 at December 31, 2009. Our increased working
capital position in 2010 was principally funded by the increased cash flow
generated by sales and the return of purchase price for Heilongjiang Tiefeng
Rice Company Limited. Management considers current working capital and borrowing
capabilities adequate to cover our current operating and capital requirements
for the full year 2011.





Currency
Exchange Fluctuations





All of
our revenues and majority of the expenses during the six months ended December
31, 2010 were denominated primarily in Renminbi (“RMB”), the currency of China,
and was converted into US dollars at the exchange rate of 6.77875 RMB to 1 U.S.
Dollar. In the third quarter of 2005, the Renminbi began to rise against the US
dollar. There can be no assurance that RMB-to-U.S. dollar exchange rates will
remain stable. A devaluation of RMB relative to the U.S. dollar would adversely
affect our business, financial condition and results of operations. We do not
engage in currency hedging.





Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements that are currently material or
reasonably likely to be material to our financial position or results of
operations.





Critical
Accounting Policies and Estimates





Method
of Accounting





The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States of
America and have been consistently applied in the presentation of financial
statements.





Accounts
Receivable





We have
very small amounts of accounts receivable incurred in the current reporting
period. The majority of our sales is to end customers who directly who pay us
instantaneously when they receive orders. The credit sale system has not been
well established in China. Our sale agreements with our customers provide that
risk of loss passes to the customer upon delivery and that we accept product
exchanges but we do not have a policy for product returns. Accordingly, we will
recognize accounts receivable on a product sale if management determines that
the product has been delivered or the sale is collectible, and an Allowance for
Doubtful Accounts measures receivable recorded but not expected to be collected
and estimates the value of those receivables believed to be uncollectible as
matching principle.




Accounts
receivable will be recorded at the invoiced amount. We use aging analysis method
quarterly on accounts receivable.





Allowance
for Doubtful Accounts





An
allowance for doubtful accounts will be established and determined based on
aging of receivables, payment history, the customer’s current credit worthiness,
and the economic environment.


28


Inventories





We value
our inventory based on our cost. Our inventories include various raw materials,
semi-finished products, finished products, package, low-value consumption goods
etc. Inventories are stated at the cost using the weighted average method.
Inventory cost includes purchase cost, processing cost and other cost. Purchase
cost include purchase price, related tax, transportation fee, handling cost,
insurance fee and other related fees. We adjust the value of our inventory to
the extent our management determines that our cost cannot be recovered due to
obsolescence or other factors. Our management uses estimates of future demand
and sales prices for each product to determine appropriate inventory
reserves.





Amortization
of low-value consumption goods and package is based on the direct write-off
method. The Company conducts physical inventory count at the end of each
quarter.





Property,
Plant, and Equipment





Property,
plant, and equipment are stated at cost. Repairs and maintenance to these assets
are charged to expense as incurred; major improvements enhancing the function
and/or useful life are capitalized. When items are sold or retired, the related
cost and accumulated depreciation are removed from the accounts and any gains or
losses arising from such transactions are recognized.





Property,
plant and equipment, patents, trademarks and other intangible assets owned by
the Company are depreciated or amortized, over their estimated useful lives.
Useful lives are based on management’s estimates over the period that such
assets will generate revenue. Intangible assets with definite lives are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Future adverse changes in
market conditions or poor operating results of underlying capital investments or
intangible assets could result in losses or an inability to recover the carrying
value of such assets, thereby possibly requiring an impairment charge in the
future.





Statutory
Reserve





Statutory
reserve refer to the amount appropriated from the net income in accordance with
laws or regulations, which can be used to recover losses and increase capital,
as approved, and, are to be used to expand production or operation. PRC laws
prescribe that an enterprise operating at a profit, must appropriate, on an
annual basis, from its earnings, an amount to the statutory reserve to be used
for future company development. Such an appropriation is made until the reserve
reaches a maximum equaling 50% of the enterprise’s capital.





Recognition
of Revenue





Our
revenue comprises the fair value of the consideration received or receivable for
the sale of goods and services net of value-added tax and other sales taxes,
discounts, and after eliminating sales within the Group.





Our
principal sources of revenue are from sales of our products through our direct
sales professionals. These sales occur either through a purchase order submitted
by the customer or through our direct marketing sales. We recognize revenue when
products are delivered to end customers directly or services are performed in
accordance with terms of the agreement, title and risk of loss have been
transferred and pricing is fixed or determinable. The majority of our revenues
have been derived from sales of our products directly to end consumers
historically. We sell our products to OEMs as well, which is only very small
portion of our overall sales.




Most of
our products are sold to end customers directly and customers made the payment
promptly. There is no cash discount and return allowance. We accept product
exchange but we do not accept product return.





Our end
customers generally have the right to exchange products purchased from us,
although we have no policy for return of products. At each period end, we
determine the extent to which our revenues need to be reduced to account for
exchange of products. Based on our historical experience with our customers,
product exchange rarely happens. We have reserve against revenue recognized for
product exchange. The consumer credit system has not been well established and
recognized by sellers in China. Except for our OEM sales, our end customers pay
us instantaneously when they receive orders. We have small amount of accounts
receivable as of the quarter ended December 31, 2010.


29


Cost





Matching
Principle-Costs have to be matched with revenues and our costs always match with
revenue. Cost of production is calculated based on actual number of products
manufactured and matched with revenues as long as it is reasonable to do so.
There has been no change in our calculation of cost of production. There are no
circumstances that cause variations in our calculation of cost of production.
Expenses are recognized not when the product is produced, but when the work or
the product actually makes its contribution to revenue. Only if no connection
with revenue can be established, cost may be charged as expenses to the expenses
to the current period (e.g. office salaries and other administrative expenses).
This principle allows greater evaluation of actual profitability and
performance.





Cost of
production is calculated based on actual number of products manufactured. We
calculate the cost of production at the end of each month. If there is any work
in progress, the cost of production is allocated between finished products and
work in progress. Below is a detailed step-by-step description of our cost of
production calculation:





a.
            Determine
      end-of-period quantity and amount of finished-goods,semi-finished
      products, raw materials, packing materials
etc.


b.
            Based
      on sales plan, the Company purchases raw materials and packing materials
      by batches and calculate stock-in and stock-out quantity and amount
      respectively. Summary calculation will be made based on actual quantity of
      consumption at the end of each
month.


c.
            Collect
      manufacturing overhead of each month, including depreciation, labor, water
      charge, electric charge, the consumptions of low value consumables.
      Distribute manufacturing overhead based on volume of production and make
      expense distribution sheet.


d.
            Apportion
      raw materials, packing materials and manufacturing overhead of each
      products in each month to finished-goods andsemi-finished products. Carry
      over Cost of Goods Sold according to sales
  quantity.





Income
Taxes





The
Company has adopted Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes” (SFAS 109). SFAS 109 requires the recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consist of
taxes currently due plus deferred taxes. Since the Company had no operations
within the United States there is no provision for US income taxes and there are
no deferred tax amounts as of December 31, 2010 and 2009. The charge for
taxation is based on the results for the year as adjusted for items, which are
non-assessable or disallowed. It is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.





Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized. Deferred tax is calculated at the tax rates that are expected
to apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when it
related to items credited or charged directly to equity, in which case the
deferred tax is also dealt with in equity. Deferred tax assets and liabilities
are offset when they related to income taxes levied by the same taxation
authority and the Company intends to settle current tax assets and liabilities
on a net basis.





Foreign
Currency Translation





The
Company’s two operating subsidiaries maintain their financial statements in the
functional currency, which is the Renminbi (RMB). Another subsidiary maintains
its financial statements in the functional currency, which is Hong Kong Dollar.
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in
currencies other than the functional currency are translated into the functional
currency at the exchanges rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included
in the determination of net income for the respective periods.


30


For
financial reporting purposes, the financial statements of subsidiaries, which
are prepared using the functional currency, have been translated into United
States dollars. Assets and liabilities are translated at the exchange rates at
the balance sheet dates and revenue and expenses are translated at the average
exchange rates, and stockholders’ equity is translated at historical exchange
rates. Translation adjustments are not included in determining net income but
are included in foreign exchange adjustment to other comprehensive income, a
component of stockholders’ equity.





The
Company has adopted “Stock-based Compensation and Other Stock-based Payments”.
This Section establishes standards for the recognition, measurement and
disclosure of stock-based compensation and other stock-based payments made in
exchange for goods and services, and applies to transactions, including
non-reciprocal transactions, in which an enterprise grants shares of common
stock or other equity instruments, or incurs liabilities based on the price of
common stock or other equity instruments. The Company uses the fair-value based
method to account for all stock-based payments to employees and non-employees by
measuring the compensation cost of the stock-based payments using the
Black-Scholes option-pricing model.





The fair
value of the stock-based compensation is recorded as a charge to operations over
the vesting period with a credit to contributed surplus.





Recently
Issued Accounting Pronouncements





The
Company does not believe the recently issued accounting pronouncements would
have a material impacts on its financial statements.





Item 3. Quantitative and Qualitative
Disclosures About Market Risk.





Not applicable.





Item 4. Controls and
Procedures.





Evaluation
of our Disclosure Controls





As of the
end of the period covered by this Quarterly Report on Form 10-Q, our principal
executive officer and principal financial officer have evaluated the
effectiveness of our “disclosure controls and procedures” (“Disclosure
Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are
designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the CEO
and CFO, as appropriate to allow timely decisions regarding required disclosure.
Our management, including the CEO and CFO, does not expect that our Disclosure
Controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.





Based
upon their controls evaluation, our CEO and CFO have concluded that our
Disclosure Controls are effective at a reasonable assurance
level.


31


Changes
in internal control over financial reporting





There
have been no changes in our internal controls over financial reporting during
our second fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.


32





PART
II - OTHER INFORMATION





Item 1. Legal
Proceedings.





There is no material legal proceeding pending against
us.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.





None.





Item
3.  Defaults Upon Senior Securities.





None.





Item
4.  (Removed and Reserved).





Item
5.  Other Information.





Not
applicable.





Item
6.  Exhibits .





Copies of
the following documents are included as exhibits to this report pursuant to Item
601 of Regulation S-K.





Exhibit No.
              
              SEC Ref. No.
              
              Title of Document1
              
              31.1
              
              Certification
      of the Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 *2.
              
              31.2
              
              Certification
      of the Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002 *3
              
              32.1
              
              Certification
      of the Principal Executive Officer pursuant to U.S.C. Section 1350 as
      adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of
      2002*4
              
              32.2
              
              Certification
      of the Principal Financial Officer pursuant to U.S.C. Section 1350 as
      adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of
      2002*





*The Exhibits attached to
this Form 10-Q shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to
liability under that section, nor shall it be deemed incorporated by reference
in any filing under the Securities Act of 1933, as amended, or the Exchange Act,
except as expressly set forth by specific reference in such
filing.


33





SIGNATURES





In
accordance with the Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.





CHINA
      HEALTH INDUSTRIES
                HOLDINGS,
      INC.Date:
      February 14, 2011/s/Xin SunXin
      SunChief
      Executive Officer and Chief FinancialOfficer


34