UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF 1934

                   For the fiscal year ended December 31, 2007

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF
    1934

                  For the transition period from ____ to _____

                        Commission file number: 001-32581

                           LOTUS PHARMACEUTICALS, INC.
                           ---------------------------
                (Name of registrant as specified in its charter)

                     Nevada                          20-0507918
                     ------                          ----------
         (State or other jurisdiction of         (I.R.S. Employer
          incorporation or organization)         Identification No.)

16 Cheng Zhuang Road, Feng Tai District, Beijing 100071
             People's Republic of China                      not applicable
-------------------------------------------------------      --------------
      (Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: 86-10-63899868

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

   Title of each class              Name of each exchange on which registered
   -------------------              -----------------------------------------
          None                                    Not applicable

         Securities registered under Section 12(g) of the Exchange Act:

                    Common stock, par value $0.001 per share
                    ----------------------------------------
                                (Title of class)

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.                                                 [ ]   Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company:

Large accelerated filer                 [ ]    Accelerated filer             [ ]
Non-accelerated filer                   [ ]    Smaller reporting company     [X]
(Do not check if smaller reporting company)

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

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter. $23,684,400 on June 29, 2007.

Indicated the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date. 42,044,200 shares of common
stock are issued and outstanding as of March 31, 2008.

                       DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). None.

                                       iiTABLE OF CONTENTS

                                                                            Page
Part I                                                                      ----
Item 1.     Business .......................................................   3
Item 1A.    Risk Factors ...................................................  13
Item 1B.    Unresolved Staff Comments ......................................  25
Item 2.     Properties .....................................................  25
Item 3.     Legal Proceedings ..............................................  25
Item 4.     Submission of Matters to a Vote of Security Holders ............  25
Part II
Item 5.     Market for Registrant's Common Equity, Related Stockholder
            Matters and Issuer Purchases of Equity Securities ..............  25
Item 6.     Selected Financial Data ........................................  26
Item 7.     Management's Discussion and Analysis of Financial
            Condition and Results of Operation .............................  27
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk .....  40
Item 8.     Financial Statements and Supplementary Data ....................  40
Item 9.     Changes In and Disagreements With Accountants on Accounting
            and Financial Disclosure .......................................  40
Item 9A.(T) Controls and Procedures ........................................  40
Item 9B.    Other Information ..............................................  43
Part III
Item 10.    Directors, Executive Officers and Corporate Governance .........  43
Item 11.    Executive Compensation .........................................  47
Item 12.    Security Ownership of Certain Beneficial Owners and
            Management and Related Stockholder Matters .....................  48
Item 13.    Certain Relationships and Related Transactions, and
            Director Independence ..........................................  50
Item 14.    Principal Accountant Fees and Services .........................  50
Part IV
Item 15.    Exhibits, Financial Statement Schedules ........................  51

                           OTHER PERTINENT INFORMATION

         We maintain a web site at www.lotuseast.com. Information on this web
site is not a part of this annual report.

               INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT

         When used in this report the terms:

         o  "Lotus," "we," "us," "our," the "Company," and similar terms refer
            to Lotus Pharmaceuticals, Inc., a Nevada corporation formerly known
            as S.E. Asia Trading Company, Inc., and its subsidiary,

         o  "Lotus International" refers to Lotus Pharmaceutical International,
            Inc., a Nevada corporation and a subsidiary of Lotus,

         o  "Lotus Century" refers to Lotus Century Pharmaceutical (Beijing)
            Technology co., Ltd., a wholly foreign-owned enterprise (WFOE)
            Chinese company which is a subsidiary of Lotus,

         o  "Liang Fang" refers to Beijing Liang Fang Pharmaceutical Co., Ltd.,
            a Chinese limited liability company formed on June 21, 2000 and an
            affiliate of En Zhe Jia,

         o  "En Zhe Jia" refers to Beijing En Zhe Jia Shi Pharmaceutical Co.,
            Ltd., a Chinese limited liability company formed on September 17,
            1999 and an affiliate of Liang Fang,

         o  "Lotus East" collectively refers to Liang Fang and En Zhe Jia,

                                       1o  "Consulting Services Agreements" refers to the Consulting Services
            Agreements dated September 20, 2006 between Lotus and Lotus East.

         o  "Operating Agreements" refers to the Operating Agreements dated
            September 20, 2006 between Lotus, Lotus East and the stockholders of
            Lotus East,

         o  "Equity Pledge Agreements" refers to the Equity Pledge Agreements
            dated September 20, 2006 between Lotus, Lotus East and the
            stockholders of Lotus East,

         o  "Option Agreements" refers to the Option Agreements dated September
            20, 2006 between Lotus, Lotus East and the stockholders of Lotus
            East,

         o  "Proxy Agreements" refers to the Proxy Agreements dated September
            20, 2006 between Lotus, Lotus East and the stockholders of Lotus
            East,

         o  "Contractual Arrangements" collectively refers to the Consulting
            Services Agreements, Operating Agreements, Equity Pledge Agreements,
            Option Agreements and the Proxy Agreements,

         o  "China" or the "PRC" refers to the People's Republic of China,

         o  "RMB" refers to the renminbi which is the currency of mainland PRC
            of which the yuan is the principal currency,

         o  "2006" generally refers to the fiscal year ended December 31, 2006,

         o  "2007" generally refers to the fiscal year ended December 31, 2007;
            and

         o  "2008" generally refers to the fiscal year ending December 31, 2008.

           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

         Certain statements in this report contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, our ability to enforce the Contractual
Arrangements, Lotus East's strategic initiatives, economic, political and market
conditions and fluctuations, U.S. and Chinese government and industry
regulation, interest rate risk, U.S., Chinese and global competition, and other
factors. Most of these factors are difficult to predict accurately and are
generally beyond our control. You should consider the areas of risk described in
connection with any forward-looking statements that may be made herein. Readers
are cautioned not to place undue reliance on these forward-looking statements
and readers should carefully review this annual report in its entirety,
including the risks described in "Item 1A. - Risk Factors." Except for our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions to
any forward-looking statements, to report events or to report the occurrence of
unanticipated events. These forward-looking statements speak only as of the date
of this report, and you should not rely on these statements without also
considering the risks and uncertainties associated with these statements and our
business.

                                       2PART I

ITEM 1.  BUSINESS.

OVERVIEW

         We operate, control and beneficially own the pharmaceutical businesses
in China of Lotus East under the terms of the Contractual Arrangements. Other
than the Contractual Arrangements with Lotus East, we do not have any business
or operations. Pursuant to the Contractual Arrangements we provide business
consulting and other general business operation services to Lotus East. Through
these Contractual Arrangements, we have the ability to control the daily
operations and financial affairs of Lotus East, appoint each of their senior
executives and approve all matters requiring stockholder approval. As a result
of these Contractual Arrangements, which enable us to control Lotus East, we are
considered the primary beneficiary of Lotus East. Accordingly, we consolidate
Lotus East's results, assets and liabilities in our financial statements. The
creditors of Lotus East, however, do not have recourse to any assets we may
have.

         PRC law currently places certain limitations on foreign ownership of
Chinese companies. To comply with these foreign ownership restrictions, we
operate our business in China through the Contractual Arrangements with Lotus
East. The contractual relationship among the above companies as follows:

Notwithstanding that Lotus, Liang Fang and En Zhe Jia are separate
legal entities and the legal obligations of the parties are governed by the
Contractual Arrangements, there is commonality of control between Lotus and
Lotus East as set forth in the following table:

                              EXECUTIVE        PRINCIPAL
                           OFFICER/DIRECTOR   STOCKHOLDER   STOCKHOLDER OF   STOCKHOLDER OF
       NAME                    OF LOTUS        OF LOTUS       LIANG FANG       EN ZHE JIA
       ----                ----------------   -----------   --------------   --------------
Dr. Liu Zhong Yi                  X                X              X                 X
Mrs. Song Zhenghong (1)           X                X              X                 X
Wen Li Xian                                                       X

(1) Mrs. Song Zhenghong is the spouse of Dr. Liu Zhong Yi.

         The Contractual Arrangements are comprised of a series of agreements,
including Consulting Services Agreements and Operating Agreements, through which
we have the right to advise, consult, manage and operate Lotus East, and collect
and own all of their respective net profits. Additionally, under Proxy
Agreements, the stockholders of Lotus East have vested their voting control over

                                       3Lotus East to us. In order to further reinforce our rights to control and
operate Lotus East, these companies and their stockholders have granted us,
under Option Agreements, the exclusive right and option to acquire all of their
equity interests in Lotus East, alternatively, all of the assets of Lotus East.
Further the Lotus East stockholders have pledged all of their rights, titles and
interests in Lotus East to us under Equity Pledge Agreements.

         Under PRC laws, each of Lotus, Lotus International, Liang Fang and En
Zhe Jia is an independent legal person and none of them is exposed to
liabilities incurred by the other party. Other than pursuant to the Contractual
Arrangements, Lotus East does not transfer any other funds generated from their
respective operations to us.

         On September 6, 2006, we entered into the following Contractual
Arrangements:

         Consulting Services Agreements. Pursuant to the exclusive Consulting
Services Agreements we have the exclusive right to provide to Lotus East general
pharmaceutical business operations services as well as consulting services
related to the technological research and development of pharmaceutical products
as well as general business operation advice and strategic planning (the
"Services"). Under these agreements, we own the intellectual property rights
developed or discovered through research and development, in the course of
providing the Services, or derived from the provision of the Services. Lotus
East is to pay us a quarterly consulting service fees in RMB that is equal to
Lotus East's net profits, as defined, for such quarter.

         Operating Agreements. Pursuant to the Operating Agreements we provide
guidance and instructions on Lotus East's daily operations, financial management
and employment issues. The stockholders of Lotus East must designate the
candidates recommended by us as their representatives on each of Lotus East's
Board of Directors. We have the right to appoint senior executives of Lotus
East. In addition, we agreed to guarantee Lotus East's performance under any
agreements or arrangements relating to Lotus East's business arrangements with
any third party. Lotus East, in return, agreed to pledge its accounts receivable
and all of its assets to us. Moreover, Lotus East agreed that without our prior
consent, Lotus East would not engage in any transaction that could materially
affect the assets, liabilities, rights or operations of Lotus East, including,
without limitation, incurrence or assumption of any indebtedness, sale or
purchase of any assets or rights, incurrence of any encumbrance on any of its
assets or intellectual property rights in favor of a third party or transfer of
any agreements relating to its business operation to any third party. The term
of these agreements is 10 years from September 6, 2006 and may be extended only
upon our written confirmation prior to the expiration of the these agreements,
with the extended term to be mutually agreed upon by the parties.

         Equity Pledge Agreements. Under the Equity Pledge Agreements, the
stockholders of Lotus East pledged all of their equity interests in Lotus East
to us to guarantee Lotus East's performance of its obligations under the
Consulting Services Agreements. If Lotus East or Lotus East's stockholders
breaches its respective contractual obligations, we, as pledgee, will be
entitled to certain rights, including the right to sell the pledged equity
interests. Lotus East's stockholders also agreed that upon occurrence of any
event of default, we will be granted an exclusive, irrevocable power of attorney
to take actions in the place and stead of Lotus East's stockholders to carry out
the security provisions of the Equity Pledge Agreements and take any action and
execute any instrument that we might deem necessary or advisable to accomplish
the purposes of The Equity Pledge Agreements. The stockholders of Lotus East
agreed not to dispose of the pledged equity interests or take any actions that
would prejudice our interest. The Equity Pledge Agreements expire two years
after Lotus East's obligations under the Consulting Services Agreements have
been fulfilled.

                                       4Option Agreements. Under the Option Agreements, the stockholders of
Lotus East irrevocably granted us or our designated person exclusive options to
purchase, to the extent permitted under PRC law, all or part of the equity
interests in Lotus East for the cost of the initial contributions to the
registered capital or the minimum amount of consideration permitted by
applicable PRC law. We, or our designated person, has sole discretion to decide
when to exercise the option, whether in part or in full. The term of these
agreements is 10 years from September 6, 2006 and may be extended prior to their
expiration by written agreement of the parties.

         Proxy Agreements. Pursuant to the Proxy Agreements, Lotus East's
stockholders agreed to irrevocably grant a person to be designated by us with
the right to exercise Lotus East's stockholders' voting rights and their other
rights, including the attendance at and the voting of Lotus East's stockholders'
shares at the stockholders' meetings (or by written consent in lieu of such
meetings) in accordance with applicable laws and their Articles of Association,
including but not limited to the rights to sell or transfer all or any of his
equity interests of Lotus East, and appoint and vote for the directors and
Chairman as the authorized representative of the stockholders of Lotus East. The
term of these Proxy Agreements is 10 years from September 6, 2006 and may be
extended prior to their expiration by written agreement of the parties.

LOTUS EAST

         Based in Beijing, China, Liang Fang is engaged in the production, trade
and retailing of pharmaceuticals, focusing on the development of innovative
medicines and investing in strategic growth to address various medical needs.
Liang Fang owns and operates 10 drug stores throughout Beijing, China that sell
Western and traditional Chinese medications, lease medical treatment facilities
to licensed physicians, and generate revenues from the leasing of retail space
to third party vendors and the leasing of advertising locations at its retail
stores. En Zhe Jia is the sole manufacturer for Liang Fang and maintains
facilities for the production of medicines, patented Chinese medicine, as well
as the research and production of other new medicines.

         Lotus East's business is composed of three parts:

         o  manufacturing and distribution of pharmaceutical products, including
            the manufacture of pharmaceutical products for other distributors
            (OEM manufacturing),

         o  retailing of Western and traditional Chinese medications, and
            medical treatment equipment through retail locations; and

         o  research and development as outlined below:

         MANUFACTURING AND DISTRIBUTION OF PHARMACEUTICAL PRODUCTS

         Lotus East's production enterprise is located in the Chaoyang District
of Beijing and covers a floor space of approximately 50,000 square feet. It
possesses liquid phase, gas phase, spectrum, and mass spectrum equipment and a
variety of types of purification and distilling equipment, all of which can be
used for production and research and development of biochemical medicines,
Chinese traditional medicines, chemical compound medicines, antibiotics and
other new medicines. As one of the first enterprises to be authenticated by the
National China Good Manufacturing Practices (GMP), Lotus East believes it has an
advanced automatic pharmacy product line which is GMP authenticated under
certificate numbers C0849, C0850, D1645, and G3452. Medicines produced by Lotus
East include:

                                       5o  material medicine,

         o  troches,

         o  capsules,

         o  granule medicaments;

         o  freeze-dried powder for injections,

         o  injections of small capacities, and

         o  eye drops.

         Different production control zones are used with separated air
conditioning system according to different production and control needs.
Production and sale of its pharmaceuticals and wholesale distribution of third
party manufactured pharmaceuticals is Lotus East's largest and most profitable
business and accounts for approximately 73% of our net revenues in 2007. Under
various manufacturing contracts, Lotus East provides contract manufacturing
services for several drug companies including the manufacture of product to
their specifications.

         Currently, Lotus East markets and sells its products only in PRC. Lotus
East's principal pharmaceutical manufactured products include:

         Valsartan

         In 2000, Lotus East obtained approval from the State Food and Drug
Administration (SFDA) of China to sell Valsartan as a raw material and as a
capsule (Maixin). Among its best selling products, Valsartan is a drug that
treats hypertension or high blood pressure. This product is globally recognized
as the ideal anti-high blood pressure medication by the medical industry due to
its most stable and longest lasting treatment results and minimum side-effects.

         High blood pressure adds to the workload of the heart and arteries. If
it continues for a long time, the heart and arteries may not function properly.
This can damage the blood vessels of the brain, heart, and kidneys, resulting in
a stroke, heart failure, or kidney failure. High blood pressure may also
increase the risk of heart attacks. These problems may be less likely to occur
if blood pressure is controlled. Valsartan works by blocking a substance in the
body that causes blood vessels to tighten. As a result, Valsartan relaxes blood
vessels. This lowers blood pressure and increases the supply of blood and oxygen
to the heart. Lotus East's goal is to make Valsartan the number one prescribed
brand in its class of high blood pressure medications in the PRC.

         Through October 2006, Lotus East held manufacturing rights to produce
Valsartan. It estimates that there are currently 10 enterprises producing single
regent dosage and fixed-dose combinations of Valsartan in China. The foreign
pharmacy Novartis Pharma sells Valsartan under its brand name, Diovan. According
to clinical verification, the two products, Maixin and Diovan, have the same
clinical effects. Lotus East believes that the longer its product is on the
market, its market share will increase year by year due to brand recognition and
continued sales efforts. Lotus East also believes that even if the Chinese
government does not take any measures to protect these products, other
enterprises still can not replicate its products before February 2009 because it
takes at least 28 months to replicate any orally taken medicine. By then, even
if the market has fiercer competition, Lotus East believes its market will be
relatively mature and that its production cost will be lower than those new
products. Accordingly, it believes that its sales revenue from Valsartan can
stay relatively stable.

                                       6Brimonidine Tartrate Eyes Drops

         Brimonidine Tartrate is a drug used to constrict adrenaline receptors,
an important step in treating glaucoma. Lotus East sells Brimonidine Tartrate
eye drops under its brand name "Muxin". The drug was first put into market in
the U.S. in 1998 and in August 2004, Lotus East received the rights to
manufacture and release the drug in the Chinese market. A fast and obvious
curative effect, very few side effects, a very high exponent of cure and high
endurement are prime features of the drug. It will produce no harmful effects of
reducing blood pressure, resulting in calmness and so on, much like diazepam.
The imported product of its kind is Alphagan and is produced by Allergan
(Hangzhou) Pharmaceutical Co., Ltd. According to clinical experiments of
People's Hospital of Peking University and Tianjin Eye Hospital, Muxin and
imported Alphagan have exactly the same curative effect but the side-effects of
Muxin are fewer than Alphagan. As a result, Lotus East believes that its product
has a stronger competitive advantage.

         Lotus East holds manufacturing rights to produce Brimonidine Tartrate
through August 2009. Lotus East estimates that other enterprises will not be
able to replicate this product until March 2010, as it believes it takes at
least 30 months to replicate an eye drop medicine. Currently, Lotus East has
minimal competition and believes its market share will not decrease. However, it
does anticipate lowers profits after 2010.

         Levofloxacin Lactate for Injection

         Levofloxacin is a popular anti-bacterial drug for the treatment of
mild, moderate, and severe infections caused by susceptible trains of the
designated microorganisms in the conditions such as acute maxillary sinusitis,
acute bacterial exacerbation of chronic bronchitis, community-acquired
pneumonia, complicated and uncomplicated skin and skin structure infections,
complicated and uncomplicated urinary tract infections, and acute
pyelonephritis. Lotus East received the rights to manufacture and release the
drug in the Chinese market in 2005. It currently sells Levofloxacin Lactate for
Injection under its brand name "Junxin". The imported product of its kind is
manufactured by Japanese pharmaceutical company, Daiichi Pharmaceutical Co.
Levofloxacin is one of most widely use antibiotics in China and Lotus East
believes this product will remain competitive through 2011.

         Nicergoline for Injection

         Nicergoline for Injection is a national medical insurance product. It
is an a-receptor blockage nerve system blood-brain medicine with remarkable
curative effect. On the cerebral level, it prompts a lowering of vascular
resistance, an increase in arterial flow and stimulates the use of oxygen and
glucose. Nicergoline also improves blood circulation in the lungs and limbs and
has been shown to inhibit blood platelet aggregation. It is used to treat senile
dementia, migraines of vascular origin, transient ischemia, platelet
hyper-aggregability and macular degeneration. Lotus East received the rights to
manufacture this product in 2006 and release the drug in the Chinese market in
2007. The estimated patient base for this product in China is approximately
30,000,000 people and Lotus East believes this product will remain competitive
through 2011.

         Lotus East also acts as a wholesale distributor to distribute various
pharmaceutical products manufactured by third party manufactures. The revenue
from wholesale distribution in 2007 was approximately 28% of Lotus East's
wholesale revenue.

         With the implementation in China of macro-economic policy, the overall
profit margin of medicines shall decrease. As of the date of this report, we can
not estimate the effect of these economic policies on our results of operations.

                                       7RETAIL DRUGSTORES

         Lotus East owns and operates 10 drug stores throughout many different
districts of Beijing, including:

         o  Xin Zhong Tai Drugstore

         o  Long Ren Tang Drugstore

         o  Wan Shou Road Drugstore

         o  He Ping Li Drugstore

         o  Feng Lin Lu Zhou

         o  Youth Lake Drugstore

         o  Capital Airport Drugstore

         o  Young An Zhong Sheng Drugstore

         o  Cheng Zhuang Road Drugstore

         o  Feng Tai Drugstore

         These 10 drug stores all offer in excess of 5,000 types of Western and
traditional Chinese medications, and medical treatment equipment. Lotus East has
over 200 employees including registered pharmacists at these drug stores. The
drug stores attempt to compete according to lower pricing and more efficient
distribution and management practices.

         Through its retail operations, Lotus East also generates revenue
through the leasing of office space to licensed physicians, the lease of store
front areas to various merchants, and the lease of advertising space in the
retail pharmacies.

         DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES AND LOTUS EAST'S
CUSTOMERS

         Currently, Lotus East sells drugs through approximately 70 distribution
agents and drug distribution companies in China covering Beijing, Shanghai,
Chongqing. GuangDong, Inner Mongolia, Ningxia, Henan, Hubei, LiaoNing,
HeiLongjiang, Guangxi, Jiangsu, Hebei, Anhui, Yunnan, Sichuan, Shanxi provinces
in the PRC. Lotus East works with various distribution companies to distribute
its products. The demand for new drugs in China is substantial as the drug
distribution companies suffer from very low profit margins from the distribution
of old generic drugs. Additionally, Lotus East has a network of connections with
hospitals in the Inner Mongolia and surrounding areas which provide direct
access to hospitals in these areas. Lotus East's drug products are also sold
through its retail drug stores.

         Lotus East recognizes the importance of branding as well as packaging.
All of its products bear a uniform brand but it also brands and packages its
products with specialized designs to differentiate the different categories of
its products.

         Lotus East conducts promotional marketing activities to publicize and
enhance the company's image as well as to reinforce the recognition of its brand
name, including:

         o  publishing advertisements and articles in national as well as
            specialized and provincial newspapers, magazines, and in other
            media, including the Internet;

                                       8o  participation in national meetings, seminars, symposiums,
            exhibitions for bio-pharmaceutical and other related industries;

         o  organizing cooperative promotional activities with distributors; and

         o  sending direct mail to major physician offices and laboratories.

         Excluding customers in its retail operations, Lotus East currently has
over 100 customers, including over 30 direct customers in Beijing, Shanghai,
Chongqing, GuangDong, Inner Mongolia, Ningxia, Henan, Hubei, LiaoNing,
HeiLongjiang, Guangxi, Jiangsu, Hebei, Anhui, Yunnan, Sichuan, Shanxi provinces
in the PRC. In 2007 Lotus East spent approximately $2,600,000 on advertising
expenses as compared to approximately $82,000 in 2006.

         AGREEMENT WITH WU LAN CHA BU EMERGENCY HOSPITAL

         On October 10, 2006, Lotus East entered into a five-year loan agreement
and contract with Wu Lan Cha Bu Emergency Hospital whereby Lotus East agreed to
lend to Wu Lan Cha Bu Emergency Hospital approximately $3,840,000 for the
construction of a hospital ward in Inner Mongolia, China. In exchange for the
loan, Wu Lan Cha Bu Emergency Hospital agreed that Lotus East would be the
exclusive provider for all medicines and disposable medical treatment apparatus
to it for a period of 20 years. In October 2006, Dr. Liu Zhong Yi, our Chief
Executive Officer and the CEO and principal stockholder of Lotus East, loaned
these funds to Wu Lan Cha Bu Emergency Hospital on behalf of Lotus East.
Accordingly, on October 10, 2006 Lotus East entered into an assignment agreement
whereby it assigned all of its rights, obligations, and receipts under the loan
agreement to Dr. Liu, except for the rights to revenues from the sale of medical
and disposable medical treatment apparatus which will remain with Lotus East. As
compensation to Dr. Liu for accepting the assignment under the loan agreement
including all of the risks and obligations and for Dr. Liu not accepting the
rights to revenues from the sale of medical and disposable medical treatment
apparatus which will remain with Lotus East, Lotus East agreed to pay Dr. Liu an
aggregate of approximately $1,150,000 to be paid in five equal annual
installments of approximately $230,000. The hospital construction project is
estimated to be completed by 2009 and it is anticipated that Lotus East will
begin generating revenue from the hospital after the completion date.

         COMPETITION

         Vertically integrated pharmaceutical operations are still at an early
stage of development in China due to heavy state involvement in the past and
Lotus East believes that the industry is fragmented. Lotus East faces
competition from domestic drug research and development companies and drug
manufacturing companies which are growing rapidly. Its direct competitors are
domestic pharmaceutical companies and new drug research and development
institutes that have fairly strong research and development capabilities in new
drugs such as Beijing Venture Biopharma Technology Co., Ltd., Fosun Group Co.,
Ltd. and Chongqing Pharmaceutical Research Institute, Co. Ltd., Zhuhai Lizhu and
Beijing Nohua. Lotus East also faces competition of foreign companies who have
strong proprietary pipeline and strong financial resources. These companies have
significantly greater assets than Lotus East and have a larger current market
share. Lotus East believes its advantage is its local concentration in research
and development as well as its local distribution network, and lower prices.
Lotus East attempts to focus more on quality, and establishing long-term good
cooperative relations with the Chinese Academy of Medical Sciences and the China
Academy of Traditional Chinese Medicine and medicine test organizations. Lotus
East believes that it is able to compete as a result of its research and
development capability, extensive sales network and lower prices. Other than
these competitors, most of Lotus East's other competitors produce only one
or two products.

                                       9SOURCES AND AVAILABILITY OF RAW MATERIALS AND THE PRINCIPAL SUPPLIERS

         Lotus East designs, creates prototypes and manufactures its products at
its manufacturing facilities located at Beijing, PRC. Its principal raw
materials include Brimonidine Tartrate, Brimonidine Tartrate and Valsartan. The
prices for these raw materials are subject to market forces largely beyond Lotus
East's control, including energy costs, organic chemical prices, market demand,
and freight costs. The prices for these raw materials have varied significantly
in the past and may vary significantly in the future.

         PATENTS, TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS. ROYALTY
AGREEMENTS OR LABOR CONTRACTS

         Lotus East relies on a combination of trademark, copyright and trade
secret protection laws in PRC and other jurisdictions, as well as
confidentiality procedures and contractual provisions to protect our
intellectual property and its brand. Lotus East intends to apply for patent
protection of certain of its special technologies to protect our core
technologies. There are no assurances, however, that if such applications are
made that the patents will be granted. Lotus East also enters into
confidentiality, non-compete and invention assignment agreements with its
employees and consultants and nondisclosure agreements with third parties.
"Maixing" and "Liang Fang" are its registered trademarks in the PRC.

         RESEARCH AND DEVELOPMENT

         Lotus East places great emphasis on product research and development
and it has established a research and development center. Lotus East's research
and development team is comprised of nine individuals who are focused on
discovering new drugs as well as developing generic and improved drugs based on
existing products already on the market and traditional Chinese medicinal
products. Lotus East also contracts third party research and development
institutes to conduct various research and development projects on its behalf.
From research and development performed during and prior to fiscal 2005, Lotus
East has a product pipeline containing approximately seven products in different
dosage forms which are ready for commercialization in China for the treatment of
diseases. Lotus East expects to receive Chinese SFDA approvals on those products
in the near future. Lotus East intends to commercialize or license these drugs
during 2008 and 2009. In 2007, Lotus East resumed its new drug research and
development effort and started five new research and development projects and
those projects are in different development stages. Major projects currently
being undertaken at these centers focus on the following:

             DRUG NAME                                       TARGET TREATMENT                                  STATUS (A)
---------------------------------------------------------------------------------------------------------------------------------
Calcium Dibutyryl Adensine                 used to cure angina and acute myocardial infarction        Pending final SFDA approval
Monophosphate for Injection
---------------------------------------------------------------------------------------------------------------------------------
Rabeprazole Sodium raw material and        used for curing gastric ulcer, duodenal ulcer,             Pending final SFDA approval
Rabeprazole Sodium Enteric-coated          stomach ulcer, reflux esophagitis, Zollinger-Ellison
                                           symptom complex and gastrinoma
---------------------------------------------------------------------------------------------------------------------------------
Compound Allantoin Dispersible Tablets     used for curing gastrelcosis, duodenal bulbar ulcer        Pending final SFDA approval
                                           and chronic gastritis
---------------------------------------------------------------------------------------------------------------------------------
Gatifloxacin Lactate for Injection         used for curing acute nasosinusitis, chronic               Pending final SFDA approval
                                           bronchitis, pneumonia, gonorrhea, and rectum
---------------------------------------------------------------------------------------------------------------------------------
Sodium Aescinate for Injection             use for curing hydrocephalus, swelling caused by           Pending final SFDA approval
                                           wounds or surgery operation and for venous return
                                           disorder.
---------------------------------------------------------------------------------------------------------------------------------
Candesartan Pills                          used for curing essential hypertension                     Pending final SFDA approval
---------------------------------------------------------------------------------------------------------------------------------

                                       10DRUG NAME                                       TARGET TREATMENT                                  STATUS (A)
---------------------------------------------------------------------------------------------------------------------------------
Nicergoline Pills                          used for the curing feeling dullness, impaired             Pending final SFDA approval
                                           concentration, memory deterioration, gloom and
                                           restlessness caused by cerebral infarction sequela
---------------------------------------------------------------------------------------------------------------------------------
Isosorbide Mononitrate-Sustained           used for preventing angina (chest pain) caused by          Pending SFDA approval
Release Tablets                            heart disease.
---------------------------------------------------------------------------------------------------------------------------------
Dilthiazem-Controlled Release Tablet       Used for cardiovascular related disease                    Undergoing clinical studies
---------------------------------------------------------------------------------------------------------------------------------
Gliclazide-Controlled Release Tablets      Used for control of hyperglycemia in gliclazide            Undergoing clinical studies
                                           responsive diabetes mellitus of stable, mild,
                                           non-ketosis prone, maturity onset or adult type
---------------------------------------------------------------------------------------------------------------------------------
Salbutamol Sulfate-Controlled Release      Used for the relief of bronchospasm in conditions          Undergoing clinical studies
Tablets                                    such as asthma and chronic obstructive pulmonary
                                           disease
---------------------------------------------------------------------------------------------------------------------------------
Felodipine-Controlled Release Tablets      Used to control high blood pressure                        In development stage
---------------------------------------------------------------------------------------------------------------------------------

(A) Subject to SFDA. Pending Administrative Protection and approval.

         In 2006, research and development costs were incurred for the
improvement of technology on existing drugs and to improve Lotus East's
production process for which it incurred research and development expenses of
$387,337. In the third quarter of 2007 Lotus East entered into various research
and development agreements with third parties. Under these agreements, the third
parties are responsible for designing, researching and developing designated
pharmaceutical projects for Lotus East. As part of the agreements, Lotus East
paid approximately $3.2 million (RMB 23.9 million) to these parties. Lotus East
will have the primary ownership of the designated research and development
project results. During 2007 Lotus East spent approximately $2.4 million on
research and development of Isosorbide Monoitrate-Sustained Release Tablets,
Dilthiazem-Controlled Release Tablet, Glicclazide-Controlled Release Tablets,
Salbutamol Sulfate-Controlled Release Tablets, Felodipine-Controlled Release
Tablets and paid approximately $847,000 for future research and development
services which are included in prepaid assets on our balance sheets appearing
elsewhere in this annual report.

         GOVERNMENT APPROVAL AND REGULATION OF LOTUS EAST'S PRINCIPAL PRODUCTS
OR SERVICES

         Lotus East's sales market is presently limited to China. Lotus East is
subject to the Drug Administration Law of China, which governs the licensing,
manufacturing, marketing and distribution of pharmaceutical products in China
and sets penalties for violations of the law. Additionally, Lotus East is also
subject to various regulations and permit systems by the Chinese government.

         The Drug Administration Law of the PRC governs Lotus East and its
products. The State Food & Drug Administration of the PRC regulates and
implements drug laws. The State FDA has granted Lotus East six government
permits for it to produce the following products:

         o  Valsartan Capsules,

         o  the material of Valsartan,

         o  Levofloxacin Lactate for Injection,

         o  the material of Levofloxacin Lactate,

                                       11o  Brimonidine Tartrate Eyes Drops with a density of 0.1, and

         o  Brimonidine Tartrate Eyes Drops with the density of 0.3.

         No enterprise may start production at its facilities until it receives
approval from the Ministry of Agriculture to begin operations. The approval
process takes about two years: including local SFDA approval, Local SFDA test,
State SFDA processing, state SFDA expert valuation, clinical trial, final
approval.

         Lotus East has the requisite approval and licenses from the Ministry of
Agriculture in order to operate its production facilities.

         COMPLIANCE WITH ENVIRONMENTAL LAW

         Lotus East complies with the Environmental Protection Law of China and
its local regulations. In compliance with PRC environmental regulations, Lotus
East spent approximately $150,000 in 2006 and approximately $170,000 in 2007 on
compliance with environmental regulations, principally for waste discharge
processing and dust cleaning.

EMPLOYEES

         We do not have any employees. As of March 31, 2008 Lotus East has 239
employees, including 199 full time employees and 40 part time employees. All of
these employees are all located in the PRC and who receive labor insurance.
These employees are organized into a union under the labor laws of China and can
bargain collectively with Lotus East. Lotus East believes it maintains good
relations with its employees.

         Lotus East is required to contribute a portion of its employees' total
salaries to the Chinese government's social insurance funds, including medical
insurance, unemployment insurance and job injuries insurance, and a housing
assistance fund, in accordance with relevant regulations. It expects the amount
of its contribution to the government's social insurance funds to increase in
the future as it expands its workforce and operations.

CONSULTING ARRANGEMENT WITH CFO ONCALL, INC.

         In August 2006, we engaged CFO Oncall, Inc., a U.S. based firm that
provides outsourced chief financial officer/controller services to public
companies, to assist us assembling our annual and quarterly financial
statements, as well as to assist our management in the preparation of our
financial statements. Under the terms of the engagement, Mr. Adam Wasserman, a
principal of CFO Oncall, Inc., serves as our Chief Financial Officer. We pay
this firm on a monthly fixed fee. In 2007, we paid CFO Oncall, Inc. $94,200 for
its services.

HISTORY OF OUR COMPANY

         We were incorporated on January 28, 2004 in the State of Nevada as S.E.
Asia Trading Company, Inc. to sell jewelry and home accessories.

         On September 6, 2006, we entered into a definitive Share Exchange
Agreement with Lotus International, whereby we would acquire all of the
outstanding common stock of Lotus International in exchange for newly-issued
shares of our stock to Lotus International's stockholders. Lotus International
was incorporated under the laws the State of Nevada on August 28, 2006 to
develop and market pharmaceutical products in China. On September 28, 2006,
Lotus International became our wholly-owned subsidiary and Lotus International's
stockholders own the majority of our voting stock. The acquisition of Lotus
International by us was accounted for as a reverse merger because on a

                                       12post-merger basis, the former stockholders of Lotus International held a
majority of our outstanding common stock on a voting and fully-diluted basis. As
a result, Lotus International is deemed to be the acquirer for accounting
purposes.

         We changed our name to Lotus Pharmaceuticals, Inc. on December 6, 2006.

         In May 2007 we formed Lotus Century to engage in the development of
innovative medicines, medical technology consulting and outsourcing services,
and related training services. As of March 31, 2008 it has not commenced
operations.

ITEM 1.A RISK FACTORS

         An investment in our common stock involves a significant degree of
risk. You should not invest in our common stock unless you can afford to lose
your entire investment. You should consider carefully the following risk factors
and other information in this report before deciding to invest in our common
stock.

                  RISKS RELATING TO OVERALL BUSINESS OPERATIONS

IN ORDER TO COMPLY WITH PRC LAWS LIMITING FOREIGN OWNERSHIP OF CHINESE
COMPANIES, WE CONDUCT OUR PHARMACEUTICAL BUSINESS THROUGH LOTUS EAST BY MEANS OF
THE CONTRACTUAL ARRANGEMENTS. WE DO NOT HAVE ANY OPERATIONS OTHER THAN PURSUANT
TO THE CONTRACTUAL ARRANGEMENTS WITH LOTUS EAST. THE TERM OF THOSE CONTRACTUAL
ARRANGEMENTS IS ONLY FOR 10 YEARS AND THERE ARE NO ASSURANCES THOSE AGREEMENTS
WILL BE RENEWED. IF THE PRC GOVERNMENT DETERMINES THAT THE CONTRACTUAL
ARRANGEMENTS DO NOT COMPLY WITH APPLICABLE REGULATIONS, OUR BUSINESS COULD BE
ADVERSELY AFFECTED AND WE COULD BE FORCED TO CEASE OPERATIONS.

         The PRC government restricts foreign investment in pharmaceutical
businesses in China. Lotus East holds the licenses and approvals necessary to
operate its pharmaceutical business in China and through the Contractual
Arrangements with Lotus East and its stockholders we substantially control Lotus
East. Neither Lotus nor Lotus International, however, are engaged in any
business or operations other than pursuant to the terms of the various
Contractual Arrangements with Lotus East as described elsewhere in this annual
report. As such, we are completely dependent on the Contractual Arrangements. We
do not generate any revenues and have no assets. All of Lotus East's assets and
operations are located in the PRC. As described in the financial statements
included elsewhere in this annual report, the assets and liabilities at each of
December 31, 2007 and 2006 and the results of operations for 2007 and 2006 are
those of Lotus East.

         We cannot assure you that we will be able to enforce these contracts.
If we are unable to enforce any legal rights we may have under these contracts
or otherwise, our ability to continue as a going concern is in jeopardy. In
addition, the terms of these contracts expire in September 2016 and there are no
assurances these agreements will be renewed. If the Contractual Arrangements are
not renewed or are significantly modified, unless we have expanded our business
and operations, of which there are no assurances, we will in all likelihood be
forced to cease our operations.

         The Contractual Arrangements are also subject to enforcement under the
laws of the PRC. Although we believe we comply with current PRC regulations, we
cannot assure you that the PRC government would agree that these operating
arrangements comply with PRC licensing, registration or other regulatory
requirements, with existing policies or with requirements or policies that may
be adopted in the future. If the PRC government determines that we do not comply
with applicable law, it could revoke Lotus East's business and operating
licenses, require us to discontinue or restrict our operations, restrict our

                                       13right to collect revenues, require us to restructure our operations, impose
additional conditions or requirements with which we may not be able to comply,
impose restrictions on our business operations or on our customers, or take
other regulatory or enforcement actions against us that could be harmful to our
business.

OUR CONTRACTUAL ARRANGEMENTS WITH LOTUS EAST AND THEIR RESPECTIVE STOCKHOLDERS
MAY NOT BE AS EFFECTIVE IN PROVIDING CONTROL OVER THESE ENTITIES AS DIRECT
OWNERSHIP.

         We have no equity ownership interest in Lotus East and rely on the
Contractual Arrangements to control and operate such businesses. These
Contractual Arrangements may not be as effective in providing control over Lotus
East as direct ownership. For example, Lotus East could fail to take actions
required for our businesses despite its contractual obligation to do so. If
Lotus East fails to perform under the agreements with us, we may have to rely on
legal remedies under PRC law, which may not be effective. In addition, we cannot
assure you that the Lotus East stockholders would always act in our best
interests.

CERTAIN OF OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS ARE ALSO
OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OF LOTUS EAST. WE ARE NOT
RECEIVING THE BENEFIT OF CERTAIN TERMS OF THE CONTRACTUAL ARRANGEMENTS AND THERE
ARE NO ASSURANCES THAT THE CONFLICTS OF INTEREST BETWEEN OBLIGATIONS TO OUR
COMPANY AND OBLIGATIONS LOTUS EAST WILL BE RESOLVED IN OUR FAVOR.

         While pursuant to the Contractual Arrangements we have the ability to
control the daily operations and financial affairs of Lotus East, appoint each
of their senior executives and approve all matters requiring approval by their
respective members, these actions on our behalf are determined by our Board of
Directors. Dr. Lui, our CEO, and his wife Mrs. Zhenghong, are members of our
Board of Directors and principal stockholders of our company and they are also
officers, directors and principal stockholders of Lotus East. Conflicts of
interests between their duties to our company and Lotus East may arise. Dr. Lui
and Mrs. Zhenghong each have a duty of loyalty and care to us under Nevada law
when there are any potential conflicts of interests between our company and
Lotus East. We cannot assure you, however, that when conflicts of interest
arise, Dr. Liu and or Mrs. Zhenghong will act completely in our interests or
that conflicts of interests will be resolved in our favor. In addition, Dr. Liu
and/or Mrs. Zhenghong could violate their legal duties by diverting business
opportunities from us to others.

         In addition, while the terms of the Contractual Arrangements provide
that we are to be paid quarterly service fees equal to the net profit of Lotus
East, such payments have not been tendered to us and those funds are being
retained by Lotus East to fund their operations. At December 31, 2007
approximately $9 million is due to us by Lotus East which remains unpaid as of
the date hereof. Although we have no business and operations other than pursuant
to the terms of the Contractual Arrangements, we incur operating expenses
related to our public company reporting requirements including legal and
accounting fees. There are no assurances that these fees will be paid, or that
any other conflicts of interest which may arise between our company and Lotus
East related to their obligation to pay the amounts due us will be resolved in
our favor.

WE HAVE LENT SUBSTANTIALLY ALL OF THE NET PROCEEDS FROM OUR RECENTLY COMPLETED
FINANCINGS TO LOTUS EAST ON AN INTEREST FREE, UNSECURED BASIS. IF THESE AMOUNTS
ARE NOT REPAID, OR IF LOTUS EAST DOES NOT BEGIN PAYING THEIR QUARTERLY SERVICE
FEES, IT IS POSSIBLE THAT WE WILL NOT HAVE SUFFICIENT CAPITAL TO PAY OUR
OPERATING EXPENSES WHICH COULD RESULT IN A REMOVAL OF OUR COMMON STOCK FROM
QUOTATION ON THE OTC BULLETIN BOARD.

                                       14In 2007, we sold $3,000,000 principal amount 14% secured convertible
notes in a private placement and we lent approximately $2 million of those
proceeds to Lotus East for working capital. In 2008, we received net proceeds
from the sale of shares of our Series A Convertible Redeemable Preferred Stock
of approximately $4.6 million. We used approximately $2,576,557 of those
proceeds to repay in full all of our outstanding obligations under our 14%
secured convertible notes. Of the remaining proceeds, we lent approximately
$1,600,000 to Lotus East. These loans are in the form of an unsecured, interest
free advances for use by Lotus East in their operations including in their
research and development activities. We do not have an understanding with Lotus
East regarding the repayment of the amounts advanced to that company. If these
funds are not repaid, we may not have sufficient capital to pay our operating
expenses which could result in our inability to remain current in our reporting
obligations under Federal securities laws. If we were unable to remain current
in those requirements, our common stock would be removed from quotation on the
OTC Bulletin Board and our stockholders would in all likelihood lose their
entire investment in our company.

IF WE FAIL TO MAINTAIN THE ADEQUACY OF OUR INTERNAL CONTROLS, OUR ABILITY TO
PROVIDE ACCURATE FINANCIAL STATEMENTS AND COMPLY WITH THE REQUIREMENTS OF THE
SARBANES-OXLEY ACT OF 2002 COULD BE IMPAIRED, WHICH COULD CAUSE OUR STOCK PRICE
TO DECREASE SUBSTANTIALLY.

         We have committed limited personnel and resources to the development of
the external reporting and compliance obligations that would be required of a
public company. Recently, we have taken measures to address and improve our
financial reporting and compliance capabilities and we are in the process of
instituting changes to satisfy our obligations in connection with joining a
public company, when and as such requirements become applicable to us. Prior to
taking these measures, we did not believe we had the resources and capabilities
to do so. We plan to obtain additional financial and accounting resources to
support and enhance our ability to meet the requirements of being a public
company. We will need to continue to improve our financial and managerial
controls, reporting systems and procedures, and documentation thereof. If our
financial and managerial controls, reporting systems or procedures fail, we may
not be able to provide accurate financial statements on a timely basis or comply
with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our
internal controls or our ability to provide accurate financial statements could
cause the trading price of our common stock to decrease substantially.

                    RISKS RELATED TO LOTUS EAST'S OPERATIONS

LOTUS EAST'S SUCCESS DEPENDS ON COLLABORATIVE PARTNERS, LICENSEES AND OTHER
THIRD PARTIES OVER WHOM IT HAS LIMITED CONTROL.

         Due to the complexity of the process of developing pharmaceuticals,
Lotus East's core business depends on arrangements with pharmaceutical
institutes, corporate and academic collaborators, licensors, licensees and
others for the research, development, clinical testing, technology rights,
manufacturing, marketing and commercialization of its products. It has one
research collaboration and outsources other business functions. Its license
agreements could obligate it to diligently bring potential products to market,
make milestone payments and royalties that, in some instances, could be
substantial, and incur the costs of filing and prosecuting patent applications.
There are no assurances that Lotus East will be able to establish or maintain
collaborations that are important to its business on favorable terms, or at all.

         A number of risks arise from its dependence on collaborative agreements
with third parties. Product development and commercialization efforts could be
adversely affected if any collaborative partner:

                                       15o  terminates or suspends its agreement with Lotus East;

         o  causes delays;

         o  fails to timely develop or manufacture in adequate quantities a
            substance needed in order to conduct clinical trials;

         o  fails to adequately perform clinical trials;

         o  determines not to develop, manufacture or commercialize a product to
            which it has rights; or

         o  otherwise fails to meet its contractual obligations.

         Lotus East's collaborative partners could pursue other technologies or
develop alternative products that could compete with the products it is
developing.

THE PROFITABILITY OF LOTUS EAST'S PRODUCTS WILL DEPEND IN PART ON ITS ABILITY TO
PROTECT PROPRIETARY RIGHTS AND OPERATE WITHOUT INFRINGING THE PROPRIETARY RIGHTS
OF OTHERS.

         The profitability of Lotus East's products will depend in part on its
ability to obtain and maintain manufacturing rights and preserve trade secrets,
and the period its intellectual property remains protected. Lotus East must also
operate without infringing the proprietary rights of third parties and without
third parties circumventing its rights. The patent positions of pharmaceutical
and biotechnology enterprises, including Lotus East, are uncertain and involve
complex legal and factual questions for which important legal principles are
largely unresolved. The biotechnology patent situation outside the U.S. is
uncertain, is currently undergoing review and revision in many countries, and
may not protect Lotus East's intellectual property rights to the same extent as
the laws of the U.S. Because patent applications are maintained in secrecy in
some cases, Lotus East cannot be certain that it or its licensors are the first
creators of inventions described in our pending patent applications or patents
or the first to file patent applications for such inventions.

         Most of Lotus East's drug products have been approved by the PRC's Food
and Drug Administration (SFDA) but have not received patent protection. For
instance, Valsartan, one of Lotus East's most profitable products, is produced
by other companies in China, including Novartis. If Novartis or any other
company were to obtain patent protection for Valsartan in China, or for any of
Lotus East's other drug products, it would have a material adverse effect on its
revenue.

         Other companies may independently develop similar products and design
around any patented products Lotus East develops. We cannot assure you that:

         o  any of Lotus East's patent applications will result in the issuance
            of patents;

         o  Lotus East will develop patentable products;

         o  the manufacturing rights Lotus East has been issued will provide it
            with any competitive advantages;

         o  the patents of others will not impede Lotus East's ability to do
            business; or

         o  third parties will not be able to circumvent Lotus East's
            manufacturing rights.

                                       16There are no assurances that Lotus East will be able to meaningfully
protect its trade secrets. We cannot assure you that any of Lotus East's
existing confidentiality agreements with employees, consultants, advisors or
collaborators will provide meaningful protection for its trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. Collaborators, advisors or consultants may dispute the ownership of
proprietary rights to Lotus East's products, for example by asserting that they
developed the product independently.

LOTUS EAST MAY ENCOUNTER DIFFICULTIES IN MANUFACTURING ITS PRODUCTS.

         Before Lotus East's products can be profitable, they must be produced
in commercial quantities in a cost-effective manufacturing process that complies
with regulatory requirements, including GMP, production and quality control
regulations. If Lotus East cannot arrange for or maintain commercial-scale
manufacturing on acceptable terms, or if there are delays or difficulties in the
manufacturing process, it may not be able to conduct clinical trials, obtain
regulatory approval or meet demand for its products. Production of Lotus East's
products could require raw materials which are scarce or which can be obtained
only from a limited number of sources. If Lotus East is unable to obtain
adequate supplies of such raw materials, the development, regulatory approval
and marketing of its products could be delayed.

LOTUS EAST COULD NEED MORE CLINICAL TRIALS OR TAKE MORE TIME TO COMPLETE ITS
CLINICAL TRIALS THAN WE HAVE planned.

         Clinical trials vary in design by factors including dosage, end points,
length, and controls. Lotus East may need to conduct a series of trials to
demonstrate the safety and efficacy of its products. The results of these trials
may not demonstrate safety or efficacy sufficiently for regulatory authorities
to approve Lotus East's products. Further, the actual schedules for its clinical
trials could vary dramatically from the forecasted schedules due to factors
including changes in trial design, conflicts with the schedules of participating
clinicians and clinical institutions, and changes affecting product supplies for
clinical trials.

         Lotus East relies on collaborators, including academic institutions,
governmental agencies and clinical research organizations, to conduct,
supervise, monitor and design some or all aspects of clinical trials involving
our products. Since these trials depend on governmental participation and
funding, Lotus East has less control over their timing and design than trials it
sponsors. Delays in or failure to commence or complete any planned clinical
trials could delay the ultimate timelines for Lotus East product releases.

LOTUS EAST MAY NOT BE ABLE TO OBTAIN THE REGULATORY APPROVALS OR CLEARANCES THAT
ARE NECESSARY TO COMMERCIALIZE ITS PRODUCTS.

         The PRC imposes significant statutory and regulatory obligations upon
the manufacture and sale of pharmaceutical products. It typically has a lengthy
approval process in which it examines pre-clinical and clinical data and the
facilities in which the product is manufactured. Regulatory submissions must
meet complex criteria to demonstrate the safety and efficacy of the ultimate
products. Addressing these criteria requires considerable data collection,
verification and analysis. Lotus East may spend time and money preparing
regulatory submissions or applications without assurances as to whether they
will be approved on a timely basis or at all.

         Lotus East's product candidates, some of which are currently in the
early stages of development, will require significant additional development and
pre-clinical and clinical testing prior to their commercialization. These steps
and the process of obtaining required approvals and clearances can be costly and

                                       17time-consuming. If Lotus East's potential products are not successfully
developed, cannot be proven to be safe and effective through clinical trials, or
do not receive applicable regulatory approvals and clearances, or if there are
delays in the process:

         o  the commercialization of Lotus East's products could be adversely
            affected;

         o  any competitive advantages of the products could be diminished; and

         o  revenues or collaborative milestones from the products could be
            reduced or delayed.

         Governmental and regulatory authorities may approve a product candidate
for fewer indications or narrower circumstances than requested or may condition
approval on the performance of post-marketing studies for a product candidate.
Even if a product receives regulatory approval and clearance, it may later
exhibit adverse side effects that limit or prevent its widespread use or that
force Lotus East to withdraw the product from the market.

         Any marketed product and its manufacturer will continue to be subject
to strict regulation after approval. Results of post-marketing programs may
limit or expand the further marketing of products. Unforeseen problems with an
approved product or any violation of regulations could result in restrictions on
the product, including its withdrawal from the market and possible civil
actions.

         In manufacturing Lotus East's products it is required to comply with
applicable good manufacturing practices regulations, which include requirements
relating to quality control and quality assurance, as well as the maintenance of
records and documentation. If Lotus East cannot comply with regulatory
requirements, including applicable good manufacturing practice requirements, it
may not be allowed to develop or market the product candidates. If Lotus Eat
fails to comply with applicable regulatory requirements at any stage during the
regulatory process, it may be subject to sanctions, including fines, product
recalls or seizures, injunctions, refusal of regulatory agencies to review
pending market approval applications or supplements to approve applications,
total or partial suspension of production, civil penalties, withdrawals of
previously approved marketing applications and criminal prosecution.

COMPETITORS MAY DEVELOP AND MARKET PHARMACEUTICAL PRODUCTS THAT ARE LESS
EXPENSIVE, MORE EFFECTIVE OR SAFER, MAKING LOTUS EAST'S PRODUCTS OBSOLETE OR
UNCOMPETITIVE.

         Some of Lotus East's competitors and potential competitors have greater
product development capabilities and financial, scientific, marketing and human
resources than it does. Technological competition from pharmaceutical companies
and biotechnology companies is intense and is expected to increase. Other
companies have developed technologies that could be the basis for competitive
products. Some of these products have an entirely different approach or means of
accomplishing the desired curative effect than products Lotus East is
developing. Alternative products may be developed that are more effective, work
faster and are less costly than its products. Competitors may succeed in
developing products earlier than Lotus East, obtaining approvals and clearances
for such products more rapidly than it, or developing products that are more
effective than those of Lotus East. In addition, other forms of treatment may be
competitive with its products. Over time, Lotus East's products may become
obsolete or uncompetitive.

LOTUS EAST'S OPERATIONS AND THE USE OF ITS PRODUCTS COULD SUBJECT IT TO DAMAGES
RELATING TO INJURIES OR ACCIDENTAL CONTAMINATION.

                                       18Lotus East's research and development processes involve the controlled
use of hazardous materials. It is subject to central government, provincial and
local laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and waste products. The risk of accidental
contamination or injury from handling and disposing of such materials cannot be
completely eliminated. In the event of an accident involving hazardous
materials, Lotus East could be held liable for resulting damages. Lotus East is
not insured with respect to this liability. Such liability could exceed its
resources.

IF LOTUS EAST WERE SUCCESSFULLY SUED FOR PRODUCT LIABILITY, IT COULD FACE
SUBSTANTIAL LIABILITIES THAT MAY EXCEED ITS RESOURCES.

         Lotus East may be held liable if any product it develops, or any
product which causes injury or is found unsuitable during product testing,
manufacturing, marketing, sale or use. These risks are inherent in the
development of pharmaceutical products. Lotus East does not have product
liability insurance. If Lotus East choose to obtain product liability insurance
but cannot obtain sufficient insurance coverage at an acceptable cost or
otherwise protect against potential product liability claims, the
commercialization of products that it develops may be prevented or inhibited. If
it is sued for any injury caused by its products, Lotus East's liability could
exceed its total assets.

LOTUS EAST HAS LIMITED BUSINESS INSURANCE COVERAGE.

         The insurance industry in China is still at an early stage of
development. Insurance companies in China offer limited business insurance
products. Lotus East does not have any business liability or disruption
insurance coverage for its operations in China. Any business disruption,
litigation or natural disaster may result in our incurring substantial costs and
the diversion of its resources.

LOTUS EAST'S SUCCESS DEPENDS ON ATTRACTING AND RETAINING QUALIFIED PERSONNEL.

         Lotus East depends on a core management and scientific team. Although
most of these personnel are founders and stockholders of Lotus East, there can
be no assurance that it can be successful in retaining them. The unavailability
or departure of such key personnel may seriously disrupt and harm its
operations, business and the implementation of its business strategy and plans.
Lotus East's future success depends in large part on its continued ability to
attract and retain other highly qualified scientific, technical and management
personnel, as well as personnel with expertise in clinical testing and
government regulation. It faces competition for personnel from other companies,
universities, public and private research institutions, government entities and
other organizations. If Lotus East's recruitment and retention efforts are
unsuccessful, its business operations could suffer.

                    RISKS RELATED TO DOING BUSINESS IN CHINA

BOTH OUR COMPANY AND LOTUS EAST MAY BE ADVERSELY AFFECTED BY COMPLEXITY,
UNCERTAINTIES AND CHANGES IN PRC REGULATION OF PHARMACEUTICAL BUSINESS AND
COMPANIES, INCLUDING LIMITATIONS ON OUR ABILITY TO OWN KEY ASSETS.

         The PRC government regulates the pharmaceutical industry including
foreign ownership of, and the licensing and permit requirements pertaining to,
companies in the pharmaceutical industry. These laws and regulations are
relatively new and evolving, and their interpretation and enforcement involve
significant uncertainty. As a result, in certain circumstances it may be
difficult to determine what actions or omissions may be deemed to be a violation
of applicable laws and regulations. Issues, risks and uncertainties relating to
PRC government regulation of the pharmaceutical industry include the following:

                                       19o we only have contractual control over Lotus East. We do not own it
due to the restriction of foreign investment in Chinese businesses; and

         o uncertainties relating to the regulation of the pharmaceutical
business in China, including evolving licensing practices, means that permits,
licenses or operations at our company may be subject to challenge. This may
disrupt Lotus East's business, or subject it to sanctions, requirements to
increase capital or other conditions or enforcement, or compromise
enforceability of related contractual arrangements, or have other harmful
effects on it.

         The interpretation and application of existing PRC laws, regulations
and policies and possible new laws, regulations or policies have created
substantial uncertainties regarding the legality of existing and future foreign
investments in, and the businesses and activities of, pharmaceutical businesses
in China, including our business.

ADVERSE CHANGES IN ECONOMIC AND POLITICAL POLICIES OF THE PRC GOVERNMENT COULD
HAVE A MATERIAL ADVERSE EFFECT ON THE OVERALL ECONOMIC GROWTH OF CHINA, WHICH
COULD ADVERSELY AFFECT LOTUS EAST'S BUSINESS.

         All of Lotus East's business operations are conducted in China.
Accordingly, our results of operations, financial condition and prospects are
subject to a significant degree to economic, political and legal developments in
China. China's economy differs from the economies of most developed countries in
many respects, including with respect to:

         o  the amount of government involvement,

         o  level of development,

         o  growth rate,

         o  control of foreign exchange, and

         o  allocation of resources.

         While the PRC economy has experienced significant growth in the past 20
years, growth has been uneven across different regions and among various
economic sectors of China. The PRC government has implemented various measures
to encourage economic development and guide the allocation of resources. Some of
these measures benefit the overall PRC economy, but may also have a negative
effect on us. For example, our financial condition and results of operations may
be adversely affected by government control over capital investments or changes
in tax regulations that are applicable to Lotus East. Since early 2004, the PRC
government has implemented certain measures to control the pace of economic
growth. Such measures may cause a decrease in the level of economic activity in
China, which in turn could adversely affect our results of operations and
financial condition.

IF PRC LAW WERE TO PHASE OUT THE PREFERENTIAL TAX BENEFITS CURRENTLY BEING
EXTENDED TO FOREIGN INVESTED ENTERPRISES AND "NEW OR HIGH-TECHNOLOGY
ENTERPRISES" LOCATED IN A HIGH-TECH ZONE, LOTUS EAST WOULD HAVE TO PAY MORE
TAXES, WHICH COULD HAVE A MATERIAL AND ADVERSE EFFECT ON OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

         Under PRC laws and regulations, a foreign invested enterprise may enjoy
preferential tax benefits if it is registered in a high-tech zone and also
qualifies as "new or high-technology enterprise". As a foreign invested
enterprise as well as a certified "new or high-technology enterprise" located in
a high-tech zone in Beijing: Lotus East is registered in the Liangxiang Economic

                                       20Tech Development Zone and is entitled to an exemption from enterprise income tax
until December 12, 2008. If the PRC law were to phase out preferential tax
benefits currently granted to "new or high-technology enterprises" and
technology consulting services, we would be subject to the standard statutory
tax rate, which currently is 33%, and we would be unable to obtain business tax
refunds for our provision of technology consulting services. Loss of these
preferential tax treatments could have a material and adverse effect on our
financial condition and results of operations.

UNCERTAINTIES WITH RESPECT TO THE PRC LEGAL SYSTEM COULD ADVERSELY AFFECT US.

         We conduct our business through the Contractual Arrangements with Lotus
East. Our operations in China are governed by PRC laws and regulations. We are
generally subject to laws and regulations applicable to foreign investments in
China and, in particular, laws applicable to wholly foreign-owned enterprises.
The PRC legal system is based on written statutes. Prior court decisions may be
cited for reference but have limited precedential value.

         Since 1979, PRC legislation and regulations have significantly enhanced
the protections afforded to various forms of foreign investments in China.
However, China has not developed a fully integrated legal system and recently
enacted laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result, we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in China may be protracted and
result in substantial costs and diversion of resources and management attention.

YOU MAY EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS, ENFORCING
FOREIGN JUDGMENTS OR BRINGING ORIGINAL ACTIONS IN CHINA BASED ON UNITED STATES
OR OTHER FOREIGN LAWS AGAINST US OR OUR MANAGEMENT.

         All of Lotus East's assets are located outside the United States and
all of its current operations are conducted in China. Moreover, the majority of
our directors and officers are nationals or residents of China. All or a
substantial portion of the assets of these persons are located outside the
United States. As a result, it may be difficult for our stockholders to effect
service of process within the United States upon these persons. In addition,
there is uncertainty as to whether the courts of China would recognize or
enforce judgments of U.S. courts obtained against us or such officers and/or
directors predicated upon the civil liability provisions of the securities law
of the United States or any state thereof, or be competent to hear original
actions brought in China against us or such persons predicated upon the
securities laws of the United States or any state thereof.

GOVERNMENTAL CONTROL OF CURRENCY CONVERSION MAY ADVERSELY AFFECT OUR COMPANY.

         The PRC government imposes controls on the convertibility of RMB into
foreign currencies and, in certain cases, the remittance of currency out of
China. Lotus East receives all of its revenues in RMB. Under our current
structure, our income is restricted to payments under the Contractual
Arrangements with Lotus East. Shortages in the availability of foreign currency
may restrict the ability of Lotus East to remit sufficient foreign currency to
pay the monthly fees due us, or otherwise satisfy their foreign currency
denominated obligations. As such, we may not be able to receive all amounts due
to us from Lotus East under the Contractual Arrangements. Under existing PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the

                                       21PRC State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies.

         The PRC government may also at its discretion restrict access in the
future to foreign currencies for current account transactions. If the foreign
exchange control system prevents Lotus East from obtaining sufficient foreign
currency to satisfy its currency demands, we may not have sufficient funds
available to pay our obligations as they become due..

FLUCTUATION IN THE VALUE OF RMB MAY HAVE A MATERIAL ADVERSE EFFECT ON YOUR
INVESTMENT.

         The value of RMB against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in political and
economic conditions. All of Lotus East's financial assets and its revenues and
costs are denominated in RMB. We rely entirely on fees paid to us by Lotus East.
Any significant fluctuation in value of RMB may materially and adversely affect
our cash flows, revenues, earnings and financial position, and the value of the
consulting fees payable to us by Lotus East. For example, an appreciation of RMB
against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to Lotus East, to the extent that it might need to
convert U.S. dollars into RMB for such purposes. An appreciation of RMB against
the U.S. dollar would also result in foreign currency translation losses for
financial reporting purposes when we translate our U.S. dollar denominated
financial assets into RMB, as RMB is our reporting currency.

WE FACE RISKS RELATED TO HEALTH EPIDEMICS AND OTHER OUTBREAKS.

         Lotus East's business could be adversely affected by the effects of
SARS or another epidemic or outbreak. China reported a number of cases of SARS
in April 2004. Any prolonged recurrence of SARS or other adverse public health
developments in China may have a material adverse effect on Lotus East's
business operations. For instance, health or other government regulations
adopted in response may require temporary closure of Lotus East's production
facilities or of its offices. Such closures would severely disrupt its business
operations and adversely affect our results of operations. Lotus East has not
adopted any written preventive measures or contingency plans to combat any
future outbreak of SARS or any other epidemic.

                     RISKS RELATED TO HOLDING OUR SECURITIES

OUR CORPORATE ACTIONS ARE SUBSTANTIALLY CONTROLLED BY OUR MANAGEMENT.

         Our executive officers and directors own approximately 62% of our
outstanding common stock and approximately 59% of voting control. These
stockholders, acting individually or as a group, could exert substantial
influence over matters such as electing directors and approving mergers or other
business combination transactions. In addition, because of the percentage of
ownership and voting concentration in these principal stockholders, elections of
our board of directors will generally be within the control of these
stockholders. It would be difficult for our stockholders to propose and have
approved proposals not supported by management. There can be no assurances that
matters voted upon by our officers and directors in their capacity as
stockholders will be viewed favorably by all stockholders of our company.

THE ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS AND OFFICERS UNDER
NEVADA LAW AND THE EXISTENCE OF INDEMNIFICATION RIGHTS TO OUR DIRECTORS AND
OFFICERS MAY RESULT IN SUBSTANTIAL EXPENDITURES BY US MAY DISCOURAGE LAWSUITS
AGAINST OUR DIRECTORS AND/OR OFFICERS.

                                       22Our articles of incorporation do not contain any specific provisions
that eliminate the liability of our directors for monetary damages to our
company and stockholders, however we are prepared to give such indemnification
to our directors and officers to the extent provided by Nevada law. These
indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors
and officers, which we may be unable to recoup. These provisions and resultant
costs may also discourage our company from bringing a lawsuit against directors
and officers for breaches of their fiduciary duties, and may similarly
discourage the filing of derivative litigation by our stockholders against our
directors and officers even though such actions, if successful, might otherwise
benefit our company and stockholders.

WE MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT, LEGAL AND FINANCIAL
CONTROLS IN THE PRC.

         PRC companies have historically not adopted a Western style of
management and financial reporting concepts and practices, which includes strong
corporate governance, internal controls and, database, financial and other
control systems. As a result, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards. Therefore, we may,
in turn, experience difficulties in implementing and maintaining adequate
internal controls as required under Section 404 of the Sarbanes-Oxley Act of
2002. Any failure on our part may result in significant deficiencies or material
weaknesses in our internal controls which could impact the reliability of our
financial statements which could have a materially adverse effect on our
business.

THE EXERCISE OF OUTSTANDING WARRANTS, THE ISSUANCE OF SHARES OF OUR COMMON STOCK
AS INTEREST ON THE OUTSTANDING NOTES AND THE POSSIBLE CONVERSION OF THOSE
OUTSTANDING NOTES WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.

         At March 31, 2008 we had 42,044,200 shares of our common stock issued
and outstanding and the following securities which are convertible or
exercisable into shares of our common stock were outstanding:

         o 5,747,118 shares of our common stock issuable upon the possible
conversion of the Series A Convertible Redeemable Preferred Stock;

         o up to an additional 919,540 shares of our common stock which we may
issue the Series A Convertible Redeemable Preferred Stockholders as dividend
payments; and

         o 4,373,553 of our common stock issuable upon the exercise of common
stock purchase warrants with an exercise price of $1.20 per share.


         The issuance of the shares as dividend payment, the exercise of the
warrants and/or the conversion of the Series A Convertible Redeemable Preferred
Stock may materially adversely affect the market price of our common stock and
will have a dilutive effect on our existing stockholders.

WE HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN
THE ABSENCE OF WHICH, STOCKHOLDERS MAY HAVE MORE LIMITED PROTECTIONS AGAINST
INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR MATTERS.

         Recent Federal legislation, including the Sarbanes-Oxley Act of 2002,
has resulted in the adoption of various corporate governance measures designed
to promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of

                                       23national securities exchanges, such as the NYSE or the NASDAQ Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges are those that
address board of directors' independence, audit committee oversight, and the
adoption of a code of ethics. We have not adopted a code of ethics nor have we
adopted any of these other corporate governance measures and, since our
securities are not yet listed on a national securities exchange, we were not
required to do so. We have not adopted corporate governance measures such as an
audit or other independent committees of our board of directors. If we expand
our board membership in future periods to include additional independent
directors, we may seek to establish an audit and other committees of our board
of directors. It is possible that if we were to adopt some or all of these
corporate governance measures, stockholders would benefit from somewhat greater
assurances that internal corporate decisions were being made by disinterested
directors and that policies had been implemented to define responsible conduct.
For example, in the absence of audit, nominating and compensation committees
comprised of at least a majority of independent directors, decisions concerning
matters such as compensation packages to our senior officers and recommendations
for director nominees may be made by a majority of directors who have an
interest in the outcome of the matters being decided. Prospective investors
should bear in mind our current lack of corporate governance measures in
formulating their investment decisions.

WE MAY BE EXPOSED TO POTENTIAL RISKS RELATING TO OUR INTERNAL CONTROLS OVER
FINANCIAL REPORTING AND OUR ABILITY TO HAVE THOSE CONTROLS ATTESTED TO BY OUR
INDEPENDENT AUDITORS.

         As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX
404"), the Securities and Exchange Commission adopted rules requiring small
business issuers, such as our company, to include a report of management on the
company's internal controls over financial reporting in their annual reports for
fiscal years ending on or after December 15, 2007. Such report is contained
later in this annual report under Item 9A(T). Controls and Procedures. In
addition, unless the pending one year delay proposed by the SEC is adopted, for
our fiscal year ending December 31, 2008 the independent registered public
accounting firm auditing our financial statements must also attest to and report
on management's assessment of the effectiveness of our internal controls over
financial reporting as well as the operating effectiveness of our internal
controls. In the event we are unable to receive a positive attestation from our
independent auditors with respect to our internal controls, investors and others
may lose confidence in the reliability of our financial statements and our
ability to obtain financing as needed could suffer.

BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE
OTC BULLETIN BOARD, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN ADVERSELY
AFFECT ITS LIQUIDITY.

         As the trading price of our common stock is less than $5.00 per share,
our common stock is considered a "penny stock," and trading in our common stock
is subject to the requirements of Rule 15g-9 under the Securities Exchange Act
of 1934. Under this rule, broker/dealers who recommend low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements. The broker/dealer must make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction.

         SEC regulations also require additional disclosure in connection with
any trades involving a "penny stock," including the delivery, prior to any penny
stock transaction, of a disclosure schedule explaining the penny stock market
and its associated risks. These requirements severely limit the liquidity of
securities in the secondary market because few broker or dealers are likely to
undertake these compliance activities. In addition to the applicability of the
penny stock rules, other risks associated with trading in penny stocks could
also be price fluctuations and the lack of a liquid market.

                                       24ITEM 1B. UNRESOLVED STAFF COMMENTS.

         Not applicable to a smaller reporting company.

ITEM 2. PROPERTIES.

         Our principal executive offices are located Liang Fang's headquarters
which are provided to us at no cost.

         Lotus East leases all of its office and retail locations. Lease terms
are generally one to 20 years, with renewal options. All of its leases provide
for a fixed annual rent. Lotus East intends to continue to lease all of its
leases.

         Lotus East has the following properties leased in Beijing, China:

PROPERTY LOCATION
  (DISTRICT OF            AREA
 BEIJING, CHINA)        (SQ. FT)         LEASE EXPIRATION PERIOD                        PURPOSE
------------------      --------      ------------------------------      ---------------------------------
Fengtai District         4,413        August 31, 2009                     Liang Fang warehouse
Fengtai District         11,345       December 31, 2009                   Liang Fang headquarters
Fengtai District         12,917       July 3, 2019                        Retail - Xinzhong Taita Pharmacy
Fengtai District         2,067        December 31, 2008                   Retail - Nangong Pharmacy
Fengtai District         2,153        December 31, 2010                   Retail - Chenzhuang Rd. Pharmacy
Haidian District         3,660        December 31, 2009                   Retail - Wanshou Rd. Pharmacy
Dongcheng District       2,153        May 31, 2009                        Retail - Qingnianhu Pharmacy
Dongcheng District       807          Month-to-Month                      Retail - Hepingli Pharmacy
Chaoyang District        1,550        December 31, 2008                   Retail - Capital Airport Pharmacy
Chaoyang District        2,691        Month-to-Month (related party)      Retail - Fenglinlvzhou Pharmacy
Fangshan District        1,615        December 31, 2010                   Retail - Yonganzhongshen Pharmacy
Liujia Village           2,153        October 9, 2010                     Retail Pharmacy
Chaoyan District         72,118       Property Owned by Lotus             En Zhe Jia Shi production and
                                                                          manufacturing facility

ITEM 3.  LEGAL PROCEEDINGS.

         We are not a party to any pending legal proceedings.

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

         None.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND
         ISSUER PURCHASE OF EQUITY SECURITIES.

MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common stock is quoted on the OTCBB under the symbol LTUS. The
reported high and low sales prices for the common stock as reported on the OTCBB
are shown below for the periods indicated. The quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not represent
actual transactions.

                                       25HIGH         LOW
                                                           --------     --------
Fiscal 2006
First quarter ended March 31, 2006 ...................     $   2.50     $   0.40
Second quarter ended June 30, 2006 ...................     $   0.40     $   0.40
Third quarter ended September 30, 2006 ...............     $   0.40     $   0.40
Fourth quarter ended December 31, 2006 ...............     $   0.40     $   0.40

Fiscal 2007
First quarter ended March 31, 2007 ...................     $   3.00     $   1.55
Second quarter ended June 30, 2007 ...................     $   3.30     $   1.61
Third quarter ended September 30, 2007 ...............     $   2.24     $   1.20
Fourth quarter ended December 31, 2007 ...............     $   1.55     $   0.95

Fiscal 2008
First quarter ended March 31, 2008 ...................     $   1.20     $   0.59

         On April 11, 2008, the last sale price of our common stock as reported
on the OTCBB was $0.66. As of March 31, 2008, there were approximately 67 record
owners of our common stock.

DIVIDEND POLICY

         We have never paid cash dividends on our common stock. Payment of
dividends will be within the sole discretion of our Board of Directors, subject
to the limitations in the designations, rights and preferences of our Series A
Preferred Stock, and will depend, among other factors, upon our earnings,
capital requirements and our operating and financial condition. At the present
time, our anticipated financial capital requirements are such that we intend to
follow a policy of retaining earnings in order to finance the development of our
business.

         Pursuant to the designations, rights and preferences of our Series A
Preferred Stock each share pays a mandatory dividend at an annual rate of 8.00%,
compounded annually, of the sum of

         o  $0.87 per share (subject to appropriate adjustment in the event of
            any stock dividend, stock split, combination or other similar
            recapitalization affecting such shares), plus

         o  an amount equal to any dividend that has accumulated through such
            date on a share of Series A Preferred Stock has not paid in full
            that are payable in respect of such share, whether or not such
            dividends are declared.

         Dividend payments are to be made in additional shares of Series A
Preferred Stock on February 25 of each year.

         The terms of the Series A Preferred Stock prohibit us from declaring or
paying dividends on our common stock as long as the Series A Preferred Stock is
outstanding.

RECENT SALES OF UNREGISTERED SECURITIES

         None.

ITEM 6. SELECTED FINANCIAL DATA.

         Not applicable to a smaller reporting company.

                                       26ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

OVERVIEW

         Prior to September 6, 2006, we operated as a retailer of jewelry,
framed art and home accessories. On September 28, 2006, we closed the Share
Exchange Agreement with Lotus International whereby we acquired all of the
outstanding common stock of Lotus International in exchange for newly-issued
shares of our common stock. As a result Lotus International became our
wholly-owned subsidiary and Lotus International's stockholders owned the
majority of our voting stock. The acquisition of Lotus International by us was
accounted for as a reverse merger because on a post-merger basis, the former
stockholders of Lotus International held a majority of our outstanding common
stock on a voting and fully-diluted basis. As a result, Lotus International is
deemed to be the acquirer for accounting purposes.

         Additionally, on September 6, 2006, Lotus International entered into
the Contractual Arrangements with Lotus East whereby the stockholders of Lotus
East transferred all operating, voting and control to Lotus. The acquisition of
the Lotus International by Lotus is accounted for as a reverse merger because on
a post-merger basis, the former stockholders of Lotus International held a
majority of the outstanding common stock of Lotus on a voting and fully-diluted
basis.

         As a result of the Contractual Arrangements, Lotus East was deemed to
be the acquirer of Lotus International for accounting purposes. Accordingly, the
financial statement data presented herein are those of Lotus East for all
periods prior to our acquisition of Lotus International on September 28, 2006,
and the financial statements of the consolidated companies from the acquisition
date forward.

         Neither Lotus nor Lotus International are engaged in any business or
operations other than pursuant to the terms of the various Contractual
Arrangements with Lotus East as described elsewhere in this report. As such, we
are completely dependent on the Contractual Arrangements. We do not generate any
revenues and have no assets. Pursuant to the requirements of Financial
Accounting Standards Board (FASB) Interpretation No. 46R "Consolidation of
Variable Interest Entities" ("FIN 46R"), under generally accepted accounting
principles Lotus East which are deemed to be variable interest entities ("VIEs")
we are required to consolidate the financial statements of Lotus East with our
financial statements. Accordingly, and as described elsewhere in this report,
the assets and liabilities at December 31, 2007 and 2006 and the results of
operations for 2007 and 2006 are those of Lotus East. All of those assets and
operations are located in the PRC and the Contractual Arrangements are subject
to enforcement under the laws of the PRC. If we are unable to enforce any legal
rights we may have under these contracts or otherwise, our ability to continue
as a going concern is in jeopardy. In addition, the terms of these contracts
expire in September 2016 and there are no assurances these agreements will be
renewed. If the Contractual Arrangements are not renewed or are significantly
modified, unless we have expanded our business and operations, of which there
are no assurances, we will in all likelihood be forced to cease our operations.

         When used in this section, and except as may be set forth otherwise,
the terms "we," "us," "ours," and similar terms includes Lotus and its
subsidiary Lotus International as well as Lotus East.

                                       27RESULTS OF OPERATIONS

FOR 2007 VERSUS 2006

         TOTAL REVENUES

         Total revenues for 2007 were $56,873,115 as compared to $36,207,689 for
2006, an increase of $20,665,426 or approximately 57%. For 2007 and 2006, net
revenues consisted of the following:

                                              2007             2006
                                          -----------      -----------
         Wholesale ..................     $41,651,106      $25,430,069
         Retail .....................       3,471,960        3,532,623
         Other revenues .............      11,750,049        7,244,997
                                          -----------      -----------
         Total Revenues .............     $56,873,115      $36,207,689
                                          ===========      ===========

         o For 2007, wholesale revenues increased by $16,221,037 or
approximately 64%. The significant increase in tangible product revenues is
mainly attributed to continued strong sales of our best selling product,
VALSARTAN Capsules, a medicine for primary hypertension or high blood pressure.
Additionally, we start various distributing third party manufactured
pharmaceutical products through our existing sale network. Furthermore, a
significant increase in wholesale revenues is attributed to the reversal of a
sales return allowance of approximately $2,200,000 originally recorded in 2006,
as discussed below.

         o For 2007, retail revenues decreased by $60,663 or approximately 2%.
The slight decrease in retail revenue was due to decreased sales in traditional
Chinese medicine through our retail channel. As part of our strategic plan, we
gradually reduced our Chinese medicine inventory level in 2007 as the quality of
traditional Chinese medicine stored at our retail location is more difficult to
control. A portion of our Chinese medicine inventory was sold at a lower price
as part of the inventory reduction effort.

         o For 2007, other revenues increased by $4,505,052, or approximately
62%. The significant increase in other revenues is attributed to the following:

                                              2007             2006
                                          -----------      -----------
         Leasing revenues ...........     $   859,288      $   696,637
         Third-party manufacturing ..       9,482,572        4,855,402
         Advertising revenues .......         601,335          571,293
         Research and development and
         lab testing services .......         806,854        1,121,665
                                          -----------      -----------
         Total other revenues .......     $11,750,049      $ 7,244,997
                                          ===========      ===========

         o During 2007, we subleased more of our counter spaces to third parties
and increased the lease amount at certain sublease locations. As a result , our
leasing revenue increased in 2007 as compared to 2006.

         o During 2007, the number of our third party contract manufacturing
projects have increased significantly. In connection with third-party
manufacturing, the customer supplies the raw materials and we are paid a fee for
manufacturing their product. As a result of increased third party contract
manufacturing projects in 2007, our third-party manufacturing revenues increased
by $4,627,170 or approximately 95%.

                                       28o Our revenue from the advertisement contract whereby we receive
approximately $50,000 per month for the lease of counter and other space at our
retail locations remained materially consistent in 2007. We expect this revenue
to increase in the future as we sign similar contracts.

         o In each of 2007 and 2006, we performed research and development and
lab testing projects for various third parties and performed drug testing and
analysis. The number of research and development and lab testing projects
decreased in 2007 as compared to 2006, our revenue from research and development
and lab testing services decreased accordingly.

         COST OF SALES

         Cost of sales includes raw materials, packing materials, shipping, and
manufacturing costs, which includes allocated portion of overhead expenses such
as utilities and depreciation directly related to product production. For 2007,
cost of sales amounted to $33,678,963, or approximately 59.2% of total net
revenues, as compared to $26,129,687 or approximately 72.2% of total revenues
for 2006. The decrease in costs of sales as a percentage of total net revenues
was primarily due to a 54% increase in third-party manufacturing revenues. We do
not incur raw material costs in connection with the manufacture of third party
products and receive a higher gross profit margin. Additionally, in 2007, we
reduced our reserve for obsolete inventory by approximately $247,000 and
accordingly, reduced our cost of sales by $247,000.

         GROSS PROFIT

         Gross profit for 2007 was $23,194,152, reflecting an overall margin of
approximately 40.8% as compared to $10,078,002 or approximately 27.8% for 2006.
The increase in gross profit margin is attributable to decrease in cost of sales
as percentage of total net revenue. Although we recognized higher than average
gross profits during 2007, there could be no assurances that we will continue to
recognize similar gross profit margin in the future.

         TOTAL OPERATING EXPENSES

         Total operating expenses for 2007 were $11,885,859, an increase of
$6,276,701, or approximately 112%, from 2006. This increase included the
following:

         o Selling expenses. For 2007, selling expenses amounted to $6,460,206
as compared to $3,030,421 for 2006, an increase of $3,429,785 or approximately
113%. This increase is attributable to a $615,000 increase in sales commissions
and bonuses provided to our sales managers and representatives as incentives.
Additionally, we contracted an advertisement and planning company in Beijing for
approximately $2 million to promote our products and brand name recognition. We
expect our selling expenses will continue to increase as our revenues increase
and expect to spend increased funds on adverting and promotion of our products
as well as sales training.

         o Research and development. For 2007, research and development costs
amounted to $2,411,651 as compared to $387,337 for 2006, an increase of
$2,024,314. This increase is primarily attributable to the research and
development agreements Lotus East entered into in 2007 with third parties for
the design, research and development of designated pharmaceutical projects for
Lotus East. As part of the agreements, Lotus East paid approximately $3,200,000
(RMB 24,000,000) to these parties and recognized $2,411,651 as expense during
2007.

         o General and administrative. For 2007, general and administrative
expenses were $3,014,002 as compared to $2,191,400 for 2006, an increase of
$822,602, or approximately 38% as summarized below:

                                       292007           2006
                                              ----------     ----------
         Salaries and related benefits ...    $1,457,501     $1,012,438
         Amortization ....................       140,471        183,613
         Depreciation ....................        10,550         22,102
         Rent ............................       242,856        206,965
         Travel and entertainment ........       284,357        164,804
         Professional fees ...............       250,472        105,081
         Other ...........................       627,795        496,397
                                              ----------     ----------
         Total ...........................    $3,014,002     $2,191,400
                                              ==========     ==========

         The changes in these expenses from 2007 as compared to 2006 included
the following:

         o Salaries and related benefits increased $445,063 or 44% primarily due
the increase in compensation of executive officers and directors and the
increased use of our part time employees,

         o Amortization of our manufacturing rights decreased by $ 43,142 or 24%
primarily due to a decrease in Valsartan manufacturing right, which was fully
amortized in 2006, of approximately $95,000 and partially offset by an increase
in amortization of revenue rights of approximately $44,000,

         o Depreciation decreased by $11,552 or approximately 52.3% primarily
due to certain office fixed assets were fully depreciated in 2006,

         o Rent increased by $35,891 or approximately 17.3% primarily due to an
unfavorable change in currency exchange rate,

         o Travel and entertainment expenses increased by $119,553 or 73% due to
increased sales-related travel,

         o Professional fees increased by $145,391 or 138% due to an increase in
accounting and legal fees related to our reporting obligations under Federal
securities laws, and

         o Other selling, general and administrative expenses, which includes
utilities, office supplies and expenses increased by $131,398 or 27% primarily
due to increase in office expenses as well as increase in the cost of directors
and officers insurance.

         INCOME FROM OPERATIONS

         We reported income from operations of $11,308,293 for 2007 as compared
to income from operations of $4,468,844 for 2006, an increase of $6,839,449 or
approximately 153%. This increase is attributable to our higher net revenues in
2007 and greater gross profit margin which was offset by increased operating
expenses.

         TOTAL OTHER INCOME (EXPENSE)

         For 2007, total other income excluding interest expense amounted to
$1,947,570 as compared to $0 for 2006, an increase of $1,947,570. This change is
primarily attributable to a one-time gain of $2,160,795 from the forgiveness of
income and value added taxes and $102,154 of interest income from our cash
deposits which was offset by one-time debt issuance costs of $205,379 and a
one-time registration rights penalty of $110,000, both associated with the
issuance of secured convertible notes in a financing transaction in 2007.

                                       30Interest expense increased $2,038,735 in fiscal 2007 from 2006.
Included in 2007 interest expense is $1,458,484 of a non-cash expense for the
amortization of debt discount related to these secured convertible promissory
notes, as well as $370,417 of interest associated with those notes which were
satisfied in February 2008. Interest expense in 2007 also included $209,834 of
interest paid to related parties on loans made to Lotus East as compared to
$325,824 paid in 2006.

         NET INCOME, OTHER COMPREHENSIVE INCOME AND COMPREHENSIVE INCOME

         As a result of these factors, we reported net income of $11,217,128 for
2007 as compared to $4,143,020 for 2006. In 2007 we reported an unrealized gain
on foreign currency translation of $1,480,352, an increase of $1,152,784, or
approximately 352%, from 2006. We report in U.S. dollars, but the functional
currency of Lotus East is the RMB. Translation adjustments result from the
process of translating the local currency financial statements into U.S.
dollars, with the average translation rates applied to our income statement of
7.6172 RMB to $1.00 in 2007. As a result of this non-cash gain, we reported
comprehensive income of $12,697,480, or basic net income per common share of
$0.27, for 2007 as compared to $4,470,588, or basic net income per common share
of $0.10 for 2006.

LIQUIDITY AND CAPITAL RESOURCES

         Liquidity is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations and otherwise operate on
an ongoing basis.

         At December 31, 2007, we had a cash balance of $4,557,957.
Substantially all of this cash is deposited in financial institutions in China.

         Our working capital position increased $16,236,314 to $24,652,137 at
December 31, 2007 from $8,415,823 at December 31, 2006. This increase in working
capital is primarily attributable to increases of approximately $2.47 million
in cash, approximately $13.1 million in accounts receivable and approximately
$757,000 in prepaid expenses as well as reductions of approximately $1.475
million in value-added and service taxes payable and approximately $602,000 due
to related parties offset a decrease of approximately $196,000 in advances from
customers and an increase of approximately $2.6 million on convertible debt,
net.

         The increase in accounts receivable at December 31, 2007 reflects our
increased sales during 2007. At December 31, 2007, we maintain an allowance for
doubtful accounts on accounts receivable balances of $548,083 as compared to
$539,627 at December 31, 2006 and reflects our best estimate of probable losses.
In determining the allowance for doubtful accounts, our management reviews our
accounts receivable aging as well as the facts and circumstances of specific
customers who may indicate the collection of specific amounts are at risk. As is
customary in the PRC, we extend relatively long payment terms to our customers.
Our terms of sale generally require payment within four months to a year, which
is considerably longer than customary terms offered in the United States,
however, we believe that our terms of sale are customary amongst our competitors
for a company our size within our industry. We also occasionally offer
established customers longer payment terms on new products as an incentive to
purchase these products, which has served to further increase the average days
outstanding for accounts receivable. As the market for these new products is
established, we will discontinue offering this sales incentive. Occasionally we
will request a customer to prepay an order prior to shipment. At December 31,
2007 our balance sheet reflected advances from customers of $34,531 as compared
to $231,340, a decrease of $196,809, or approximately 85%, from December 31,
2006 due to product delivery timing difference.

                                       31At December 31, 2007, our inventories of raw materials and finished
goods totaled $3,410,739, an increase of approximately 9% from December 31,
2006. Our inventory levels may vary based upon our production schedule and the
timing of shipments. We expect to maintain higher inventory levels to
accommodate for anticipated future sales growth as well as a wider variety of
products.

         From time to time we have obtained either working capital advances from
our executive officers or loans from these officers, employees and other related
parties. The following table provides comparative balances at December 31, 2007
to December 31, 2006:

                                                         DECEMBER 31,
                                                      2007          2006       DIFFERENCE
                                                  -----------   -----------   ------------
Due from related party .......................    $         0   $ 1,826,626   $(1,826,626)
Due to related parties - current liabilities .    $   323,178   $   925,484   $  (602,306)
Due to related parties - long term liabilities    $   738,300   $   863,447   $  (125,147)
Notes payable - related parties ..............    $ 4,738,508   $ 4,729,880   $     8,628

         At December 31, 2006, an entity owned by our CEO owed us $1,826,626 for
funds lent to this entity. During 2007, this related party repaid approximately
$1,061,000 of these advances and on December 31, 2007, our CEO agreed to offset
the remaining balance due under a note payable to related party in the amount of
approximately $814,000 which represented funds which had been advanced to us
from time to time for working capital.

         At December 31, 2007 and 2006, due to related parties - current and
long term reflected amounts due for working capital advances made to us as well
as a portion of the assignment of the fee payable under the agreement with our
CEO, Mr. Liu, related to Wu Lan Cha Bu Emergency Hospital. See Part III, Item
13. Certain Relationships and Related Transactions appearing later in this
report. During 2007 we paid $680,797 of these advances and recorded interest of
$58,774 on those working capital advances. During 2007, we also paid $194,709 of
the assignment fees payable. Additional changes in due to related party balances
is attributable to foreign currency translations.

         Notes payable - related parties reflect balances due various related
parties for long-term notes. During 2007, interest expense related to these
notes was $209,834.

         Net cash used in operating activities for 2007 was $850,455 as compared
to net cash provided by operating activities of $4,834,642 for 2006. For 2007,
net cash used in operating activities was attributable primarily to our net
income of $11,217,128, a decrease in advances from customers of $204,267 and
increases in accounts payable and accrued expenses of $27,266 and unearned
revenue of $71,402 together with a reduction in valued-added and service taxes
payable of $608,526, which was offset by cash used to fund an increase in
accounts receivable of $9,746,076, inventories of $58,942, prepaid and other
current assets of $714,013 and non-cash items totaling $2,033,479. For the year
ended December 31, 2006, net cash provided by operating activities was
attributable primarily to our net income of $4,143,020, the add back of
depreciation and amortization of $581,564, a decrease in inventory balance of
$3,928,236, an increase in taxes payable of $1,999,675, and an increase in other
liabilities of $446,660 offset by a net increase in accounts receivable of
$6,189,358 (net of increases in allowance for doubtful accounts and sales
returns of $2,732,889) and prepaid expenses of $75,155.

         Net cash provided by investing activities for 2007 was $679,237 as
compared to $1,242,262 for 2006. In 2007, we purchased factory equipment for
$381,772 as compared to $1,480 spent in 2006 and, in 2007 we collected amounts
due to us by a related party of $1,061,009 as compared to $1,243,742 collected
in 2006.

                                       32Net cash provided by financing activities was $2,411,093 for 2007 and
reflects proceeds of $3,459,351 from issuance of debt net of repayments of
related party advances and debt issuance costs of $1,048,258. Net cash used in
financing activities was $4,193,487 for 2006 and was attributable to payments on
related party advances and loans.

         We reported a net increase in cash for 2007 of $2,239,875 for 2007 as
compared to $1,928,222 for 2006.

         In 2007, we lent approximately $2 million of the net proceeds received
from the sale of $3 million principal amount convertible debt to Lotus East,
which they used as working capital. These advances are unsecured and interest
free. In 2008, we used a portion of the proceeds from the sale of equity to
satisfy these notes, lent Lotus East an additional $1.6 million and retained the
balance to fund our operating expenses. We have no operations other than the
Contractual Arrangements with Lotus East and, accordingly, we are dependent upon
the quarterly service fees due us to provide cash to pay our operating expenses.
Such payments have not been tendered to us and those funds are being retained by
Lotus East to fund their operations. At December 31, 2007 Lotus East owned us
approximately $9 million for such fees and we do not know when such funds will
be paid to us. Our CEO is also the CEO and principal shareholder of Lotus East.
Accordingly, we are solely reliant upon his judgment to ensure that the funds
advanced to Lotus East are repaid to us. If these funds should not be repaid, or
if Lotus East should continue to withhold payment of the quarterly service fee
due us under the Contractual Arrangement, it is possible that we will not have
sufficient funds to pay our operating expenses in future periods.

         Other than our existing cash we presently have no other alternative
source of working capital. We currently have no material commitments for capital
expenditures but believe that our working capital is sufficient to fund our
current operations for approximately the next 12 months. Lotus East has
historically funded its capital expenditures from their working capital and have
advised us that they believe this capital is sufficient for their current needs.
However, the ability of Lotus East to raise any significant capital to expand
their operations is very limited. We believe that it is in our best long term
interests to assist Lotus East in their growth plans. Accordingly, it is likely
that we will seek to raise working capital to fund the expansion of its
production line, upgrade of its manufacturing facilities and technologies,
expand its retail operations, and fund research and development projects as well
as providing working capital necessary for its ongoing operations and
obligations. No assurances can be given that we will be successful in obtaining
additional capital, or that such capital will be available in terms acceptable
to our company.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Our discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses. On an ongoing basis, we evaluate our estimates and judgments,
including those related to accrued expenses, fair valuation of stock related to
stock-based compensation and income taxes. We based our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

                                       33REVENUE RECOGNITION

         Product sales. Product sales are generally recognized when title to the
product has transferred to customers in accordance with the terms of the sale.
We recognize revenue in accordance with the Securities and Exchange Commission's
(SEC) Staff Accounting Bulletin (SAB) No. 101, " Revenue Recognition in
Financial Statements " as amended by SAB No. 104 (together, "SAB 104"), and
Statement of Financial Accounting Standards (SFAS) No. 48 " Revenue Recognition
When Right of Return Exists. " SAB 104 states that revenue should not be
recognized until it is realized or realizable and earned. In general, we record
revenue when persuasive evidence of an arrangement exists, services have been
rendered or product delivery has occurred, the sales price to the customer is
fixed or determinable, and collectability is reasonably assured.

         SFAS No. 48 states that revenue from sales transactions where the buyer
has the right to return the product shall be recognized at the time of sale only
if the seller's price to the buyer is substantially fixed or determinable at the
date of sale, the buyer has paid the seller, or the buyer is obligated to pay
the seller and the obligation is not contingent on resale of the product, the
buyer's obligation to the seller would not be changed in the event of theft or
physical destruction or damage of the product, the buyer acquiring the product
for resale has economic substance apart from that provided by the seller, the
seller does not have significant obligations for future performance to directly
bring about resale of the product by the buyer, and the amount of future returns
can be reasonably estimated.

         We recognize revenue for the sale of pharmaceutical products and for
payments received, if any, under reimbursement of development costs as follows:

         Product Sales. Revenue from product sales, net of estimated provisions,
is recognized when there is persuasive evidence that an arrangement exists,
delivery has occurred, the selling price is fixed or determinable, and
collectability is reasonably probable. Our customers consist of pharmaceutical
wholesalers who sell directly into the retail channel, hospitals, and retail
customers. Provisions for sales discounts, and estimates for chargebacks, and
product returns are established as a reduction of product sales revenue at the
time revenues are recognized, based on historical experience adjusted to reflect
known changes in the factors that impact these reserves. Factors include current
contract prices and terms, estimated wholesaler inventory levels, remaining
shelf life of product, and historical information for similar products in the
same distribution channel. These revenue reductions are generally reflected
either as a direct reduction to accounts receivable through an allowance, or as
an addition to accrued expenses if the payment is due to a party other than the
customer.

Product returns.

         We account for sales returns in accordance with Statements of Financial
Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of Return
Exists, by establishing an accrual in an amount equal to its estimate of sales
recorded for which the related products are expected to be returned. We
determine the estimate of the sales return accrual primarily based on historical
experience regarding sales returns, but also by considering other factors that
could impact sales returns. These factors include levels of inventory in the
distribution channel, estimated shelf life, product discontinuances, and price
changes of competitive products, introductions of generic products and
introductions of competitive new products. In general, for wholesale sales, we
provide credit for product returns that are returned six months prior to and up
to six months after the product expiration date. Upon sale, we estimate an
allowance for future product returns. We provide additional reserves for
contemporaneous events that were not known and knowable at the time of shipment.

                                       34In order to reasonably estimate future returns, we analyzed both
quantitative and qualitative information including, but not limited to, actual
return rates, the level of product manufactured by us, the level of product in
the distribution channel, expected shelf life of the product, current and
projected product demand, the introduction of new or generic products that may
erode current demand, and general economic and industry wide indicators. We also
utilize the guidance provided in SAB 104 in establishing our return estimates.

         Other revenues. Other revenues consist of (i) rental income received
for the lease of retail space to various retail merchants; (ii) advertising
revenues from the lease of counter space at our retail locations; (iii) rental
income from the lease of retail space to licensed medical practitioners; and
(iv) revenues received by us for research and development projects. We recognize
revenues upon performance of such funded research. We recognize revenues from
leasing of space as earned from contracting third parties. Revenues received in
advance are reflected as deferred revenue on the accompanying balance sheets.
Additionally, we receive income from the sale of developed drug formulas. Income
from the sale of drug formulas are recognized upon performance of all of our
obligations under the respective sales contract and are included in other income
on the accompanying consolidated statement of operations.

ACCOUNTS RECEIVABLE

         Accounts receivable are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all outstanding
amounts on a monthly basis. Management judgment and estimates are made in
connection with establishing the allowance for doubtful accounts. Specifically,
we analyze the aging of accounts receivable balances, historical bad debts,
customer concentrations, customer credit-worthiness, current economic trends and
changes in our customer payment terms. Significant changes in customer
concentration or payment terms, deterioration of customer credit-worthiness or
weakening in economic trends could have a significant impact on the
collectability of receivables and our operating results. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. The
reserve for bad debts increased to $548,083 at December 31, 2007, up from
$539,627 at December 31, 2006. This increase is due to the increasing level of
sales revenue and its corresponding exposure. At December 31, 2007, accounts
receivable, net of allowance for doubtful accounts and sales returns, amounted
to $20,430,827.

INVENTORIES

         Inventories are stated at the lower of cost or market with cost
determined under the weighted-average method. Inventory consists of finished
capsules, liquids, finished oral suspension powder and other western and
traditional Chinese medicines and medical equipment. At least on a quarterly
basis, we review our inventory levels and write down inventory that has become
obsolete or has a cost basis in excess of its expected net realizable value or
is in excess of expected requirements. Inventory levels are evaluated by
management relative to product demand, remaining shelf life, future marketing
plans and other factors, and reserves for obsolete and slow-moving inventories
are recorded for amounts which may not be realizable.

PROPERTY AND EQUIPMENT

         Property and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements 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 year of disposition. In accordance with Statement

                                       35of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", we examine the possibility of decreases in
the value of fixed assets when events or changes in circumstances reflect the
fact that their recorded value may not be recoverable.

         Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets. The useful lives for property and equipment are as
follows:

         Buildings and leasehold improvement  20 to 40 years
         Manufacturing equipment ...........  10 to 15 years
         Office equipment and furniture ....  5 to 8 years

INCOME TAXES

         Taxes are calculated in accordance with taxation principles currently
effective in the United States and PRC. We account for income taxes using the
liability method. 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 as
income in the period that includes the enactment date. A valuation allowance is
provided for the amount of deferred tax assets that, based on available
evidence, are not expected to be realized.

RECENT ACCOUNTING PRONOUNCEMENTS

         In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" (SFAS 157), which provides guidance for how companies should
measure fair value when required to use a fair value measurement for recognition
or disclosure purposes under generally accepted accounting principle (GAAP).
SFAS 157 is effective for fiscal years beginning after November 15, 2007. The
adoption of SFAS 157 did not have a material impact on our financial statements.

         In December 2006, FASB Staff Position No. EITF 00-19-2, "Accounting for
Registration Payment Arrangements," was issued. The FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with SFAS
No. 5, "Accounting for Contingencies." We believe that our current accounting is
consistent with the FSP. Accordingly, adoption of the FSP had no effect on our
financial statements.

         In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115", under which entities will now be permitted to measure many
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The adoption of SFAS 159 did not have a material impact
on our financial statements.

         In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141R, Business Combinations (SFAS 141R) and Statement of Financial
Accounting Standards No. 160, Accounting and Reporting of Non-controlling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS
160). These two standards must be adopted in conjunction with each other on a
prospective basis. The most significant changes to business combination
accounting pursuant to SFAS 141R and SFAS 160 are the following: (a) recognize,

                                       36with certain exceptions, 100 percent of the fair values of assets acquired,
liabilities assumed and non-controlling interests in acquisitions of less than a
100 percent controlling interest when the acquisition constitutes a change in
control of the acquired entity, (b) acquirers' shares issued in consideration
for a business combination will be measured at fair value on the closing date,
not the announcement date, (c) recognize contingent consideration arrangements
at their acquisition date fair values, with subsequent changes in fair value
generally reflected in earnings, (d) the expensing of all transaction costs as
incurred and most restructuring costs, (e) recognition of pre-acquisition loss
and gain contingencies at their acquisition date fair values, with certain
exceptions, (f) capitalization of acquired in-process research and development
rather than expense recognition, (g) earn-out arrangements may be required to be
re-measured at fair value and (h) recognize changes that result from a business
combination transaction in an acquirer's existing income tax valuation
allowances and tax uncertainty accruals as adjustments to income tax expense. We
anticipate these new standards will significantly affect our accounting for
future business combinations following adoption on January 1, 2009.

         In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities-- an amendment of FASB Statement
No. 133 " ("FAS 161"). FAS 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. The guidance in FAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. This
Statement encourages, but does not require, comparative disclosures for earlier
periods at initial adoption. We are currently assessing the impact of FAS 161.

OFF BALANCE SHEET ARRANGEMENTS

         As of the date of this report, we do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors, however we have agreed to guarantee
loans for Lotus East, if required. As of the date of this report, we have not
entered into any guarantee arrangements with Lotus East. The term "off-balance
sheet arrangement" generally means any transaction, agreement or other
contractual arrangement to which an entity unconsolidated with us is a party,
under which we have: (i) any obligation arising under a guarantee contract,
derivative instrument or variable interest; or (ii) a retained or contingent
interest in assets transferred to such entity or similar arrangement that serves
as credit, liquidity or market risk support for such assets.

CERTAIN EFFECTS OF PRODUCT RETURNS ON OUR FINANCIAL STATEMENTS

         As described elsewhere herein, our return policy typically allows
product returns for products within a 12 month window from six months prior to
the expiration date and up to six months after the expiration date of a product.
Under generally accepted accounting principles, we are required to estimate the
level of sales which will ultimately be returned pursuant to our return policy,
and record a related reserve at the time of sale which is reflected on our
balance sheet as a deduction from accounts receivable. The amount of these
reserves is deducted from our gross sales to determine our net revenues for the
period. The amount of actual product returns could be either higher or lower
than the amounts we accrued and any changes in our estimates are recorded in the
income statement, as either an increase or decrease in our gross sales to
determine our net revenues for the period, in the period of the change. If we
over or under estimate the quantity of product which will ultimately be
returned, there may be a material impact to our financial statements.

                                       37Historically, approximately 65% of our total revenues consist of sales
of four principal products and product returns from these principal products, as
well as our other products, have been immaterial. Accordingly, based upon our
experience we historically do not record a reserve at the time of sale and there
have been no accounting entries related to our product return policy which have
reduced our gross revenues or had any material impact on our financial
statements

         During the fourth quarter of fiscal 2006, however, we sold
approximately $2,300,000 of products which were either less popular products or
products that were nearing their expiration dates to existing customers at
reduced prices in a one-time transaction. The customers had the right to return
these products pursuant to our product return policy. Because of the one-time
nature of the transaction and the age of the products sold, we did not believe
that the customary assumptions which we utilize when determining the amount of
reserve to establish for product returns were appropriate as it was more than
remotely possible that all or substantially all of the products would be
returned by the customer and we would not collect any revenues from this
transaction. Accordingly, we believed that it was prudent to fully reserve the
amount of the sales and at December 31, 2006, we increased our allowance for
sales returns by $2,300,000 which equaled 100% of the amount of revenues
recorded in the transaction. This accounting treatment had the effect of
reducing our net revenues by $2,300,000 during the fourth quarter of fiscal
2006. However, we recorded cost of sales related to this product of
approximately $2,200,000 during the year fiscal 2006, which had the effect of
increasing our cost of sales during the year by that amount, and correspondingly
reducing our gross profit and income from operations. Based on management's
estimate, during 2006 we wrote off inventory that we deemed obsolete.

         During the year ended December 31, 2007 we collected substantially all
of the amounts billed to these customers for the product. Accordingly, we
reduced our allowance for sales returns at during 2007 by approximately
$2,200,000 recorded as a reserve at December 31, 2006. The collection of this
receivable had the effect of increasing our net revenues during 2007 by
$2,200,000, even through the sales of these products were actually made during
the fourth quarter of fiscal 2006. Because we recorded the costs associated with
these products in our cost of sales during fiscal 2006, both our gross profit
margin and income from operations for the year ended December 31, 2007 increased
by $2,200,000.

RECENT CAPITAL RAISING TRANSACTION

         On February 25, 2008, we entered into a Convertible Redeemable
Preferred Share and Warrant Purchase Agreement by and among our company, Dr. Liu
Zhong Yi and Mrs. Song Zhenghong, and certain accredited investors pursuant to
which we sold the purchasers 5,747,118 shares of our Series A Convertible
Redeemable Preferred Stock and warrants to purchase 2,873,553 shares of our
common stock in a private placement pursuant to Regulation D under the
Securities Act of 1933, for the aggregate purchase price of $5 million. Net
proceeds, exclusive of expenses of placement, were $4.6 million after we paid
fees of $400,000 to Maxim Group, LLC, our placement agent for the offering. We
used approximately $2,576,557 of the net proceeds to repay in full all of our
outstanding obligations under our 14% Secured Convertible Notes due February
2008. We let $1.6 million to Lotus East to fund its operations and we are using
the remainder of the net proceeds for working capital and general corporate
purposes.

         Each of the shares of Series A Convertible Redeemable Preferred Stock
is convertible into one share of our common stock, subject to proportional
adjustment for stock splits, dividends and similar corporate events. Holders of
preferred shares may not convert the Series A Convertible Redeemable Preferred

                                       38Stock if the conversion would result in the holder beneficially owning more than
4.99% of our outstanding common shares. This limitation may be waived by a
holder on not less than 61 days written notice to us.

         The shares of Series A Convertible Redeemable Preferred Stock pay an 8%
dividend annually, which is payable annually on February 25 of each year in
additional shares of Series A Convertible Redeemable Preferred Stock and the
Series A Convertible Redeemable Preferred Stock also pay any dividend paid on
the common shares on an as converted basis. For a period of 90 days after
February 25, 2010, the Series A Convertible Redeemable Preferred Stock may be
redeemed at the option of the purchasers at the redemption price of $0.87 per
share (as adjusted for stock splits, stock dividends, reclassification and the
like), and no other shares of our capital stock may be redeemed prior to any
redemption of the Series A Convertible Redeemable Preferred Stock.

         The holders of the shares of Series A Convertible Redeemable Preferred
Stock vote with holders of the common stock on an as converted basis, except
that the holders of the Series A Convertible Redeemable Preferred Shares are not
entitled to vote for the election of our directors. We are prohibited from
taking certain corporate actions without the approval of the holders of a
majority of the Series A Convertible Redeemable Preferred Stock outstanding.,
including:

         o  issuing securities senior to the Series A Convertible Preferred
            Stock,

         o  selling substantially all of our assets,

         o  repurchasing securities, or

         o  declaring or paying dividends.

         Under the Certificate of Designation, under certain circumstances the
purchasers have a preemptive right, from the closing date until the conclusion
of a public offering by us, to purchase any equity securities we may offer that
are convertible into or exchangeable or exercisable for shares of our common
stock or its equivalent.

         In the transaction we issued the purchasers five year common stock
purchase warrants to purchase up to 2,873,553 shares of our common stock with an
initial exercise price of $1.20 per share, subject to adjustment pursuant to the
terms of the warrants. Holders of the warrants may not exercise the warrants if
the exercise would result in the holder beneficially owning more than 4.99% of
our outstanding common shares. That limitation may be waived by a holder of the
warrants on not less than 61 days written notice to us.

         We agreed to undertake to file a registration statement within 60 days
following the closing date in order to register the maximum number of common
stock issuable from conversion or exercise of the shares of Series A Convertible
Redeemable Preferred Stock and warrants sold in the offering that is allowable
under applicable federal securities regulations. We are also obligated to have
the registration statement declared effective within 120 days following the
closing date. Otherwise, we are subject to liquidated damages, equal to 1% of
the total conversion price and exercise price for the common stock being
registered under the registration statement, for every 30-day period following
the date that the registration statement should have been effective, prorated
for any period less than 30 days, until either all of common shares registered
under the registration statement have been sold or all such common shares may be
sold in any three month period pursuant to Rule 144 promulgated under the
Securities Act of 1933, whichever is earlier. We must also pay the liquidated
damages up to a maximum of $500,000 if sales cannot be made pursuant to the
registration statement for any reason excepting market conditions.

                                       39In connection with the purchase agreement, Dr. Liu and Mrs. Zhenghong
entered into an escrow agreement with the purchasers and delivered in the
aggregate 7,500,000 shares of our common stock owned by them to an escrow
account. Approximately 2,083,334 of the escrowed shares are being held in escrow
subject to our meeting certain earning targets as set forth below:

         o  the target for 2007 is $8.5 million in net income,

         o  the target for 2008 is 95% of $13.8 million in net income after
            eliminating the effect of non-cash charges associated with the
            offering and adjusting for differences in the exchange rate between
            RMB and US dollars used in our financial statements, and

         o  the target for 2009 is 95% of $17.5 million in net income after
            eliminating the effect of non-cash charges associated with offering
            and adjusting for differences in the exchange rate between RMB and
            US dollars used in our financial statements .

         So long as the shares remain in escrow pursuant to the terms of the
escrow agreement, Dr. Liu and Mrs. Hong retain voting control over the
securities. The escrow shares will be transferred to the purchasers if we do not
meet the earning targets, and released back to stockholders if we do.

         Approximately 416,666 of the escrowed shares is being held in escrow
subject to our listing of our common stock on the NASDAQ Stock Market within 18
months following the closing date. These escrowed shares will be transferred to
the purchasers if the listing is not completed within that time period, and
released back to the stockholders if it is.

         Finally, 5,000,000 of the escrowed shares are held in escrow to ensure
that the purchasers receive their full redemption payments if they choose to
redeem their shares of Series A Convertible Redeemable Preferred Stock. If a
purchaser receives less than the full redemption amount for each preferred share
being redeemed, the purchaser will receive a number of escrowed shares to make
up the difference, based on the then-current market price of the common shares.
Following the end of the redemption period, these escrowed shares, less those
transferred to any purchasers that redeemed their shares of Series A Convertible
Redeemable Preferred Stock, will be released back to the stockholders.

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

         Not applicable to smaller reporting companies.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Please see our financial statements beginning on page F-1 of this
annual report.

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

         None.

ITEM 9A(T). CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

         We maintain "disclosure controls and procedures" as such term is
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In
designing and evaluating our disclosure controls and procedures, our management
recognized that disclosure controls and procedures, no matter how well conceived

                                       40and operated, can provide only reasonable, not absolute, assurance that the
objectives of disclosure controls and procedures are met. Additionally, in
designing disclosure controls and procedures, our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures. The design of any disclosure
controls and procedures is also 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.

         Our management, including our CEO and our CFO, have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this annual report. Based on such evaluation, and as described
in greater detail below, our CEO and CFO have concluded that, as of the end of
the period covered by this Annual Report on Form 10-K, our disclosure controls
and procedures were not effective:

         o to give reasonable assurance that the information required to be
disclosed by us in reports that we file under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and

         o to ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934 is accumulated
and communicated to our management, including our CEO and our Treasurer, to
allow timely decisions regarding required disclosure.

         Management's Report on Internal Control Over Financial Reporting

         Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act. Our management is also required to
assess and report on the effectiveness of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
("Section 404"). Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2007. In making this assessment, we
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control - Integrated Framework. During
our assessment of the effectiveness of internal control over financial reporting
as of December 31, 2007, management identified material weaknesses related to
(i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal
audit functions and (iii) the absence of an Audit Committee as of December 31,
2007, and (iv) a lack of segregation of duties within accounting functions.

         We began preparing to be in compliance with the internal control
obligations, including Section 404, for our fiscal year ending December 31,
2007. Our internal accounting staff was primarily engaged in ensuring compliance
with PRC accounting and reporting requirements for our operating affiliates and
their U.S. GAAP knowledge was limited. As a result, majority of our internal
accounting staff, on a consolidated basis, is relatively inexperienced with U.S.
GAAP and the related internal control procedures required of U.S. public
companies. Although our accounting staff is professional and experienced in
accounting requirements and procedures generally accepted in the PRC, management
has determined that they require additional training and assistance in U.S. GAAP
matters. Management has determined that our internal audit function is also
significantly deficient due to insufficient qualified resources to perform
internal audit functions. Finally, management determined that the lack of an
Audit Committee of our Board of Directors also contributed to insufficient
oversight of our accounting and audit functions.

         In order to correct the foregoing weaknesses, we have taken the
following remediation measures:

                                       41o  In first quarter of 2008, under our CEO and CFO's supervision, we
            have started a new accounting system implementation project to
            improve our financial reporting process. We intend to rely on our
            CFO, a senior financial executive from the U.S. with extensive
            experience in internal control and U.S. GAAP, and together with our
            CEO to oversee and manage the financial reporting process. In
            connection with the new accounting system implementation, we also
            plan to increase training of our accounting staff both accounting
            system and U.S. GAAP related knowledge. Additionally, we also plan
            on hiring additional U.S. GAAP experienced accounting staff in China
            to improve our financial reporting process.

         o  We have committed to the establishment of effective internal audit
            functions, however, due to the scarcity of qualified candidates with
            extensive experience in U.S. GAAP reporting and accounting in the
            region, we were not able to hire sufficient internal audit resources
            before the end of 2007. However, we will increase our search for
            qualified candidates with assistance from recruiters and through
            referrals.

         o  We have started searching for an independent director qualified to
            serve on an audit committee to be established by our Board of
            Directors and we anticipate that our Board of Directors will also
            establish a compensation committee to be headed by one of an
            independent director.

         Due to our size and nature, segregation of all conflicting duties may
not always be possible and may not be economically feasible. However, to the
extent possible, we will implement procedures to assure that the initiation of
transactions, the custody of assets and the recording of transactions will be
performed by separate individuals.

         We believe that the foregoing steps will remediate the material
weaknesses identified above, and we will continue to monitor the effectiveness
of these steps and make any changes that our management deems appropriate. Due
to the nature of these material weaknesses in our internal control over
financial reporting, there is more than a remote likelihood that misstatements
which could be material to our annual or interim financial statements could
occur that would not be prevented or detected.

         A material weakness (within the meaning of PCAOB Auditing Standard No.
5) is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. A significant deficiency is a deficiency, or a
combination of deficiencies, in internal control over financial reporting that
is less severe than a material weakness, yet important enough to merit attention
by those responsible for oversight of the company's financial reporting.

         Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.

Auditor Attestation

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

                                       42Changes in Internal Control over Financial Reporting

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

ITEM 9B. OTHER INFORMATION.

None.

                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

DIRECTORS AND EXECUTIVE OFFICERS

         The following individuals serve as our executive officers and members
of our Board of Directors:

NAME                   AGE    POSITION
----                   ---    --------
Dr. Liu Zhong Yi       47     Chief Executive Officer and Chairman of the Board
Mr. Adam Wasserman     43     Chief Financial Officer
Dr. Ian Ashley         38     Director
Mr. Li Ping            44     Director
Mr. Liu Jin            69     Director
Mr. Mel Rothberg       61     Director
Ms. Caeli Widger       33     Director
Ms. Xian Xuemei        38     Director
Mrs. Song Zhenghong    41     Director and Vice President

         DR. LIU ZHONG YI. Dr. Lui has served a Chairman of the Board and Chief
Executive Officer of Lotus since September 2006 and he has also served in those
positions at Lotus International since founding that company in August 2006. Dr.
Liu is also the Chairman, Deputy Chief Physician and founder of Liang Fang and
founder and General Manager of En Zhe Jia Shi.. As a researcher and medical
student, Dr. Liu excelled in the development of many new drugs in wide use in
China today. While working for the Chinese Government in 1992, he established
the Research Center of Space Flight Biological Engineering Technology, and
continued his renowned research related to incretion diseases. Four years later,
entering the private sector and invigorated by burgeoning capitalism in China,
Dr. Liu started his first pharmaceutical company in Beijing. He earned his
Master's Degree in Beijing hospitals, after doing his undergraduate studies in
Inner Mongolia Medicine College in Inner Mongolia, China He is a majority
stockholder in each of Liang Fang and En Zhe Jia and the spouse of Mrs. Song
Zhenghong.

         ADAM WASSERMAN. Mr. Wasserman has served as Chief Financial Officer for
Lotus since October 2006 under the terms of the consulting agreement with his
firm, CFO Oncall, Inc. Mr. Wasserman devotes approximately 20% of his time to
our company. Since November 1999, Mr. Wasserman has been CEO of CFO Oncall,
Inc., a Weston, Florida based provider of consultant accounting services
specializing in financial reporting, budgeting and planning, mergers and
acquisitions, audit preparation services, accounting, automated systems, banking
relations and internal controls. Mr. Wasserman has also served as the chief
financial officer of Transax International Limited since May 2005, Gold Horse
International, Inc. since July 2007 and China Wind Systems, Inc. since March
2008. Mr. Wasserman has also served as the chief financial officer of
Explorations Group Inc. (January 2002 until December 2005) Colmena Corp. (May
2003 until June 2004) and Genesis Pharmaceuticals Enterprises, Inc. (October
2001 until October 2007), all client companies of CFO Oncall, Inc. From June
1991 to November 1999 he was Senior Audit Manager at American Express Tax and

                                       43Business Services, in Fort Lauderdale, Florida where his responsibilities
included supervising, training and evaluating senior staff members, work paper
review, auditing, maintaining positive client relations, preparation of tax
returns and preparation of financial statements and the related footnotes. From
September 1986 to May 1991, he was employed by Deloitte & Touche, LLP.
During his employment, his significant assignments included audits of public
(SEC reporting) and private companies, tax preparation and planning, management
consulting, systems design, staff instruction, and recruiting. Mr. Wasserman
holds a Bachelor of Administration from the State University of New York at
Albany. He is a CPA (New York) and a member of The American Institute of
Certified Public Accountants and is a director, the treasurer and an executive
board member of Gold Coast Venture Capital Association.

         DR. IAN ASHLEY. Dr. Ashley has been a member of our Board of Directors
since September 2006 and a member of Lotus International's Board of Directors
since August 2006. Previously he worked for Merck & Co in 1990 in Research
and Development with focus on hypertension and calcium channel blockers. He is
ABEM Board Certified in Emergency Medicine after finishing a residency in
Emergency Medicine at Loma Linda University Medical Center in Southern
California. Since 2002, Dr. Ashley has served as Attending Physician at
Providence Hospital in Waco, Texas. Dr. Ashley graduated Summa Cum Laude with
degrees in Chemistry and Biochemistry from Oberlin College before graduating
from Baylor College of Medicine in Houston, Texas in 1996.

         LI PING. Ms. Li has been a member of our Board of Directors since
September 2006 and a member of Lotus International's Board of Directors since
August 2006. Ms. Li served as salesman and deputy manager of the sales
department of Beijing Dongcheng Medicine Wholesale Company from 1984 to 1999.
Since 2000, she served as director of Liang Fang and is responsible for medicine
and clinic promotions. Ms. Li graduated from the Beijing Medical School,
apothecary.

         LIU JIN. Mr. Liu has been a member of our Board of Directors since
September 2006 and a member of Lotus International's Board of Directors since
August 2006. Mr. Liu served as an accountant for the Finance Bureau of
Liangcheng County from 1958 to1970 and the as accountant and accountant general
for Finance Bureau of Chayouqiqnqi of Inner Mongolia. Since 2000, Mr. Liu has
served as a director of Liang Fang and has been responsible for production cost
control. Mr. Liu graduated from the Middling Finance School of Wulanchabu City
of Inner Mongolia in 1958.

         MELVIN ROTHBERG. Mr. Rothberg has been a member of our Board of
Directors since September 2006 and a member of Lotus International's Board of
Directors since August 2006. Mr. Rothberg has, over the last 30 years,
participated in the development of the South Florida bioscience industry and
since2002 he has been Chairman of the Southeast Chapter of Bioflorida. Since
October 2005, Mr. Rothberg has been Chairman and CEO of Advanced Processing and
Imaging. Additionally Mr. Rothberg is interim CEO of Dharma Biomedical and CEO
of Rothberg Associates, Inc. From March 1998 to April 2005, Mr. Rothberg was
Executive Vice President, Operations of Viragen Inc., Plantation, Florida (VRA:
AMEX) and Director of Viragen International Inc. (VGNI: OTCBB) and Viranative AB
(Sweden), where he was responsible for manufacturing, regulatory, business
development, marketing and sales of Viragen's lead drug, Multiferon. Prior to
Viragen, Mr. Rothberg was Vice President of Manufacturing and Business
Development for Althin Medical a Swedish publicly traded company focused on the
hemodialysis machine and disposables market. He previously held multiple roles
with a subsidiary of Dow Chemical and Cordis Dow and was instrumental in
assisting in the sale ofDow's dialysis division to Althin Medical. He held both
international and domestic positions within Dow's subsidiary CD Medical
including responsibility for offices in Australia, Singapore and Japan and was
Managing Director of Cordis Dow's European manufacturing operations located in
the Netherlands. Mr. Rothberg has a BE Chemical Engineering degree from
Vanderbilt University and an MBA from Nova University.

                                       44Mr. Rothberg has advised us that he intends to resign from our Board of
Directors following the filing of this annual report. There are no disagreements
between our company and Mr. Rothberg.

         CAELI WIDGER. Ms. Widger has been a member of our Board of Directors
since September 2006 and a member of Lotus International's Board of Directors
since August 2006. Since April 2000, Ms. Widger has directed large-scale
staffing projects, ranging from sales force expansion to executive searches, for
young technology companies on both coasts of the U.S. She is currently managing
a talent search for Mimeo.com (www.mimeo.com), an international print-on-demand
solutions provider. Ms. Widger co-directs The Sackett School, a renowned
creative writing institute in New York City (www.sackettworkshop.com). She holds
a BA from Wellesley College and an MFA from the University of Montana.

         XIAN XUEMEI. Ms. Xian has been a member of our Board of Directors since
December 2006. Ms. Xian served as clinical pharmacist of Chengdu Spaceflight
Hospital from 1997 to 2000. Since 2001, she has been working with Liang Fang and
is responsible for medical quality inspections. Ms. Xian graduated from the
School of Pharmacy, West China University of Medical Sciences with a bachelor's
degree in 1996 with excellent academic results.

         SONG ZHENGHONG. Mrs. Song has been a member of our Board of Directors
since September 2006 and a member of Lotus International's Board of Directors
since August 2006. Since 1991, Mrs. Song has been a teacher, assistant teacher
and senior teacher at Yungang Second Middle School in Fengtai, Beijing. She is a
minority stockholder in each of Liang Fang and En Zhe Jia and the wife of Dr.
Liu.

         There are no family relationships between any of the executive officers
and directors, except as set forth above. Each director is elected at our annual
meeting of stockholders and holds office until the next annual meeting of
stockholders, or until his successor is elected and qualified.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to us under Rule 16a-3(d) of the Securities Exchange Act during 2007
and Forms 5 and amendments thereto furnished to us with respect to 2007, as well
as any written representation from a reporting person that no Form 5 is
required, we are not aware that any officer, director or 10% or greater
stockholder failed to file on a timely basis, as disclosed in the aforementioned
Forms, reports required by Section 16(a) of the Securities Exchange Act during
2007, except as follows:

         o  Dr. Liu Zhong Yi did not timely file on one occasion the receipt of
            30,000 shares of our common stock issued as compensation for his
            services as a director,

         o  Dr. Ian Ashley did not timely file on one occasion the receipt of
            30,000 shares of our common stock issued as compensation for his
            services as a director,

         o  Mr. Li Ping did not timely file on one occasion the receipt of
            30,000 shares of our common stock issued as compensation for his
            services as a director,

         o  Mr. Liu Jin did not timely file on one occasion the receipt of
            30,000 shares of our common stock issued as compensation for his
            services as a director,

         o  Mr. Mel Rothberg did not timely file on one occasion the receipt of
            30,000 shares of our common stock issued as compensation for his
            services as a director,

                                       45o  Ms. Caeli Widger did not timely file on one occasion the receipt of
            30,000 shares of our common stock issued as compensation for her
            services as a director,

         o  Ms. Xian Xuemei did not timely file on one occasion the receipt of
            30,000 shares of our common stock issued as compensation for her
            services as a director, and

         o  Mrs. Song Zhenghong did not timely file on one occasion the receipt
            of 30,000 shares of our common stock issued as compensation for her
            services as a director.

CODE OF ETHICS

         We have not adopted a Code of Ethics within the meaning of Item 406(b)
of Regulation S-K of the Securities Exchange Act of 1934.We believe our company
faces unique challenges in adopting a code of ethics which encompasses both
Western business practices and those of Chinese companies We are currently
evaluating a proper set of code of ethics to be adopted by our company and
expect to adopt the code of ethics in the near future.

COMMITTEES OF THE BOARD OF DIRECTORS

         Our Board of Directors has not established any committees, including an
Audit Committee, a Compensation Committee or a Nominating Committee, any
committee performing a similar function. The functions of those committees are
being undertaken by the entire board as a whole.

         We do not have a policy regarding the consideration of any director
candidates which may be recommended by our stockholders, including the minimum
qualifications for director candidates, nor has our Board of Directors
established a process for identifying and evaluating director nominees. We have
not adopted a policy regarding the handling of any potential recommendation of
director candidates by our stockholders, including the procedures to be
followed. Our Board has not considered or adopted any of these policies as we
have never received a recommendation from any stockholder for any candidate to
serve on our Board of Directors. Given our relative size and lack of directors
and officers insurance coverage, we do not anticipate that any of our
stockholders will make such a recommendation in the near future. While there
have been no nominations of additional directors proposed, in the event such a
proposal is made, all members of our Board will participate in the consideration
of director nominees.

         None of our directors is an "audit committee financial expert" within
the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee
financial expert" is an individual member of the audit committee or Board of
Directors who:

         o  understands generally accepted accounting principles and financial
            statements,

         o  is able to assess the general application of such principles in
            connection with accounting for estimates, accruals and reserves,

         o  has experience preparing, auditing, analyzing or evaluating
            financial statements comparable to the breadth and complexity to our
            financial statements,

         o  understands internal controls over financial reporting, and

         o  understands audit committee functions.

                                       46Since the closing of the share exchange with Lotus International, we
have relied upon the personal relationships of our CEO to attract individuals to
our Board of Directors. While we would prefer that one or more of our directors
be an audit committee financial expert, the individuals whom we have been able
to attract to our Board do not have the requisite professional backgrounds. It
is our intent to expand our Board of Directors during 2008 to include additional
independent directors as well as one or more directors who are considered audit
committee financial experts. At that time we intent to establish an Audit
Committee of our Board of Directors. Our securities are not quoted on an
exchange, however, that has requirements that a majority of our Board members be
independent and we are not currently otherwise subject to any law, rule or
regulation requiring that all or any portion of our Board of Directors include
"independent" directors, nor are we required to establish or maintain an Audit
Committee or other committee of our Board of Directors.

ITEM 11. EXECUTIVE COMPENSATION.

         The following table summarizes all compensation recorded by us in the
last completed fiscal year for our principal executive officer, each other
executive officer serving as such whose annual compensation exceeded $100,000,
and up to two additional individuals for whom disclosure would have been made in
this table but for the fact that the individual was not serving as an executive
officer of our company at December 31, 2007. The value attributable to any
option awards is computed in accordance with FAS 123R.

                                                   SUMMARY COMPENSATION TABLE
                                                   --------------------------
                                                                     NON-EQUITY
                                                                     INCENTIVE       NONQUALIFIED    ALL
NAME AND                                        STOCK      OPTION    PLAN            DEFERRED        OTHER
PRINCIPAL                     SALARY    BONUS   AWARDS     AWARDS    COMPENSATION    COMPENSATION    COMPENSATION    TOTAL
POSITION               YEAR   ($)       ($)     ($)        ($)       ($)             EARNINGS ($)    ($)             ($)
(A)                    (B)    (C)       (D)     (E)        (F)       (G)             (H)             (I)             (J)
-------------------    ----   -------   -----   ------     ------    ------------    ------------    ------------    -------
Dr. Liu Zhong Yi (1)   2007   150,000       0        0          0               0               0         244,709    394,709
                       2006    37,500       0        0          0               0               0         100,000    137,500

(1) Dr. Liu has served as our Chief Executive Officer and President since
September 28, 2006. All of Dr. Liu's compensation is paid by Lotus East. Other
compensation for 2007 includes and $194,709 paid under the agreement related to
Wu Lan Cha Bu Emergency Hospital and $50,000 of fees paid for car allowances and
personal expenses. Dr. Liu's fiscal 2006 other compensation includes fees paid
for car allowances and personal expenses. Compensation amounts reflected for Dr.
Liu for each of 2006 and 2007 exclude any payments to him pursuant to the terms
of the assignment agreement entered into between Dr. Liu and Lotus East in
October 2006 in conjunction with the loan agreement and contract with Wu Lan Cha
Bu Emergency Hospital. See Item 13. Certain Relationships and Related
Transactions, and Director Independence.

HOW DR. LIU'S COMPENSATION IS DETERMINED

         We currently have no employment agreements with any of our executive
officers, nor any compensatory plans or arrangements resulting from the
resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer's
responsibilities following a change-in-control. All compensation paid to Dr. Liu
as reflected in the foregoing table is paid by Lotus East. Dr. Liu is the
principal owner of the Lotus East companies and the amount of compensation paid
to him is within his sole discretion.

                                       47OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

         The following table provides information concerning unexercised
options, stock that has not vested and equity incentive plan awards for each
named executive officer outstanding as of December 31, 2007:

                                      OPTION AWARDS                                           STOCK AWARDS
           -----------------------------------------------------------------   -------------------------------------------
                                                                                                                Equity
                                                                                                                incentive
                                                                                          Market   Equity       plan
                                                                                          value    incentive    awards:
                                         Equity                                           of       plan         Market or
                                         incentive                                        shares   awards:      payout
                                         plan                                  Number     or       Number of    value of
                                         awards:                               of         units    unearned     unearned
           Number of     Number of       Number of                             shares     of       shares,      shares,
           securities    securities      securities                            or units   stock    units or     units or
           underlying    underlying      underlying                            of stock   that     other        other
           unexercised   unexercised     unexercised   Option                  that       have     rights       rights
           options       options         unearned      exercise   Option       have not   not      that have    that have
           (#)           (#)             options       price      expiration   vested     vested   not          not
Name       exercisable   unexercisable   (#)           ($)        date         (#)        ($)      vested (#)   vested (#)
(a)        (b)           (c)             (d)           (e)        (f)          (g)        (h)      (i)          (j)
--------   -----------   -------------   -----------   --------   ----------   --------   ------   ----------   ----------
Dr. Liu
Zhong Yi        0              0               0           0           0           0         0          0            0

DIRECTOR COMPENSATION

         The following table provides information concerning the compensation of
members of our Board of Directors for each of their services as a directors for
2007. The value attributable to any option awards is computed in accordance with
FAS 123R.

                                                  DIRECTOR COMPENSATION
                                                  ---------------------
                                                                Non-equity
                                                                incentive      Nonqualified
                      Fees earned                               plan           deferred       All other
                      or paid in    Stock awards   Option       compensation   compensation   compensation
Name                  cash ($)      ($)            awards ($)   ($)            earnings ($)   ($)            Total ($)
(a)                   (b)           (c)            (d)          (e)            (f)            (g)            (h)
-------------------   -----------   ------------   ----------   ------------   ------------   ------------   ---------
Dr. Liu Zhong Yi ..             0         30,000            0              0              0              0      30,000
Dr. Ian Ashley ....             0         30,000            0              0              0              0      30,000
Li Ping ...........             0         30,000            0              0              0              0      30,000
Liu Jin ...........             0         30,000            0              0              0              0      30,000
Mel Rothberg ......             0         30,000            0              0              0              0      30,000
Caeli Widger ......             0         30,000            0              0              0              0      30,000
Xian Xuemei .......             0         30,000            0              0              0              0      30,000
Song Zhenghong ....             0         30,000            0              0              0              0      30,000

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

         At March 31, 2008 we had 42,044,200 shares of common stock and
5,747,118 shares of Series A Convertible Redeemable Preferred Stock issued and
outstanding. Each share of common stock entitles the holder to one vote and each
of the Series A Convertible Redeemable Preferred Stock entitles the holder to a
number of votes equal to the number of shares into which the Series A
Convertible Redeemable Preferred Stock is then convertible vote at any meeting
of our stockholders. Presently, the Series A Convertible Redeemable Preferred
Stock is convertible on a one for one basis. The holders of the common stock and
the Series A Convertible Redeemable Preferred Stock vote together on all matters
submitted to a vote of our stockholders, except that they are not entitled to

                                       48vote in the election of our directors. The following table sets forth
information known to us as of March 31, 2008 relating to the beneficial
ownership of shares of our voting securities by:

         o  each person who is known by us to be the beneficial owner of more
            than five percent of our outstanding voting stock;

         o  each director;

         o  each executive officer; and

         o  all executive officers and directors as a group.

         Unless otherwise indicated, the business address of each person listed
is in care of Boca Corporate Plaza, 16 Cheng Zhuang Road, Feng Tai District
Beijing 100071 People's Republic of China. The percentages in the table have
been calculated on the basis of treating as outstanding for a particular person,
all shares of our common stock outstanding on that date and all shares of our
common stock issuable to that holder in the event of exercise of outstanding
options, warrants, rights or conversion privileges owned by that person at that
date which are exercisable within 60 days of that date. Except as otherwise
indicated, the persons listed below have sole voting and investment power with
respect to all shares of stock owned by them, except to the extent that power
may be shared with a spouse.

                                  AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
                                  -----------------------------------------
                                                       SERIES A CONVERTIBLE
                                                           REDEEMABLE
                                     COMMON STOCK        PREFERRED STOCK
                                  -------------------    ---------------
                                     # OF       % OF      # OF     % OF     % OF
NAME                                SHARES      CLASS    SHARES    CLASS    VOTE
----                              ----------    -----    ------    -----   -----
Dr. Liu Zhong Yi (1) ..........   18,812,400    44.7%       0       n/a    39.4%
Adam Wasserman (2) ............       94,200        *       0       n/a        *
Dr. Ian Ashley ................            0      n/a       0       n/a      n/a
Li Ping .......................       30,000        *       0       n/a        *
Liu Jin .......................       30,000        *       0       n/a        *
Mel Rothberg ..................            0      n/a       0       n/a      n/a
Caeli Widger ..................       30,000        *       0       n/a        *
Xian Xuemei ...................       30,000        *       0       n/a        *
Song Zhenghong ................    6,738,000    16.0%       0       n/a    14.1%
All officers and directors as a
 group (nine persons) (1),(2) .   25,764,600    61.3%       0       n/a    53.9%
Genesis Pharmaceuticals
Enterprises, Inc. (3)..........    3,250,000     7.7%       0       n/a     6.8%

* represents less than 1%

(1) Includes 7,500,000shares of our common stock which are subject to the terms
of the Escrow Agreement entered into in February 2008 in conjunction with the
sale our Series A Convertible Redeemable Preferred Stock described earlier in
this annual report.

(2) Mr. Wasserman's address is 1643 Royal Grove Way, Weston, Florida 33327.

(3) Genesis Pharmaceuticals Enterprises, Inc.'s address is 7900 Glades Road,
Boca Raton, Florida 33432. Mr. Cao Wabo is CEO of Genesis Pharmaceuticals
Enterprises, Inc. and he has sole voting and dispositive control over securities
owned by that company in his capacity as an officer of the company. Mr. Wubo
disclaims beneficial ownership over securities owned by Genesis Pharmaceuticals
Enterprises, Inc.

                                       49ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
         INDEPENDENCE.

         Dr. Liu leases Lotus East a 249 square meter retail space for no charge
on a month-to-month basis.

         On October 10, 2006, Lotus East entered into a five-year loan agreement
and contract with Wu Lan Cha Bu Emergency Hospital whereby Lotus East agreed to
lend to Wu Lan Cha Bu Emergency Hospital approximately $3,840,000 for the
construction of a hospital ward in Inner Mongolia, China. In exchange for the
loan, Wu Lan Cha Bu Emergency Hospital agreed that Lotus East would be the
exclusive provider for all medicines and disposable medical treatment apparatus
to it for a period of 20 years. In October 2006, Dr. Liu Zhong Yi, our Chief
Executive Officer and the CEO and principal stockholder of Lotus East, loaned
these funds to Wu Lan Cha Bu Emergency Hospital on behalf of Lotus East.
Accordingly, on October 10, 2006 Lotus East entered into an assignment agreement
whereby it assigned all of its rights, obligations, and receipts under the loan
agreement to Dr. Liu, except for the rights to revenues from the sale of medical
and disposable medical treatment apparatus which will remain with Lotus East. As
compensation to Dr. Liu for accepting the assignment under the loan agreement
including all of the risks and obligations and for Dr. Liu not accepting the
rights to revenues from the sale of medical and disposable medical treatment
apparatus which will remain with Lotus East, Lotus East agreed to pay Dr. Liu an
aggregate of approximately $1,150,000 to be paid in five equal annual
installments of approximately $230,000. During 2007 Dr. Liu was paid $ 194,709
under the terms of this agreement.

         From time to time Lotus East has lent working capital to related
parties. At December 31, 2006 we had a receivable of $1,826,626 from an
affiliated entity owned by Dr. Liu. During 2007 this related party repaid
approximately $1,061,000 of these advances and at December 31, 2007 Dr. Liu
agreed to offset the remaining balance due against a note payable to a related
party in the amount of $814,000. At December 31, 2007 amounts due from related
parties was $0.

         In 2007, we sold $3,000,000 principal amount 14% secured convertible
notes in a private placement and we lent approximately $2 million of those
proceeds to Lotus East for working capital. In 2008 we received net proceeds
from the sale of shares of our Series A Convertible Redeemable Preferred Stock
of approximately $4.6 million. We used approximately $2,576,557 of those
proceeds to repay in full all of our outstanding obligations under our 14%
secured convertible notes. Of the remaining proceeds, we lent approximately
$1,600,000 to Lotus East. These loans are in the form of an unsecured, interest
free advances for use by Lotus East in their operations including in their
research and development activities. We do not have an understanding with Lotus
East regarding the repayment of the amounts advanced to that company.

DIRECTOR INDEPENDENCE

         Our Board of Directors has determined that directors Mel Rothberg, Dr.
Ian Ashley, and Caeli Widger are independent directors within The NASDAQ Stock
Market's director independence standards pursuant to Marketplace Rule 4200.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

         Sherb & Co., LLP served as our independent registered public accounting
firm for 2007 and 2006. The following table shows the fees that were billed for
the audit and other services provided by such firm for 2007 and 2006.

                                       502007         2006
                                            -------      -------
         Audit Fees ..................      $75,000      $62,000
         Audit-Related Fees ..........       17,400       12,500
         Tax Fees ....................            0            0
         All Other Fees ..............            0            0
                                            -------      -------
                           Total .....      $92,400      $74,500

         Audit Fees -- This category includes the audit of our annual financial
statements, review of financial statements included in our Form 10-QSB Quarterly
Reports and services that are normally provided by the independent auditors in
connection with engagements for those fiscal years. This category also includes
advice on audit and accounting matters that arose during, or as a result of, the
audit or the review of interim financial statements.

         Audit-Related Fees -- This category consists of assurance and related
services by the independent auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported above under "Audit Fees." The services for the fees disclosed under
this category include consultation regarding our correspondence with the SEC and
other accounting consulting.

         Tax Fees -- This category consists of professional services rendered by
our independent auditors for tax compliance and tax advice. The services for the
fees disclosed under this category include tax return preparation and technical
tax advice.

         All Other Fees -- This category consists of fees for other
miscellaneous items.

         Our Board of Directors has adopted a procedure for pre-approval of all
fees charged by our independent auditors. Under the procedure, the Board
approves the engagement letter with respect to audit, tax and review services.
Other fees are subject to pre-approval by the Board, or, in the period between
meetings, by a designated member of Board. Any such approval by the designated
member is disclosed to the entire Board at the next meeting. The audit and tax
fees paid to the auditors with respect to fiscal year 2007 were pre-approved by
the entire Board of Directors.

                                     PART IV

ITEM 15. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES.

EXHIBIT
NO.                                DESCRIPTION
-------  -----------------------------------------------------------------------

2.3      Share Exchange Agreement between S.E. Asia Trading Company, Inc., SEAA
         Stockholders and Lotus Pharmaceutical International, Inc. and the Lotus
         Pharmaceutical International, Inc. Stockholders dated September 6, 2006
         (1)
3.1      Certificate of Amendment effective December 14, 2006 (5)
3.2      Charter of S.E. Asia Trading Company, Inc. as filed with the State of
         Nevada (2)
3.3      Bylaws (2)
3.4      Certificate of Designation of the Relative Rights and Preferences of
         the Series A Convertible Redeemable Preferred Stock (8)
4.1      Form of Warrant (6)

                                       5110.1     Equity Pledge Agreement between Lotus Pharmaceutical International,
         Inc. and Liang Fang Pharmaceutical Co., Ltd. and Liang Fang's Majority
         Stockholders dated September 6, 2006 (3)
10.2     Operating Agreement between Lotus Pharmaceutical International, Inc.,
         and Liang Fang, Liang Fang's Majority Stockholders dated September 6,
         2006 (3)
10.3     Proxy Agreement between Lotus Pharmaceutical International, Inc., Liang
         Fang, and Liang Fang s Majority Stockholders dated September 6, 2006
         (3)
10.4     Option Agreement between Lotus Pharmaceutical International, Inc. and
         Liang Fang, Liang Fang Majority Stockholders dated September 6, 2006
         (3)
10.5     Equity Pledge Agreement between Lotus Pharmaceutical International,
         Inc. and En Zhe Jia Shi Pharmaceutical Co., Ltd. and En Zhe Jia Shi's
         Majority Stockholders dated September 6, 2006 (3)
10.6     Operating Agreement between Lotus Pharmaceutical International, Inc.,
         and En Zhe Jia Shi, En Zhe Jia Shi's Majority Stockholders dated
         September 6, 2006 (3)
10.7     Proxy Agreement between Lotus Pharmaceutical International, Inc., En
         Zhe Jia Shi, and En Zhe Jia Shi's Majority Stockholders dated September
         6, 2006 (3)
10.8     Option Agreement between Lotus Pharmaceutical International, Inc. and
         En Zhe Jia Shi, En Zhe Jia Shi's Majority Stockholders dated September
         6, 2006 (3)
10.9     Consulting Services Agreement between Lotus Pharmaceutical
         International, Inc. and Liang Fang Pharmaceutical Co., Ltd. dated
         September 6, 2006 (3)
10.10    Consulting Services Agreement between Lotus Pharmaceutical
         International, Inc., En Zhe Jia Shi Pharmaceutical Co., Ltd. dated
         September 6, 2006 (3)
10.11    Letter of Resignation by Mr. Thomas Miller to the Board of Directors of
         S.E. Asia Trading Company (3)
10.12    General Partnership Agreement between Genesis Equity Partners, LLC and
         Liang Fang Pharmaceutical, Ltd. dated March 15, 2006. (3)
10.13    Lease Agreement between Beijing Aoshikai Peace Lane Shopping Center and
         Liang Fang Pharmaceutical Co. Ltd. dated June 1, 2002. (3)
10.14    Lease Agreement between Beijing Aoshikai Peace Lane Shopping Center and
         Liang Fang Pharmaceutical Co. Ltd. dated June 1, 2005. (3)
10.15    Lease Agreement between Beijing Fengtai District Retired Officer
         Management Agency of General Logistics of P.L.A. and Liang Fang
         Pharmaceutical Co. Ltd. dated September 15, 2003. (3)
10.16    Lease Agreement between Beijing Fengtai District 2nd Sanatorium of
         General Logistics of P.L.A. and Liang Fang Pharmaceutical Co. Ltd.
         dated April 1, 2003. (3)
10.17    Lease Agreement between Beijing Qiji Investment and Management Center
         and Liang Fang Pharmaceutical Co. Ltd. dated October 10, 2005. (3)
10.18    Lease Agreement between Beijing South Palace Marketing Center and Liang
         Fang Pharmaceutical Co. Ltd. dated January 1, 2006. (3)
10.19    Lease Agreement between Beijing Xingfa Food Shop and Liang Fang
         Pharmaceutical Co. Ltd. dated January 1, 2006. (3)
10.20    Lease Agreement between Construction and Repair Agency of Haiying Group
         and Liang Fang Pharmaceutical Co. Ltd. dated December 31, 2000. (3)
10.21    Lease Agreement between Liu Zhongyi and Liang Fang Pharmaceutical Co.
         Ltd. Dated December 15, 2001. (3)
10.22    Lease Agreement between Real Estate Management Agency of General
         Logistics of P.L.A. and Drugstore (Wanshou Round Branch) of Liang Fang
         Pharmaceutical Co. Ltd. dated September 1, 2004. (3)
10.23    Loan Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd.
         and Liu Zhongyi dated December 31, 2005. (3)
10.24    Loan Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd.
         and Ma Zhaozhao dated December 31, 2005. (3)

                                       5210.25    Loan Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd.
         and Song Guo an dated December 31, 2005. (3)
10.26    Loan Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd.
         and Song Zhenghong dated December 31, 2005. (3)
10.27    Loan Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd.
         and Zehng Guixin dated December 31, 2005. (3)
10.28    Letter Agreement among S.E. Asia Trading Company, Inc., Lynn
         Management, LLC and Dynacap Holdings Limited LLC dated September 13,
         2006. (3)
10.29    Bill of Sale between S.E. Asia Trading Company, Inc. and Charles Smith
         dated September 25, 2006. (3)
10.30    Loan Agreement among Beijing Liang Fang Pharmaceutical Co., Ltd. and Wu
         Lan Cha Bu Emergency Hospital (English version) (7)
10.31    Loan Agreement among Beijing Liang Fang Pharmaceutical Co., Ltd. and Wu
         Lan Cha Bu Emergency Hospital (Chinese version) (7)
10.32    Contract among Wu Lan Cha Bu Emergency Hospital Center and Beijing
         Liang Fang Pharmaceutical Co., Ltd. dated October 10, 2006 (English
         version) (7)
10.33    Contract among Wu Lan Cha Bu Emergency Hospital Center and Beijing
         Liang Fang Pharmaceutical Co., Ltd. dated October 10, 2006 (Chinese
         version) (7)
10.34    Assignment agreement among Beijing Liang Fang Pharmaceuticals Co., Ltd.
         and Dr. Liu Zhong Yi dated October 10, 2006 (English version) (7)
10.35    Assignment agreement among Beijing Liang Fang Pharmaceuticals Co., Ltd.
         and Dr. Liu Zhong Yi dated October 10, 2006 (Chinese version) (7)
10.36    Convertible Redeemable Preferred Share and Warrant Purchase Agreement
         dated February 25, 2008 by and among Lotus Pharmaceuticals, Inc., its
         founders Dr. Liu Zhong Yi and Mrs. Song Zhenghong, and certain
         accredited investors (6)
10.37    Form of Escrow Agreement (6)
10.38    Form of Closing Escrow Agreement (6)
21.1     Subsidiaries of the company (7)
31.1     Certification of Chief Executive Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002 *
31.2     Certification of Chief Financial Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002 *
32.1     Certification of Chief Executive Officer pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002 *
32.2     Certification of Chief Financial Officer pursuant to Section 906 of the
         Sarbanes-Oxley Act of 2002 *

* Filed herein

(1)  Incorporated by reference from the Current Report on Form 8-K filed on
     September 7, 2006.
(2)  Incorporated by reference from the registration statement on Form SB-1, SEC
     File No. 333-118898, filed on September 10, 2004, as amended.
(3)  Incorporated by reference from the Current Report on Form 8-K filed on
     October 5, 2006.
(4)  Incorporated by reference from the Current Report on Form 8-K filed on
     November 13, 2006.
(5)  Incorporated by reference from the Current Report on Form 8-K filed on
     December 19, 2006.
(6)  Incorporated by reference from the Current Report on Form 8-K filed on
     February 26, 2008.
(7)  Incorporated by reference from the Annual Report on Form 10-KSB for the
     fiscal year ended December 31, 2006.
(8)  Incorporated by reference from the Current Report on Form 8-K/A as filed on
     February 29, 2008.

                                       53SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                          LOTUS PHARMACEUTICALS, INC.

                          By: /s/ Liu Zhong Yi
                              ----------------
                          Dr. Liu Zhong Yi, Chief Executive Officer and director
                          Date: April 14, 2008

                          By: /s/ Adam Wasserman
                              ------------------
                          Adam Wasserman, Chief Financial Officer
                          Date: April 14, 2008

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


/s/ Liu Zhong Yi                Chief Executive Officer,          April 14, 2008
----------------                Chairman of the Board
Liu Zhong Yi

/s/ Ian Ashley                  Director                          April 14, 2008
--------------
Ian Ashley

/s/ Li Ping                     Director                          April 14, 2008
-----------
Li Ping

/s/ Liu Jin                     Director                          April 14, 2008
-----------
Liu Jin

/s/ Mel Rothberg                Director                          April 14, 2008
----------------
Mel Rothberg

/c/ Caeli Widger                Director                          April 14, 2008
----------------
Caeli Widger

/s/ Xian Xuemei                 Director                          April 14, 2008
---------------
Xian Xuemei

/s/ Song Zhenghong              Director                          April 14, 2008
------------------
Song Zhenghong
                                       54LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2007 and 2006

                                    CONTENTS

Report of Independent Registered Public Accounting Firm ...........          F-2

Consolidated Financial Statements:

    Consolidated Balance Sheets ...................................          F-3

    Consolidated Statements of Operations .........................          F-4

    Consolidated Statements of Shareholders' Equity ...............          F-5

    Consolidated Statements of Cash Flows .........................          F-6

Notes to Consolidated Financial Statements ........................  F-7 to F-31

                                       F-1REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Lotus Pharmaceuticals, Inc. and Subsidiaries
Beijing, China

         We have audited the accompanying consolidated balance sheets of Lotus
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2007 and 2006 and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the years ended December 31, 2007 and 2006. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

         We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amount and disclosures in the combined
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lotus
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for the years ended December
31, 2007 and 2006, in conformity with accounting principles generally accepted
in the United States of America.

                                               /s/ Sherb & Co., LLP
                                               --------------------
                                               Certified Public Accountants

Boca Raton, Florida
March 17, 2008

                                       F-2LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                                         CONSOLIDATED BALANCE SHEETS

                                                                                         December 31,
                                                                                   -------------------------
                                                                                       2007         2006
                                                                                   -----------   -----------
                                                   ASSETS                                       (As Restated)
CURRENT ASSETS:
    Cash ........................................................................  $ 4,557,957   $ 2,089,156
    Accounts receivable, net of allowance for doubtful accounts and sale returns    20,430,827     7,277,067
    Inventories, net of reserve for obsolete inventory ..........................    3,410,739     3,133,677
    Prepaid expenses ............................................................    1,009,382       252,103
    Deferred debt costs .........................................................       29,340             -
                                                                                   -----------   -----------
        Total Current Assets ....................................................   29,438,245    12,752,003

PROPERTY AND EQUIPMENT - Net ....................................................    6,169,966     5,813,935

OTHER ASSETS
    Intangible assets, net of accumulated amortization ..........................    1,291,322     1,345,041
    Due from related party ......................................................            -     1,826,626
                                                                                   -----------   -----------
        Total Assets ............................................................  $36,899,533   $21,737,605
                                                                                   ===========   ===========
                                    LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
    Convertible debt, net of debt discount ......................................  $ 2,561,645   $         -
    Accounts payable and accrued expenses .......................................      764,491       705,147
    Value-added and service taxes payable .......................................      572,200     2,047,851
    Advances from customers .....................................................       34,531       231,340
    Unearned revenue ............................................................      530,063       426,358
    Due to related parties ......................................................      323,178       925,484
                                                                                   -----------   -----------
        Total Current Liabilities ...............................................    4,786,108     4,336,180

LONG-TERM LIABILITIES:
    Due to related parties ......................................................      738,300       863,447
    Notes payable - related parties .............................................    4,738,508     4,729,880
                                                                                   -----------   -----------
        Total Liabilities .......................................................   10,262,916     9,929,507
                                                                                   -----------   -----------
SHAREHOLDERS' EQUITY:
    Preferred stock ($.001 par value; 10,000,000 shares authorized;
        No shares issued and outstanding) .......................................            -             -
    Common stock ($.001 par value; 200,000,000 shares authorized;
        41,794,200 and 41,280,000 shares issued and outstanding
        at December 31, 2007 and 2006, respectively) ............................       41,794        41,280
    Additional paid-in capital ..................................................    8,095,848     5,965,323
    Statutory reserves ..........................................................    2,161,505       769,930
    Retained earnings ...........................................................   14,355,913     4,530,360
    Other comprehensive gain - cumulative foreign currency translation adjustment    1,981,557       501,205
                                                                                   -----------   -----------
        Total Shareholders' Equity ..............................................   26,636,617    11,808,098
                                                                                   -----------   -----------
        Total Liabilities and Shareholders' Equity ..............................  $36,899,533   $21,737,605
                                                                                   ===========   ===========

                               See notes to consolidated financial statements
                                                     F-3LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                          CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                 For the Year Ended
                                                                    December 31,
                                                           -----------------------------
                                                               2007              2006
                                                           ------------     ------------
                                                                            (As Restated)
NET REVENUES:
     Wholesale ........................................    $ 41,651,106     $ 25,430,069
     Retail ...........................................       3,471,960        3,532,623
     Other revenues ...................................      11,750,049        7,244,997
                                                           ------------     ------------
        Total Revenues ................................      56,873,115       36,207,689

COST OF SALES .........................................      33,678,963       26,129,687
                                                           ------------     ------------
GROSS PROFIT ..........................................      23,194,152       10,078,002
                                                           ------------     ------------
OPERATING EXPENSES:
     Selling expenses .................................       6,460,206        3,030,421
     Research and development .........................       2,411,651          387,337
     General and administrative .......................       3,014,002        2,191,400
                                                           ------------     ------------
        Total Operating Expenses ......................      11,885,859        5,609,158
                                                           ------------     ------------
INCOME FROM OPERATIONS ................................      11,308,293        4,468,844
                                                           ------------     ------------
OTHER INCOME (EXPENSE):
     Forgiveness of business and value-added taxes ....       2,160,795                -
     Debt issuance costs ..............................        (205,379)               -
     Registration rights penalty ......................        (110,000)               -
     Interest income ..................................         102,154                -
     Interest expense .................................      (2,038,735)        (325,824)
                                                           ------------     ------------
        Total Other Income (Expense) ..................         (91,165)        (325,824)
                                                           ------------     ------------
INCOME BEFORE INCOME TAXES ............................      11,217,128        4,143,020

INCOME TAXES ..........................................               -                -
                                                           ------------     ------------
NET INCOME ............................................    $ 11,217,128     $  4,143,020
                                                           ============     ============
COMPREHENSIVE INCOME:
     NET INCOME .......................................    $ 11,217,128     $  4,143,020

     OTHER COMPREHENSIVE INCOME:
        Unrealized foreign currency translation gain ..       1,480,352          327,568
                                                           ------------     ------------
     COMPREHENSIVE INCOME .............................    $ 12,697,480     $  4,470,588
                                                           ============     ============
NET INCOME PER COMMON SHARE:
     Basic ............................................    $       0.27     $       0.10
                                                           ============     ============
     Diluted ..........................................    $       0.26     $       0.10
                                                           ============     ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
     Basic ............................................      41,417,434       40,360,530
                                                           ============     ============
     Diluted ..........................................      43,861,106       40,360,530
                                                           ============     ============

                      See notes to consolidated financial statements
                                           F-4LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                           For the Years Ended December 31, 2007 and 2006

                                         Common Stock,
                                        $.001 Par Value
                                     ---------------------   Additional                                     Other          Total
                                      Number of                Paid-in       Retained      Statutory    Comprehensive   Shareholders'
                                       Shares      Amount      Capital       Earnings       Reserves       Income          Equity
                                     ----------   --------   -----------   ------------   -----------   -------------   -----------
Balance, December 31, 2005 .......   40,041,600   $ 40,042   $ 5,973,061   $    817,024   $   340,246   $     173,637   $  7,344,010

Recapitalization of Company ......    1,238,400      1,238        (7,738)             -             -               -         (6,500)

Appropriation to statutory reserve            -          -             -       (429,684)      429,684               -              -

Comprehensive income:
   Net income for the year .......            -          -             -      4,143,020             -               -      4,143,020

   Foreign currency translation
     adjustment ..................            -          -             -              -             -         327,568        327,568
                                                                                                                        ------------

   Total comprehensive income ....            -          -             -              -             -               -      4,470,588
                                     ----------   --------   -----------   ------------   -----------   -------------   ------------
Balance, December 31, 2006 .......   41,280,000     41,280     5,965,323      4,530,360       769,930         501,205     11,808,098

Discount on convertible debt .....            -          -     1,616,839              -             -               -      1,616,839

Common stock issued for services .      284,200        284       283,916              -             -               -        284,200

Common stock issued for conversion
  of convertible debt ............      230,000        230       229,770              -             -               -        230,000

Appropriation to statutory reserve            -          -             -     (1,391,575)    1,391,575               -              -

Comprehensive income:
   Net income for the year .......            -          -             -     11,217,128             -               -     11,217,128

   Foreign currency translation
     adjustment ..................            -          -             -              -             -       1,480,352      1,480,352
                                                                                                                        ------------

   Total comprehensive income ....            -          -             -              -             -               -     12,697,480
                                     ----------   --------   -----------   ------------   -----------   -------------   ------------
Balance, December 31, 2007 .......   41,794,200   $ 41,794   $ 8,095,848   $ 14,355,913   $ 2,161,505   $   1,981,557   $ 26,636,617
                                     ==========   ========   ===========   ============   ===========   =============   ============

                                           See notes to consolidated financial statements
                                                                 F-5LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                     For the Year Ended
                                                                        December 31,
                                                               ------------------------------
                                                                   2007              2006
                                                               ------------      ------------
                                                                                 (As Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income ...........................................     $ 11,217,128      $  4,143,020
    Adjustments to reconcile net income from operations to
     net cash provided by (used in) operating activities:
       Depreciation and amortization .....................          564,607           581,564
       Amortization of deferred debt issuance costs ......          205,379                 -
       Amortization of debt discount .....................        1,458,484                 -
       Stock issued for compensation .....................          284,200                 -
       (Decrease) increase in allowance for doubtful
       accounts and sales returns ........................       (2,385,354)        2,732,889
       Forgiveness of income and value-added taxes .......       (2,160,795)                -
    Changes in assets and liabilities:
       Accounts receivable ...............................       (9,764,076)       (8,922,247)
       Inventories .......................................          (58,942)        3,928,236
       Prepaid and other current assets ..................         (714,013)          (75,155)
       Accounts payable and accrued expenses .............           27,266           206,516
       Value-added and service taxes payable .............          608,526         1,999,675
       Unearned revenue ..................................           71,402           200,811
       Advances from customers ...........................         (204,267)           39,333
                                                               ------------      ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ......         (850,455)        4,834,642
                                                               ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Collections from related party advances ..............        1,061,009         1,243,742
    Purchase of property and equipment ...................         (381,772)           (1,480)
                                                               ------------      ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES ................          679,237         1,242,262
                                                               ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from convertible debt ...................        2,950,000                 -
    Payment of debt issuance costs .......................         (231,526)                -
    Repayments of related party advances .................         (816,732)         (737,291)
    Repayments of notes payable - related parties ........          509,351        (3,456,196)
                                                               ------------      ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ......        2,411,093        (4,193,487)
                                                               ------------      ------------
EFFECT OF EXCHANGE RATE ON CASH ..........................          228,926            44,805
                                                               ------------      ------------
NET INCREASE IN CASH .....................................        2,468,801         1,928,222

CASH - beginning of year .................................        2,089,156           160,934
                                                               ------------      ------------
CASH - end of year .......................................     $  4,557,957      $  2,089,156
                                                               ============      ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:
    Cash paid for:
       Interest ..........................................     $    477,001      $    325,824
                                                               ============      ============
       Income taxes ......................................     $          -      $          -
                                                               ============      ============
    Non-cash investing and financing activities:
       Due from related party offset against
       note payable - related parties ....................     $    813,650      $          -
                                                               ============      ============
       Common stock issued for conversion of
       convertible debt ..................................     $    230,000      $          -
                                                               ============      ============
       Debt discount for grant of warrants
       and beneficial conversion feature .................     $  1,616,839      $          -
                                                               ============      ============
       Intangible assets for related party liabilities ...     $          -      $  1,127,551
                                                               ============      ============

                        See notes to consolidated financial statements.
                                              F-6LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization
------------

Lotus Pharmaceuticals, Inc. ("Lotus" or the "Company"), formerly S.E. Asia
Trading Company, Inc. ("SEAA"), was incorporated on January 28, 2004 under the
laws of the State of Nevada. SEAA operated as a retailer of jewelry, framed art
and home accessories. In December 2006, SEAA changed its name to Lotus
Pharmaceuticals, Inc.

On September 6, 2006, the Company entered into a definitive Share Exchange
Agreement with Lotus Pharmaceutical International, Inc. ("Lotus International"),
whereby the Company acquired all of the outstanding common stock of Lotus
International in exchange for newly-issued stock of the Company to Lotus
International's shareholders. On September 28, 2006 (the closing date), Lotus
International became a wholly-owned subsidiary of the Company and Lotus
International's shareholders became the owners of the majority of the Company's
voting stock. The acquisition of Lotus International by the Company was
accounted for as a reverse merger because on a post-merger basis, the former
shareholders of Lotus International hold a majority of the outstanding common
stock of the Company on a voting and fully-diluted basis. As a result, Lotus
International is deemed to be the acquirer for accounting purposes.

Lotus International was incorporated under the laws the State of Nevada on
August 28, 2006 to develop and market pharmaceutical products in the People's
Republic of China ("PRC" or "China"). PRC law currently has limits on foreign
ownership of certain companies. To comply with these foreign ownership
restrictions, Lotus operates its pharmaceutical business in China through
Beijing Liang Fang Pharmaceutical Co., Ltd. ("Liang Fang") and an affiliate of
Liang Fang, Beijing En Zhe Jia Shi Pharmaceutical Co., Ltd. ("En Zhe Jia"), both
of which are pharmaceutical companies headquartered in the PRC and organized
under the laws of the PRC (hereinafter, referred to together as "Lotus East").
Lotus International has contractual arrangements with Lotus East and its
shareholders pursuant to which Lotus International will provide technology
consulting and other general business operation services to Lotus East. Through
these contractual arrangements, Lotus International also has the ability to
substantially influence Lotus East's daily operations and financial affairs,
appoint its senior executives and approve all matters requiring shareholder
approval. As a result of these contractual arrangements, which enable Lotus
International to control Lotus East, Lotus International is considered the
primary beneficiary of Lotus East. Accordingly, the consolidated financial
statements include the accounts of Lotus Pharmaceuticals, Inc. and its
wholly-owned subsidiary, Lotus International and companies under its control
(Lotus East).

On September 6, 2006, Lotus International entered into the following contractual
arrangements:

Operating Agreement. Pursuant to the operating agreement among Lotus, Lotus East
and the shareholders of Lotus East, (collectively "Lotus East's Shareholders"),
Lotus provides guidance and instructions on Lotus East's daily operations,
financial management and employment issues. The shareholders of Lotus East must
designate the candidates recommended by Lotus as their representatives on Lotus
East's Board of Directors. Lotus has the right to appoint senior executives of
Lotus East. In addition, Lotus agreed to guarantee Lotus East's performance
under any agreements or arrangements relating to Lotus East's business
arrangements with any third party. Lotus East, in return, agreed to pledge its
accounts receivable and all of its assets to Lotus. Moreover, Lotus East agreed
that without the prior consent of Lotus, Lotus East would not engage in any
transaction that could materially affect the assets, liabilities, rights or
operations of Lotus East, including, without limitation, incurrence or

                                       F-7LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Organization (continued)
------------------------

assumption of any indebtedness, sale or purchase of any assets or rights,
incurrence of any encumbrance on any of its assets or intellectual property
rights in favor of a third party or transfer of any agreements relating to its
business operation to any third party. The term of this agreement is ten (10)
years from September 6, 2006 and may be extended only upon Lotus's written
confirmation prior to the expiration of the this agreement, with the extended
term to be mutually agreed upon by the parties.

Consulting Services Agreement. Pursuant to the exclusive consulting services
agreements between Lotus and Lotus East, Lotus has the exclusive right to
provide to Lotus East general pharmaceutical business operations services as
well as consulting services related to the technological research and
development of pharmaceutical products as well as general business operation
advice and strategic planning (the "Services"). Under this agreement, Lotus owns
the intellectual property rights developed or discovered through research and
development, in the course of providing the Services, or derived from the
provision of the Services. Lotus East is required to pay a quarterly consulting
service fees in Renminbi ("RMB"), the functional currency of the PRC, to Lotus
that is equal to Lotus East's profits, as defined, for such quarter. To date, no
consulting fees have been paid by Lotus East.

Equity Pledge Agreement. Under the equity pledge agreement between the
shareholders of Lotus East and Lotus, the shareholders of Lotus East pledged all
of their equity interests in Lotus East to Lotus to guarantee Lotus East's
performance of its obligations under the technology consulting agreement. If
Lotus East or Lotus East's Shareholders breaches its respective contractual
obligations, Lotus, as pledgee, will be entitled to certain rights, including
the right to sell the pledged equity interests. Lotus East's Shareholders also
agreed that upon occurrence of any event of default, Lotus shall be granted an
exclusive, irrevocable power of attorney to take actions in the place and stead
of Lotus East's Shareholders to carry out the security provisions of the equity
pledge agreement and take any action and execute any instrument that Lotus may
deem necessary or advisable to accomplish the purposes of the equity pledge
agreement. The shareholders of Lotus East agreed not to dispose of the pledged
equity interests or take any actions that would prejudice Lotus' interest. The
equity pledge agreement will expire two (2) years after Lotus East's obligations
under the exclusive consulting services agreements have been fulfilled.

Option Agreement. Under the option agreement between the shareholders of Lotus
East and Lotus, the shareholders of Lotus East irrevocably granted Lotus or its
designated person an exclusive option to purchase, to the extent permitted under
PRC law, all or part of the equity interests in Lotus East for the cost of the
initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. Lotus or its designated person
has sole discretion to decide when to exercise the option, whether in part or in
full. The term of this agreement is 10 years from September 6, 2006 and may be
extended prior to its expiration by written agreement of the parties.

Proxy Agreement. Pursuant to the proxy agreement among Lotus and Lotus East's
Shareholders, Lotus East's Shareholders agreed to irrevocably grant a person to
be designated by Lotus with the right to exercise Lotus East's Shareholders'
voting rights and their other rights, including the attendance at and the voting
of Lotus East's Shareholders' shares at the shareholders' meetings (or by
written consent in lieu of such meetings) in accordance with applicable laws and
its Article of Association, including but not limited to the rights to sell or
transfer all or any of his equity interests of Lotus East, and appoint and vote
for the directors and Chairman as the authorized representative of the

                                       F-8LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Organization (continued)
------------------------

shareholders of Lotus East. The term of this Proxy Agreement is ten (10) years
from September 6, 2006 and may be extended prior to its expiration by written
agreement of the parties.

Liang Fang is a Chinese limited liability company and was formed under laws of
the People's Republic of China on June 21, 2000. Liang Fang is engaged in the
production, trade and retailing of pharmaceuticals. Further, Liang Fang is
focused on development of innovative medicines and investing strategic growth to
address various medical needs for patients worldwide. Liang Fang's operations
are based in Beijing, China.

As of December 31, 2007, Liang Fang owns and operates 10 drug stores throughout
Beijing, China. These drugstores sell Western and traditional Chinese medicines,
and medical treatment accessories.

Liang Fang's affiliate, En Zhe Jia is a Chinese limited liability company and
was formed under laws of the People's Republic of China on September 17, 1999.
En Zhe Jia is the sole manufacturer for Liang Fang and maintains facilities for
the production of medicines, patented Chinese medicine, as well as the research
and production of other new medicines.

As a result of the management agreements between Lotus International and Lotus
East, Lotus East was deemed to be the acquirer of Lotus International for
accounting purposes. Accordingly, the financial statement data presented are
those of Lotus East for all periods prior to the Company's acquisition of Lotus
International on September 28, 2006, and the financial statements of the
consolidated companies from the acquisition date forward.

On May 29, 2007, the Company formed a new entity, Lotus Century Pharmaceutical
(Beijing) Technology Co., Ltd. ("Lotus Century"), a wholly foreign-owned
enterprise ("WFOE") organized under the laws of the Peoples' Republic of China.
Lotus Century is a Chinese limited liability company and a wholly-owned
subsidiary of Lotus Pharmaceutical International, Inc. Lotus Century intends to
be engaged in development of innovative medicines, medical technology consulting
and outsourcing services, and related training services.

Basis of presentation
---------------------

The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP"). The
consolidated statements include the accounts of Lotus Pharmaceuticals, Inc. and
its wholly-owned subsidiaries, Lotus and Lotus Century and variable interest
entities under its control (Liang Fang and En Zhe Jia). All significant
inter-company balances and transactions have been eliminated.

The Company has adopted FASB Interpretation No. 46R "Consolidation of Variable
Interest Entities" ("FIN 46R"), an Interpretation of Accounting Research
Bulletin No. 51. FIN 46R requires a Variable Interest Entity (VIE) to be
consolidated by a company if that company is subject to a majority of the risk
of loss for the VIE or is entitled to receive a majority of the VIE's residual
returns. VIEs are those entities in which the Company, through contractual
arrangements, bears the risks of, and enjoys the rewards normally associated
with ownership of the entities, and therefore the Company is the primary
beneficiary of these entities. As a VIE, Lotus East's revenues are included in
the Company's total revenues, its income from operations is consolidated with
the Company's, and the Company's net income includes all of Lotus East's net
income.

                                       F-9LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of estimates
----------------

The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates. Significant estimates in 2007 and 2006 include the allowance for
doubtful accounts, the allowance for obsolete inventory, the useful life of
property and equipment and intangible assets, accruals for taxes due and
stock-based compensation.

Fair value of financial instruments
-----------------------------------

The carrying amounts reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued expenses, convertible debt, customer
advances, and amounts due from/to related parties approximate their fair market
value based on the short-term maturity of these instruments.

Cash and cash equivalents
-------------------------

For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid instruments purchased with a maturity of three months or less
and money market accounts to be cash equivalents. The Company maintains cash and
cash equivalents with various financial institutions mainly in the PRC and the
United States. Balances in the United States are insured up to $100,000 at each
bank.

Accounts receivable
-------------------

The Company records accounts receivable, net of an allowance for doubtful
accounts and sales returns. The Company maintains allowances for doubtful
accounts for estimated losses. The Company reviews the accounts receivable on a
periodic basis and makes general and specific allowances when there is doubt as
to the collectability of individual balances. In evaluating the collectability
of individual receivable balances, the Company considers many factors, including
the age of the balance, customer's historical payment history, its current
credit-worthiness and current economic trends. The amount of the provision, if
any is recognized in the consolidated statement of operations within "General
and administrative expenses". Accounts are written off after exhaustive efforts
at collection. The Company policy regarding sales returns is discussed below.
The activity in the allowance for doubtful accounts and sales returns accounts
for accounts receivable for the years ended December 31, 2007 and 2006 is as
follows:

                                      F-10LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

                                       Allowance      Allowance
                                      for doubtful    for sales
                                        accounts       returns         Total
                                      -----------    -----------    -----------
Balance - December 31, 2005 .......   $    45,161    $         -    $    45,161
Additions .........................       482,853      2,250,081      2,732,934
Foreign currency translation
  adjustments .....................        11,613         47,318         58,931
                                      -----------    -----------    -----------
Balance - December 31, 2006 .......       539,627      2,297,399      2,837,026
Reductions ........................       (26,617)    (2,354,720)    (2,381,337)
Foreign currency translation
  adjustments .....................        35,073         57,321         92,394
                                      -----------    -----------    -----------

Balance - December 31, 2007 .......   $   548,083    $         -    $   548,083
                                      ===========    ===========    ===========

Inventories
-----------

Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
weighted average method. An allowance is established when management determines
that certain inventories may not be saleable. If inventory costs exceed expected
market value due to obsolescence or quantities in excess of expected demand, the
Company will record reserves for the difference between the cost and the market
value. These reserves are recorded based on estimates and reflected in cost of
sales. The Company recorded an inventory reserve of $42,554 and $280,251,
respectively, for the year ended December 31, 2007 and 2006.

Property and equipment
----------------------

Property and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets. The cost of
repairs and maintenance is expensed as incurred; major replacements and
improvements 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 year of disposition. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", the Company examines the
possibility of decreases in the value of fixed assets when events or changes in
circumstances reflect the fact that their recorded value may not be recoverable.

Impairment of long-lived assets
-------------------------------

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the Company
periodically reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be fully recoverable. The Company recognizes an impairment loss when the sum of
expected undiscounted future cash flows is less than the carrying amount of the
asset. The amount of impairment is measured as the difference between the
asset's estimated fair value and its book value. The Company did not consider it
necessary to record any impairment charges during the year ended December 31,
2007 and 2006.

                                      F-11LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Advances from customers
-----------------------

Advances from customers at December 31, 2007 and 2006 of $34,531 and $231,340,
respectively, consist of prepayments from third party customers to the Company
for merchandise that had not yet shipped. The Company will recognize the
advances as revenue as customers take delivery of the goods, in compliance with
its revenue recognition policy.

Income taxes
------------

The Company is governed by the Income Tax Law of the People's Republic of China
and the United States. Income taxes are accounted for under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which is
an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.

Earnings per common share
-------------------------

Basic earnings per share is computed by dividing net earnings by the weighted
average number of shares of common stock outstanding during the period. Diluted
income per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period. Potentially dilutive common
shares consist of the common shares issuable upon the conversion of convertible
debt (using the if-converted method). The following table presents a
reconciliation of basic and diluted earnings per share:

                                                           FOR THE YEAR ENDED
                                                               DECEMBER 31,
                                                        ------------------------
                                                            2007         2006
                                                        -----------  -----------
Net income for basic and diluted earnings per share ..  $11,217,128  $ 4,143,020
                                                        -----------  -----------

Weighted average shares outstanding - basic ..........   41,417,434   40,360,530
Effect of dilutive securities:
Convertible debentures ...............................    2,443,672            -
                                                        -----------  -----------
Weighted average shares outstanding- diluted .........   43,861,106   40,360,530
                                                        -----------  -----------
Earnings per share - basic ...........................  $      0.27  $      0.10
                                                        ===========  ===========
Earnings per share - diluted .........................  $      0.26  $      0.10
                                                        ===========  ===========

In 2007, 1,500,000 outstanding warrants have not been included in the
calculation of diluted earnings per shares as the effect would be anti-dilutive.

Revenue recognition
-------------------

Product sales

Product sales are generally recognized when title to the product has transferred
to customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the Securities and Exchange Commission's (SEC) Staff

                                      F-12LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accounting Bulletin (SAB) No. 101, " Revenue Recognition in Financial Statements
" as amended by SAB No. 104 (together, "SAB 104"), and Statement of Financial
Accounting Standards (SFAS) No. 48 " Revenue Recognition When Right of Return
Exists. " SAB 104 states that revenue should not be recognized until it is
realized or realizable and earned. In general, the Company records revenue when
persuasive evidence of an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured.

SFAS No. 48 states that revenue from sales transactions where the buyer has the
right to return the product shall be recognized at the time of sale only if the
seller's price to the buyer is substantially fixed or determinable at the date
of sale, the buyer has paid the seller, or the buyer is obligated to pay the
seller and the obligation is not contingent on resale of the product, the
buyer's obligation to the seller would not be changed in the event of theft or
physical destruction or damage of the product, the buyer acquiring the product
for resale has economic substance apart from that provided by the seller, the
seller does not have significant obligations for future performance to directly
bring about resale of the product by the buyer, and the amount of future returns
can be reasonably estimated.

The Company's net product revenues represent total product revenues less
allowances for returns.

Allowance for returns

The Company accounts for sales returns in accordance with Statements of
Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of
Return Exists, by establishing an accrual in an amount equal to its estimate of
sales recorded for which the related products are expected to be returned. The
Company determines the estimate of the sales return accrual primarily based on
historical experience regarding sales returns, but also by considering other
factors that could impact sales returns. These factors include levels of
inventory in the distribution channel, estimated shelf life, product
discontinuances, and price changes of competitive products, introductions of
generic products and introductions of competitive new products. In general, for
wholesale sales, the Company provides credit for product returns that are
returned six months prior to and up to six months after the product expiration
date. Upon sale, the Company estimates an allowance for future product returns.
The Company provides additional reserves for contemporaneous events that were
not known and knowable at the time of shipment. In order to reasonably estimate
future returns, the Company analyzed both quantitative and qualitative
information including, but not limited to, actual return rates, the level of
product manufactured by the Company, the level of product in the distribution
channel, expected shelf life of the product, current and projected product
demand, the introduction of new or generic products that may erode current
demand, and general economic and industry wide indicators. The Company also
utilizes the guidance provided in SAB 104 in establishing its return estimates.
Historically, approximately 65% of our total revenues consist of sales of four
principal products and product returns from these principal products, as well as
the Company's other products, have been immaterial. Accordingly, based upon the
Company's experience, it historically does not record a reserve at the time of
sale and there have been no accounting entries related to its product return
policy which have reduced its gross revenues or had any material impact on its
financial statements. However, during the fourth quarter of fiscal 2006, the
Company sold approximately $2,300,000 of products which were either less popular
products or products that were nearing their expiration dates to existing
customers at reduced prices in a one-time transaction. The customers had the
right to return these products pursuant to our product return policy.

                                      F-13LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accordingly, the Company reduced its allowance for sales returns as during 2007
by $2,200,000 recorded as a reserve at December 31, 2006. The collection of this
receivable had the effect of increasing the Company's net income for the year
ended December 31, 2007 by $2,200,000, even though the sales of these products
were actually made during the fourth quarter of fiscal 2006. Because the Company
recorded the costs associated with these products in its cost of sales during
fiscal 2006, both the Company's gross profit margin and income from operations
for the year ended December 31, 2007 increased by $2,200,000. The allowance for
product returns at December 31, 2007 and 2006 was $0 and $2,297,399,
respectively.

Because of the one-time nature of the transaction and the age of the products
sold, the Company did not believe that the customary assumptions which it
utilizes when determining the amount of reserve to establish for product
returns, were appropriate, as it was more than remotely possible that all or
substantially all of the products would be returned by the customer and the
Company would not collect any revenues from this transaction. During the year
ended December 31, 2007 the Company collected substantially all of the amounts
billed to these customers for the product.

Other revenues

         Other revenues consist of (i) leasing revenues received for the lease
of retail space to various retail merchants; (ii) advertising revenues from the
lease of counter space at the Company's retail locations; (iii) leasing revenue
from the lease of retail space to licensed medical practitioners; (iv) revenues
received by the Company for research and development projects and lab testing
jobs conducted on behalf of third party companies, and; (v) revenues received
for performing third party contract manufacturing projects. In connection with
third-party manufacturing, the customer supplies the raw materials and we are
paid a fee for manufacturing their product and revenue is recognized at the
completion of the manufacturing job. The Company recognizes revenues from
leasing of space and advertising revenues as earned from contracting third
parties. The Company recognizes revenues upon performance of any research or lab
testing jobs. Revenues received in advance are reflected as deferred revenue on
the accompanying balance sheet. Additionally, the Company receives income from
the sale of developed drug formulas. Income from the sale of drug formulas, if
any, are recognized upon performance of all of the Company's obligations under
the respective sales contract and are included in other income on the
accompanying consolidated statement of operations.

Concentrations of credit risk
-----------------------------

Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade accounts receivable.
Substantially all of the Company's cash is maintained with state-owned banks
within the People's Republic of China of which no deposits are covered by
insurance. The Company has not experienced any losses in such accounts and
believes it is not exposed to any risks on its cash in bank accounts. A
significant portion of the Company's sales are credit sales which are primarily
to customers whose ability to pay is dependent upon the industry economics
prevailing in these areas; however, concentrations of credit risk with respect
to trade accounts receivables is limited due to generally short payment terms.
The Company also performs ongoing credit evaluations of its customers to help
further reduce credit risk.

                                      F-14LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Shipping costs
--------------

Shipping costs are included in cost of sales and totaled $420,082 and $570,152
for the years ended December 31, 2007 and 2006, respectively.

Advertising
-----------

Advertising is expensed as incurred. Advertising expenses are included in
selling expenses and totaled $2,602,997 and $81,888 for the years ended December
31, 2007 and 2006, respectively.

Foreign currency translation
----------------------------

The reporting currency of the Company is the U.S. dollar. The functional
currency of the Company is the local currency, the Chinese Renminbi ("RMB").
Results of operations and cash flows are translated at average exchange rates
during the period, assets and liabilities are translated at the unified exchange
rate at the end of the period, and equity is translated at historical exchange
rates. Translation adjustments resulting from the process of translating the
local currency financial statements into U.S. dollars are included in
determining comprehensive income. The cumulative translation adjustment and
effect of exchange rate changes on cash at December 31, 2007 and 2006 was
$228,926 and $44,805, respectively. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as incurred.

Asset and liability accounts at December 31, 2007 and 2006 were translated at
7.3141 RMB to $1.00 USD and at 7.8175 RMB to $1.00 USD, respectively. Equity
accounts were stated at their historical rate. The average translation rates
applied to income statements for the years ended December 31, 2007 and 2006 were
7.6172 RMB and 7.9819 RMB to $1.00 USD, respectively. In accordance with
Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows,"
cash flows from the Company's operations is calculated based upon the local
currencies using the average translation rate. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.

Research and development
------------------------

Research and development costs are expensed as incurred. These costs primarily
consist of cost of material used and salaries paid for the development of the
Company's products and fees paid to third parties. In the fourth quarter of
2007, the Company entered into a various research and development agreement with
third parties. Under the research and development agreements, the third parties
are responsible for designing, researching and developing designated
pharmaceutical projects for the Company. As part of the agreements, the Company
paid RMB 24,000,000 (approximately $3.2 million) to these third parties. The
Company will have the primary ownership of the designated research and
development project results. For the year ended December 31, 2007 and 2006, the
Company expensed $2,411,651 and $387,337 as research and development expense,
respectively, and paid for future research and development services in the
amount of $769,742 at December 31, 2007, which has been included in prepaid
expenses on the accompanying balance sheets and expensed over the contract term.

                                      F-15LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accumulated other comprehensive income
--------------------------------------

Accumulated other comprehensive income consisted of unrealized gains on currency
translation adjustments from the translation of financial statements from
Chinese RMB to US dollars. For the years ended December 31, 2007 and 2006,
accumulated other comprehensive income was $1,480,352 and $327,568,
respectively.

Recent Accounting Pronouncements
--------------------------------

In September 2006, the FASB issued SFAS No. 157,"Fair Value Measurements" (SFAS
157), which provides guidance for how companies should measure fair value when
required to use a fair value measurement for recognition or disclosure purposes
under generally accepted accounting principle (GAAP). SFAS 157 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
assessing the impact, if any, the adoption of SFAS 157 will have on its
financial statements.

In September 2006, the EITF reached a consensus on EITF Issue No. 06-1,
Accounting for Consideration Given by a Service Provider to Manufacturers or
Resellers of Equipment Necessary for an End-Customer to Receive Service from the
Service Provider (EITF 06-1). EITF 06-1 provides that consideration provided to
the manufacturers or resellers of specialized equipment should be accounted for
as a reduction of revenue if the consideration provided is in the form of cash
and the service provider directs that such cash be provided directly to the
customer. Otherwise, the consideration should be recorded as an expense. The
provisions of EITF 06-1 will be effective on January 1, 2008. The adoption of
EITF 06-1 will not have any effect on the Company's financial position or
results of operations.

In December 2006, FASB Staff Position No. EITF 00-19-2,"Accounting for
Registration Payment Arrangements" was issued. The FSP specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with SFAS
No. 5, "Accounting for Contingencies." The Company believes that its current
accounting is consistent with the FSP.

In February 2007, the FASB issued SFAS No. 159,"The Fair Value Option for
Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115" , under which entities will now be permitted to measure many
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis. This Statement is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The Company is currently assessing the impact, if any,
the adoption of SFAS 159 will have on its financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141R, Business Combinations (SFAS 141R) and Statement of Financial
Accounting Standards No. 160, Accounting and Reporting of Non-controlling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS
160). These two standards must be adopted in conjunction with each other on a

                                      F-16LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)
--------------------------------------------

prospective basis. The most significant changes to business combination
accounting pursuant to SFAS 141R and SFAS 160 are the following: (a) recognize,
with certain exceptions, 100 percent of the fair values of assets acquired,
liabilities assumed and non-controlling interests in acquisitions of less than a
100 percent controlling interest when the acquisition constitutes a change in
control of the acquired entity, (b) acquirers' shares issued in consideration
for a business combination will be measured at fair value on the closing date,
not the announcement date, (c) recognize contingent consideration arrangements
at their acquisition date fair values, with subsequent changes in fair value
generally reflected in earnings, (d) the expensing of all transaction costs as
incurred and most restructuring costs, (e) recognition of pre-acquisition loss
and gain contingencies at their acquisition date fair values, with certain
exceptions, (f) capitalization of acquired in-process research and development
rather than expense recognition, (g) earn-out arrangements may be required to be
re-measured at fair value and (h) recognize changes that result from a business
combination transaction in an acquirer's existing income tax valuation
allowances and tax uncertainty accruals as adjustments to income tax expense.
The Company anticipates these new standards will significantly affect the
Company's accounting for future business combinations following adoption on
January 1, 2009.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-- an amendment of FASB Statement No. 133 "
("FAS 161"). FAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. The guidance in FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company is currently assessing the impact of FAS 161.

Reclassifications
-----------------

Certain prior period balances have been reclassified to conform to the current
period's financial statement presentation. These reclassifications had no impact
on previously reported financial position, results of operations or cash flows.

NOTE 2 - ACCOUNTS RECEIVABLE

At December 31, 2007 and 2006, accounts receivable consisted of the following:

                                                      2007             2006
                                                  ------------     ------------
Accounts receivable ..........................    $ 20,978,910     $ 10,114,093
Less: allowance for sales returns ............               -       (2,297,399)
Less: allowance for doubtful accounts ........        (548,083)        (539,627)
                                                  ------------     ------------
                                                  $ 20,430,827     $  7,277,067
                                                  ============     ============

                                      F-17LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 3 - INVENTORIES

At December 31, 2007 and 2006,  inventories consisted of the following:

                                                      2007             2006
                                                  ------------     ------------
Raw materials ................................    $  2,312,111     $  2,500,564
Work in process ..............................         279,759                -
Packaging materials ..........................          52,967                -
Finished goods ...............................         808,456          913,364
                                                  ------------     ------------
                                                     3,453,293        3,413,928
Less: reserve for obsolete inventory .........         (42,554)        (280,251)
                                                  ------------     ------------
                                                  $  3,410,739     $  3,133,677
                                                  ============     ============

NOTE 4 - PROPERTY AND EQUIPMENT

At December 31, 2007 and 2006, property and equipment consist of the following:

                                        Useful Life       2007          2006
                                       -------------  -----------   -----------
Office equipment and furniture ......    5-8 Years    $   154,488   $   136,609
Manufacturing equipment .............  10 - 15 Years    5,032,601     4,708,531
Building and building improvements ..  20 - 40 Years    2,938,966     2,385,656
                                                      -----------   -----------
                                                        8,126,055     7,230,796
Less: accumulated depreciation                         (1,956,089)   (1,416,861)
                                                      -----------   -----------
                                                      $ 6,169,966   $ 5,813,935
                                                      ===========   ===========

For the years ended December 31, 2007 and 2006, depreciation expense amounted to
$424,135 and $397,951, of which $413,586 and $375,850 is included in cost of
sales, respectively

NOTE 5 - INTANGIBLE ASSETS

The Company has manufacturing rights for two issued drugs. The manufacturing
rights issued are in connection with the Company's products Valsartan and
Brimonidine. The manufacturing rights for Valsartan became effective in November
2000 and had a life of 6.5 years, which expired in 2007. The manufacturing
rights for Brimonidine became effective on August 27, 2005 and have a life of 5
years.

On October 9, 2006, the Company entered into a five-year loan agreement and a
contract with Wu Lan Cha Bu Emergency Hospital ("Wu Lan"), whereby the Company
agreed to lend to Wu Lan approximately $3,840,000 for the construction of a
hospital ward in Inner Mongolia, China. In exchange for agreeing to lend to Wu
Lan the funds, Wu Lan agreed that the Company will be the exclusive provider for
all medicines and disposable medical treatment apparatus to Wu Lan for a period
of twenty (20) years. In October 2006, the Company's chief executive officer,
Mr. Liu, lent these funds to Wu Lan on behalf of the Company. The Company
entered into an assignment agreement whereby the Company assigned all of its
rights, obligations, and receipts under the Loan Agreement to Mr. Liu, except
for the rights to revenues from the sale of medical and disposable medical
treatment apparatus which will remain with the Company. As compensation to Mr.
Liu for accepting the assignment under the loan agreement including all of the
risks and obligations and for Liu not accepting the rights to revenues from the

                                      F-18LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 5 - INTANGIBLE ASSETS (continued)

sale of medical and disposable medical treatment apparatus which will remain
with the Company, the Company agreed to pay Mr. Liu an aggregate of $1,151,263
to be paid in 5 equal annual installments of approximately $230,000.
Accordingly, the Company recorded an intangible asset of $1,151,263 related to
exclusive rights to provide all medicines and disposable medical treatment
apparatus to Wu Lan for a period of twenty (20) years. The Company will amortize
this exclusive right over a term of 20 years.

At December 31, 2007 and 2006, intangible assets consist of the following:

                                                      2007              2006
                                                  -----------       -----------
Manufacturing rights .......................      $ 1,187,569       $ 1,111,097
Revenue rights .............................        1,230,500         1,151,263
                                                  -----------       -----------
                                                    2,418,069         2,262,360
Less:  accumulated amortization ............       (1,126,747)         (917,319)
                                                  -----------       -----------
                                                  $ 1,291,322       $ 1,345,041
                                                  ===========       ===========

Amortization expense amounted to approximately $140,472 and $183,613 for the
year ended December 31, 2007 and 2006.

Amortization expense attributable to future periods is as follows:

Year ending December 31:
2008 ...................    $   143,558
2009 ...................        117,220
2010 ...................         61,525
2011 ...................         61,525
2012 and thereafter.....        907,494
                            -----------
                            $ 1,291,322
                            ===========

NOTE 6 - RELATED PARTY TRANSACTIONS

DUE FROM RELATED PARTIES

At December 31, 2006, the Company had a receivable of $1,826,626 from an
affiliated entity owned by the Company's chief executive officer. During the
year ended December 31, 2007, this related party repaid approximately $1,061,000
of these advances. On December 31, 2007, the Company's chief executive officer
agreed to offset the remaining balance due was against note payable related
party in the amount of approximately $814,000. For the year ended December 31,
2007 and 2006, activity in due from related party is as follows:

                                                      2007              2006
                                                   -----------      ------------
Balance at beginning of year .................     $ 1,826,626      $ 2,999,637
Repayments made ..............................      (1,061,009)      (1,243,742)
Amount offset against notes payable -
   related parties ...........................        (813,650)               -
Foreign currency fluctuations ................          48,033           70,731
                                                   -----------      -----------
Balance at end of year .......................     $         -      $ 1,826,626
                                                   ===========      ===========

                                      F-19LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 6 - RELATED PARTY TRANSACTIONS (continued)

NOTES PAYABLE - RELATED PARTIES

Notes payable - related parties consisted of the following at December 31, 2007
and 2006:
                                                                                    2007          2006
                                                                                 ----------    ----------
Note to Song Guoan, father of Song Zheng Hong, director and spouse of Liu
Zhong Yi, due on December 30, 2015 with variable annual interest at 80% of
current bank rate (6.26% at December 31, 2007), and unsecured ...............    $1,895,424    $1,880,397

Note to Zheng Gui Xin, employee, due on December 30, 2015 with variable
annual interest at 80% of current bank rate (6.26% at December 31, 2007), and
unsecured ...................................................................     1,545,645     1,446,114

Note to Ma Zhao Zhao, employee, due on December 30, 2015 with variable annual
interest at 80% of current bank rate (6.26% at December 31, 2007), and
unsecured ...................................................................       619,027       579,165

Note to Liu Zhong Yi, officer and director, due on December 30, 2015 with
variable annual interest at 80% of current bank rate (6.26% at December 31,
2007), and unsecured ........................................................       136,244       568,367

Note to Song Zheng Hong, director and spouse of the Company chief executive
officer, Liu Zhong Yi, due on December 30, 2015 with variable annual interest
at 80% of current bank rate (6.26% at December 31, 2007), and unsecured .....       542,168       255,837
                                                                                 ----------    ----------
     Total notes payable - related parties, long term .......................    $4,738,508    $4,729,880
                                                                                 ==========    ==========

For the years ended December 31, 2007 and 2006, interest expense related to
these related loans amounted to $209,834 and $325,824, respectively.

DUE TO RELATED PARTIES

Prior to fiscal 2006, an employee of the Company, from time to time, provided
advances to the Company for operating expenses. During the year ended December
31, 2007 and 2006, the Company repaid approximately $118,919 and $378,042 of
these advances, respectively. At December 31, 2007 and 2006, the Company had a
payable to this employee amounting to $34,072 and $547,481, respectively. These
advances are short-term in nature and non-interest bearing.

Prior to fiscal 2006, the chief executive officer of the Company and his spouse,
from time to time, provided advances to the Company for operating expenses.
During the year ended December 31, 2007 and 2006, the Company repaid $561,878
and $302,871 of these advances, respectively. At December 31, 2007 and 2006, the
Company had a payable to the chief executive officer and his spouse amounting to
$0 and $147,750, respectively. These advances are short-term in nature and
non-interest bearing.

On October 9, 2006, the Company entered into a five-year loan agreement and a
contract with Wu Lan Cha Bu Emergency Hospital ("Wu Lan"), whereby the Company
agreed to lend to Wu Lan approximately $3,840,000 for the construction of a
hospital ward in Inner Mongolia, China. In exchange for agreeing to lend to Wu
Lan the funds, Wu Lan agreed that the Company will be the exclusive provider for
all medicines and disposable medical treatment apparatus to Wu Lan for a period
of twenty (20) years. In October 2006, the Company's chief executive officer,
Mr. Liu, lent these funds to Wu Lan on behalf of the Company. Accordingly, the
Company entered into an assignment agreement whereby the Company assigned all of
its rights, obligations, and receipts under the Loan Agreement to Mr. Liu,
except for the rights to revenues from the sale of medical and disposable

                                      F-20LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 6 - RELATED PARTY TRANSACTIONS (continued)

medical treatment apparatus which will remain with the Company. As compensation
to Mr. Liu for accepting the assignment under the loan agreement including all
of the risks and obligations and for Liu not accepting the rights to revenues
from the sale of medical and disposable medical treatment apparatus which will
remain with the Company, the Company agreed to pay Mr. Liu an aggregate of
approximately $1,137,000 to be paid in 5 equal annual installments of
approximately $230,000. Accordingly, the Company recorded an intangible asset of
approximately $1,137,000 related to exclusive rights to provide all medicines
and disposable medical treatment apparatus to Wu Lan for a period of twenty (20)
years and a corresponding related party liability. For the year ended December
31, 2007 and 2006, the Company paid approximately $195,000 and $56,000 of this
related party liability, respectively. At December 31, 2007 and 2006, amounts
due under this assignment agreement amounted to $966,198 and $1,093,700 of which
$738,300 and $863,447 is included in long-term liabilities and has been included
in due to related parties on the accompanying balance sheets, respectively.

At December 31, 2007, the Company has recorded accrued interest relating to
notes payable - related parties of $61,208, which has been included in due to
related parties on the accompanying balance sheets.

For the year ended December 31, 2007 and 2006, a summary of activities in due to
related parties is as follows:

                                                    Working
                                  Assignment        capital         Accrued
                                  fee payable       advances        interest         Total
                                  -----------     -----------     -----------     -----------
Balance  - December 31, 2005      $         -     $ 1,346,958     $         -     $ 1,346,958
Additions ...................       1,137,000               -               -       1,137,000
Payments made ...............         (56,378)       (680,913)              -        (737,291)
Foreign currency fluctuations          13,078          29,186               -          42,264
                                  -----------     -----------     -----------     -----------
Balance  - December 31, 2006        1,093,700         695,231               -       1,788,931
Additions ...................               -               -          58,774          58,774
Payments made ...............        (194,709)       (680,797)              -        (875,506)
Foreign currency fluctuations          67,207          19,638           2,434          89,279
                                  -----------     -----------     -----------     -----------
Balance  - December 31, 2007      $   966,198     $    34,072     $    61,208     $ 1,061,478
                                  ===========     ===========     ===========     ===========

NOTE 7 - CONVERTIBLE DEBT

On February 12, 2007, the Company entered into Subscription Agreements with
certain accredited investors (the "Purchasers"). Pursuant to the Agreements, the
Company issued to the Purchasers Secured Convertible Notes, ("Notes"), with an
aggregate principal value of $3,000,000, plus interest on the unpaid principal
balance at a rate equal to 14.0% per annum. The maturity date of the Notes is
February 12, 2008. Interest on the Notes commenced accruing on February 12, 2007
and is payable on April 30, 2007 and on the last business day of each calendar
quarter thereafter. Interest is payable in cash, except that upon notice to the
Purchasers in writing not less than 15 trading days prior to the relevant
interest payment date, the Company may deliver common stock that were registered
exclusively for the purpose of satisfying the payment of interest and not
principal ("Interest Shares") valued at 75% of the average of the three lowest
closing bid prices of the common stock as report by Bloomberg L.P. for the 20
trading days ending on the trading day preceding the relevant interest payment
date. In the event of default under the terms of the Notes, at the option of the
Purchaser, all sums of principal and interest remaining unpaid will become
immediately due and payable. The notes are convertible into shares of common
stock of the Company a rate equal to $1.00 per share, subject to adjustment. The
transaction closed on February 12, 2007.

                                      F-21LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 7 - CONVERTIBLE DEBT (continued)

In connection with the debt issuance on February 12, 2007, $50,000 was deducted
from the gross proceeds, which was deferred as a debt discount and will be
amortized over the life of the convertible debentures. Other fees incurred in
connection with the debt issuance include $234,719 of legal fees and other
costs, which were treated as a deferred debt issue costs and are being amortized
to debt issue cost expense over the life of the debenture.

In accordance with Emerging Issues Task Force ("EITF") 98-5 and EITF 00-27, the
convertible notes were considered to have an embedded beneficial conversion
feature (BCF) because the effective conversion price was less than the fair
value of the Company's common stock. This convertible notes were fully
convertible at the issuance date, therefore the portion of proceeds allocated to
the convertible notes of $808,420 was determined to be the value of the
beneficial conversion feature and was recorded as a debt discount and is being
amortized over the 12-months note term.

The Purchasers also received Common Stock Purchase Warrants (the "Warrants").
Pursuant to the terms of the Warrants, the Purchasers are entitled to purchase
up to 1,500,000 shares of common stock of the Company at an exercise price of
$1.50 per share. The Warrants have a term of 5 years after the issue date of
February 12, 2007. These warrants were treated as a discount on the secured
notes and were valued at $808,419 to be amortized over the 12-month note term.
The fair market value of each stock warrant was estimated on the date of grant
using the Black-Scholes option-pricing model in accordance with SFAS No. 123R
using the following weighted-average assumptions: expected dividend yield 0%;
risk-free interest rate of 4.62%; volatility of 105% and an expected term of
five years.

During the year ended December 31, 2007, amortization of debt issue costs was
$205,379. The remaining balance of debt issue costs at December 31, 2007 was
$29,340. The amortization of debt discounts for the year ended December 31, 2007
was $1,458,484, which has been included in interest expense on the accompanying
statement of operations. The balance of the debt discount is $208,355 at
December 31, 2007.

The Notes are secured by a Security Agreement, a Pledge Agreement, a Guaranty,
and Share Pledge Agreements (collectively, the "Security Agreements"). In the
event of a default, the Security Agreements grants to S. Michael Rudolph, as
collateral agent for the Purchasers, a security interest in all right, title and
interest of Debtors, as that term is defined therein, to and in respect of all
Accounts, Goods, real or personal property, all present and future books and
records relating to the foregoing and all products and Proceeds of the
foregoing, as set forth therein, and all security interests, as set forth
therein, of the Company, Lotus Pharmaceutical International, Inc. Beijing Liang
Fang Pharmaceutical Co., Ltd. and Beijing En Zhe Jia Shi Pharmaceutical Co.,
Ltd. In addition, Liu Zhong Yi, the Company's president and chief executive
officer, pledged his 18,782,400 shares of the Company's common stock, Song
Zhenghong, a director of the Company and spouse of Liu Zhong Yi, pledged her
6,708,000 shares of the Company's common stock, and the Company pledged its
38,800 shares of Lotus's common stock in the event of a default under the Notes.
Events of default include, but are not limited to, (i) the Company's failure to
pay any installment of principal, interest or other sum due under the Notes when
due and such failure continues for a period of 5 business days after the due
date, (ii) the commencement of a voluntary or involuntary liquidation, or other
relief with respect to the Company or its debts under bankruptcy, insolvency or
other similar law, that is not dismissed with 45 days of initiation (iii) final
judgments for the payment in excess of $100,000 are rendered against the
Company, and remain unpaid, unvacated, unbonded or unstayed for a period of 45
days (iv) or any breach or failure to comply in any respect with the terms of
the Notes or any agreements entered into in connection with the transactions
contemplated by the Agreements.

                                      F-22LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 7 - CONVERTIBLE DEBT (continued)

The Company evaluated whether or not the secured convertible debentures contain
embedded conversion options, which meet the definition of derivatives under SFAS
133 "Accounting for Derivative Instruments and Hedging Activities" and related
interpretations. The Company concluded that since the secured convertible
debentures had a fixed conversion rate of $1.00, the secured convertible debt
was not a derivative instrument.

The Company granted registration rights to holders of the Securities. Generally,
the Company shall file with the Commission a Form SB-2 registration statement
(the "Registration Statement") (or such other form that it is eligible to use)
in order to register the Registrable Securities for resale and distribution
under the 1933 Act within forty-five (45) calendar days after the Closing Date
(the "Filing Date"), and cause the Registration Statement to be declared
effective not later than one hundred and fifty (150) calendar days after the
Closing Date (the "Effective Date"). If the Registration Statement was not filed
on or before the Filing Date or was not declared effective on or before the
Effective Date, then the Company shall deliver to the holder of Registrable
Securities, as Liquidating Damages, an amount equal to two percent (2%) for the
first day of such Non-Registration Event and two percent (2%) for each thirty
(30) days (or such lesser pro-rata amount for any period of less than thirty
(30) days) of the Purchase Price of the outstanding Notes. The Company must pay
the Liquidated Damages in cash. The Liquidated Damages must be paid within ten
(10) days after the end of each thirty (30) day period or shorter part thereof
for which Liquidated Damages are payable. The Company filed its registration on
April 25, 2007 and it was declared effective on May 4, 2007. For the year ended
December 31, 2007, the Company recorded registration rights penalty expense of
$110,000.

During 2007, the Company issued 230,000 shares of its common stock upon
conversion of debt.

The convertible debenture liability is as follows at December 31, 2007:

Convertible debentures payable .............................        $ 2,770,000
Less: unamortized discount on debentures ...................           (208,355)
                                                                    -----------
Convertible debentures, net ................................        $ 2,561,645
                                                                    ===========

In February 2008, in connection with a private placement (See Note 12), the
convertible debt and any unpaid interest was repaid in full.

NOTE 8 - SHAREHOLDERS' EQUITY

In February 2007, the Company's Board of Directors and its consenting majority
stockholders have adopted and approved an amendment to increase the number of
the Company's authorized shares of capital stock from 50,000,000 to 210,000,000
total authorized shares of capital stock. The capital stock shall consist of
200,000,000 authorized shares of Common Stock, $0.001 par value per share, and
10,000,000 authorized shares of Preferred Stock, with a par value $0.001 per
share.

In May 2007, the Company issued 74,200 shares of common stock to an officer and
a director of the Company for services rendered. The shares were issued at the
fair values at the date of the grant of $74,200 or $1.00 per share. Accordingly,
the Company recorded stock-based compensation of $74,200.

In September 2007, the Company issued 210,000 shares of common stock to seven
directors of the Company for services rendered. The shares were issued at the
fair values at the date of the grant of $210,000 or $1.00 per share.
Accordingly, the Company recorded stock-based compensation of $210,000.

During the three months ended December 2007, the Company issued 230,000 shares
of its common in connection with the conversion of $230,000 of convertible debt.

                                      F-23LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 8 - SHAREHOLDERS' EQUITY (continued)

In connection with the debt financing (See Note 7), the Company granted
1,500,000 to investors purchase up to 1,500,000 shares of common stock of the
Company at an exercise price of $1.50 per share. The Warrants have a term of 5
years after the issue date of February 12, 2007. On February 25, 2008, pursuant
to a Convertible Redeemable Preferred Share and Warrant Purchase Agreement (See
Note 14), the exercise price of these warrants were reduced to $1.20 per share.

NOTE 9 - INCOME TAXES

The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
the recognition of deferred tax assets and liabilities for both the expected
impact of differences between the financial statements and the tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets. Realization of deferred tax assets, including those
related to the U.S. net operating loss carryforwards, are dependent upon future
earnings, if any, of which the timing and amount are uncertain. Accordingly, the
net deferred tax asset related to the U.S. net operating loss carryforward has
been fully offset by a valuation allowance. The Company is governed by the
Income Tax Law of the People's Republic of China and the United States.

Under the Income Tax Laws of PRC, Chinese companies are generally subject to an
income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income reported in the statutory financial statements after
appropriate tax adjustments. The PRC local government has provided various
incentives to companies in order to encourage economic development. Such
incentives include reduced tax rates and other measures. Since 2002, the Company
has been entitled to an income tax exemption for a six-year period and was
exempted from all of its income tax in the 2007 and 2006 period. The estimated
tax savings due to the tax exemption for the years ending December 31, 2007 and
2006 amounted to approximately $4,600,000 and $1,400,000, respectively. The net
effect on earnings per share if the income tax had been applied would decrease
basic earnings per share for December 31, 2007 and 2006 to $0.16 and $0.07,
respectively.

Lotus Pharmaceuticals, Inc. was incorporated in the United States and has
incurred net operating losses of $704,000 for income tax purposes for the year
ended December 31, 2007 subject to the Internal Revenue Code Section 382, which
places a limitation on the amount of taxable income that can be offset by net
operating losses after a change in ownership. The net operating loss carries
forwards for United States income taxes, which may be available to reduce future
years' taxable income. These carry forwards will expire, if not utilize, through
2027. Management believes that the realization of the benefits from these losses
appears uncertain due to the Company's limited operating history and continuing
losses for United States income tax purposes. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset benefit to reduce
the asset to zero. Management will review this valuation allowance periodically
and make adjustments as warranted. The valuation allowance at December 31, 2007
was approximately $246,000. The consolidated income is earned overseas and the
Company does not intend to repatriate the funds and, in the event of
repatriation there will be a tax on the repatriated income

The components of income (loss) before income tax consist of the following:

                                            Year Ended December 31,
                                        ------------------------------
                                            2007               2006
                                        ------------       -----------
         U.S. Operations .........      $ (2,801,788)      $  (153,800)
         Chinese Operations ......        14,018,916         4,296,820
                                        ------------       -----------
                                        $ 11,217,128       $ 4,143,020
                                        ============       ===========

                                      F-24LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 9 - INCOME TAXES (continued)

The table below summarizes the differences between the U.S. statutory federal
rate and the Company's effective tax rate and as follows for years ended
December 31, 2007 and 2006:
                                                               2007      2006
                                                              ------    ------
US Statutory rates .......................................     34.0%     34.0%
US effective rate in excess of China tax rate ............     (0.4%)    (0.4%)
China income tax exemptions ..............................    (42.1%)   (34.0%)
Non-deductible stock-based compensation and interest .....      5.3%      0.0%
US valuation allowance ...................................      3.2%      0.4%
                                                              ------    ------
                                                                0.0%      0.0%
                                                              ======    ======

Deferred tax assets and liabilities are provided for significant income and
expense items recognized in different years for tax and financial reporting
purposes. Temporary differences, which give rise to a net deferred tax asset is
as follows:
                                                           2007          2006
                                                        ---------     ---------
Tax benefit of net operating loss carryforward .....    $ 246,000        58,444
Valuation allowance ................................     (246,000)      (58,444)
                                                        ---------     ---------
Net deferred tax asset .............................    $       -             -
                                                        =========     =========

After consideration of all the evidence, both positive and negative, management
has recorded a valuation allowance at December 31, 2007 and 2006, due to the
uncertainty of realizing the deferred income tax assets related to the U.S. net
operating loss carryforward.

Beginning January 1, 2008, the new PRC Enterprise Income Tax ("EIT") law will
replace the existing laws for PRC Domestic Enterprises ("DES") and PRC Foreign
Invested Enterprises ("FIEs"). The key changes are:

a. The new standard PRC EIT rate of 25% will replace the 33% rate currently
   applicable to both DES and FIEs, except for High Tech companies who pays a
   reduced rate of 15%; and

b. Companies established before March 16, 2007 will continue to enjoy tax
   holiday treatment approved by local government for a grace period of the next
   5 years or until the tax holiday term is completed, whichever is sooner.

BUSINESS TAX and VALUE ADDED TAX

The Company is subject to value added tax ("VAT") for manufacturing products and
business tax for services provided. The applicable VAT tax rate is 17% for
products sold in the PRC, and the business tax rate is 5% for services provided
in PRC. The amount of VAT liability is determined by applying the applicable tax
rate to the invoiced amount of goods sold (output VAT) less VAT paid on
purchases made with the relevant supporting invoices (input VAT). Under the
commercial practice of the PRC, the Company paid value added taxes ("VAT") and
business tax based on tax invoices issued. The tax invoices may be issued
subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and the
date on which the tax invoice is issued. In the event that the PRC tax
authorities dispute the date of which revenue is recognized for tax purposes,
the PRC tax office has the right to assess a penalty, which can range from zero
to five times the amount of the taxes which are determined to be late or
deficient. According to the PRC tax laws, any potential tax penalty payable on
late or deficient payments of this tax could be between zero and five times the

                                      F-25LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 9 - INCOME TAXES (continued)

amount of the late or deficient tax payable, and will be expensed as a period
expense if and when a determination has been made by the taxing authorities that
a penalty is due. At December 31, 2007 and 2006, the Company accrued $572,200
and $2,047,851, respectively of unpaid business and value-added taxes.

In January 2008, the Chinese local government granted Lotus East a special tax
waiver to exempt and release any unpaid value added tax liabilities and any
related penalties as of December 31, 2007 and for all periods prior to December
31, 2007. In connection with this special tax waiver, the Company recorded a
gain from forgiveness of unpaid value-added tax of $2,160,795.

NOTE 10 - SEGMENT INFORMATION

The following information is presented in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In the year
ended December 31, 2007 and 2006, the Company operated in two reportable
business segments - (1) the manufacture and distribution of pharmaceutical
products and (2) the retailing of traditional and Chinese medicines and supplies
through ten drug stores located in Beijing China and other ancillary revenues
generated from retail location such as advertising income, rental income, and
examination income. The Company's reportable segments are strategic business
units that offer different products. They are managed separately based on the
fundamental differences in their operations.

Information with respect to these reportable business segments for the year
ended December 31, 2007 and 2006 is as follows:

                                          WHOLESALE AND
                                           THIRD-PARTY      RETAIL
                 2007                     MANUFACTURING   OPERATIONS     UNALLOCATED       TOTAL
--------------------------------------    -------------   -----------   ------------   ------------

NET REVENUES .........................    $  51,133,678   $ 4,932,583   $    806,854   $ 56,873,115
                                          -------------   -----------   ------------   ------------
COST OF SALES (EXCLUDING DEPRECIATION)       29,404,614     3,830,206         30,557     33,265,377
OPERATING EXPENSES (EXCLUDING
  DEPRECIATION AND AMORTIZATION) .....                -             -     11,734,838     11,734,838
DEPRECIATION AND AMORTIZATION ........          392,907        20,679        151,021        564,607
OTHER EXPENSE (INCOME) ...............                -             -     (1,947,570)    (1,947,570)
INTEREST EXPENSE .....................                -             -      2,038,735      2,038,735
                                          -------------   -----------   ------------   ------------
NET INCOME ...........................    $  21,336,157   $ 1,081,698   $(11,200,727)  $ 11,217,128
                                          =============   ===========   ============   ============


                                          WHOLESALE AND
                                           THIRD-PARTY      RETAIL
                 2006                     MANUFACTURING   OPERATIONS     UNALLOCATED       TOTAL
--------------------------------------    -------------   -----------   ------------   ------------

NET REVENUES .........................    $  30,285,471   $ 4,800,553   $  1,121,665   $ 36,207,689
                                          -------------   -----------   ------------   ------------

COST OF SALES (EXCLUDING DEPRECIATION)       21,853,466     3,856,494         29,782     25,739,742
OPERATING EXPENSES (EXCLUDING
  DEPRECIATION AND AMORTIZATION) .....                -             -      5,417,539      5,417,539
DEPRECIATION AND AMORTIZATION ........          371,153        18,792        191,619        581,564
INTEREST EXPENSE .....................                -             -        325,824        325,824
                                          -------------   -----------   ------------   ------------
NET INCOME ...........................    $   8,060,852   $   925,267   $ (4,843,099)  $  4,143,020
                                          =============   ===========   ============   ============

                                      F-26LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 10 - SEGMENT INFORMATION (continued)

The Company does not allocate selling and general and administrative expenses to
its reportable segments, because these activities are managed at a corporate
level.

Asset information by reportable segment is not reported to or reviewed by the
chief operating decision maker and, therefore, the Company has not disclosed
asset information for each reportable segment. Substantially all of the
Company's assets are located in China.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases office and manufacturing space under leases in Beijing, China
that expire through July 2019.

Future minimum rental payments required under these operating leases are as
follows:

Year ending December 31:
         2008 .................  $   242,110
         2009 .................      199,949
         2010 .................      119,603
         2011 .................       98,461
  2012 and thereafter..........      738,460
                                 -----------
Total minimum lease payments ..  $ 1,398,583
                                 ===========

For the years ended December 31, 2007 and 2006, rent expense amounted to
$242,856 and $206,965, respectively.

NOTE 12 - OPERATING RISK

(a) Country risk

Currently, the Company's revenues are primarily derived from the sale of
pharmaceutical products to customers in the Peoples Republic of China (PRC). The
Company hopes to expand its operations to countries outside the PRC, however,
such expansion has not been commenced and there are no assurances that the
Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.

(b) Products risk

In addition to competing with other manufacturers of pharmaceutical product
offerings, the Company competes with larger Chinese and International companies
who may have greater funds available for expansion, marketing, research and
development and the ability to attract more qualified personnel. These Chinese
companies may be able to offer products at a lower price. There can be no
assurance that the Company will remain competitive.

(c) Political risk

Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.

                                      F-27LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 13 - RESTATEMENT

For the year ending December 31, 2006, the Company revised certain accounting
treatment related to the recording of an intangible asset and a corresponding
related party liability associated with an assignment agreement and exclusive
revenue rights as described in Notes 4 and 5. The Company initially did not
record the value of the intangible asset and corresponding liability and treated
payment due under the assignment agreement as a periodic payment of interest
expense to the Company's chief executive officer. Subsequently, the Company
determined that an intangible asset and a corresponding related party liability
should have been recorded. Accordingly, the adjustments to the financial
statements for this adjustment were as follows:

1. Balance Sheet:

         a) Intangible assets increased by $1,136,872 to $1,345,041 from
$208,169 and total assets increased by $1,136,872. This increase reflects the
addition of an intangible asset of $1,151,263 offset by an increase in
accumulated amortization of $14,391

         b) Due to related parties increased by $1,093,700 which increased total
current liabilities by $230,253 and long-term liabilities by $863,447. This
increase reflects the addition of a related party payable of $1,151,263 offset
by the repayment of this payable of approximately $57,500. Stockholders' equity
increased $43,172 which reflect the changes made to the balance sheet and
statement of operations as well as an increase in comprehensive income of $889.

2. Statement of Operations:

         a) General and administrative expenses decreased by $42,283 which
reflects an increase in depreciation and amortization expenses of $14,095 offset
by a decrease in assignment fee expenses of $56,378 due to the reversal of the
periodic assignment fee expense previously recorded.

3. Statement of Cash Flows:

         a) For the year ended December 31, 2006, net cash flows provided by
operating activities increased by $56,378 and net cash used in financing
activities increased by $56,378.

NOTE 14 - SUBSEQUENT EVENT

In January 2008, the Company issued 250,000 shares of its common in connection
with the conversion of $250,000 of convertible debt.

On February 25, 2008, the Company entered into a Convertible Redeemable
Preferred Share and Warrant Purchase Agreement (the "Purchase Agreement") by and
among the Company, Dr. Liu Zhong Yi and Mrs. Song Zhenghong (the "Founders"),
and accredited investors (each a "Purchaser" and collectively, the
"Purchasers"), pursuant to which the Company sold to the Purchasers 5,747,118
shares of the Company's series A convertible redeemable preferred stock and
warrants to purchase 2,873,553 shares of the Company's common stock, in a
private placement pursuant to Regulation D under the Securities Act of 1933, for
the aggregate purchase price of $5 million (the "Transaction"). The Transaction
closed on February 25, 2008 (the "Closing Date"). Net proceeds, exclusive of
expenses of the Transaction, from the sale to the Company were $4.6 million,
after the Company paid fees of $400,000 to Maxim Group, LLC, its placement agent
for the Transaction. The Company used $2,576,556 of the net proceeds of the
Transaction to repay in full all of its outstanding obligations under the 14%
Secured Convertible Notes due February 2008 and the Company will use the
remainder of the net proceeds for working capital and general corporate
purposes.

                                      F-28LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 14 - SUBSEQUENT EVENT (continued)

The Purchase Agreement includes customary representations and warranties by each
party thereto. The following is a brief description of the terms and conditions
of the Purchase Agreement and the transactions contemplated thereunder that are
material to the Company:

Pursuant to the Purchase Agreement, the Company issued to the Purchasers an
aggregate of 5,747,118 shares of the Company's series A convertible redeemable
preferred stock, par value $0.001 per share, at a price equal to $0.87 per share
(the "Preferred Shares"). Each of these Preferred Shares may be converted into
one share of the Company's common stock, par value $0.001 per share (as adjusted
for stock splits, stock dividends, reclassification and the like). The Preferred
Shares pay an 8% dividend annually, which is payable in additional Preferred
Shares. Preferred Shares also pay any dividend paid on the common shares on an
as converted basis. For a period of 90 days after February 25, 2010, these
Preferred Shares may also be redeemed at the option of the Purchasers at the
redemption price of $0.87 per share (as adjusted for stock splits, stock
dividends, reclassification and the like), and no other capital stock of the
Company may be redeemable prior to the Preferred Shares. The designation,
rights, preferences and other terms and provisions of the Preferred Shares are
set forth in the Certificate of Designation filed with the Nevada Secretary of
State on February 25, 2008. Holders of Preferred Shares may not convert
Preferred Shares to common shares if the conversion would result in the holder
beneficially owning more than 4.99% of the Company's outstanding common shares.
That limitation may be waived by a holder of Preferred Shares on not less than
61 days written notice to the Company.

The Preferred Shares vote with the common stock on an as converted basis, except
that the Preferred Shares are not entitled to vote for directors. The Company is
prohibited from taking certain corporate actions, including, without limitation,
issuing securities senior to the Preferred Shares, selling substantially all
assets, repurchasing securities and declaring or paying dividends, without the
approval of the holders of a majority of the Preferred Shares outstanding.

In addition, pursuant to the Purchase Agreement, the Company issued to the
Purchasers warrants to purchase up to 2,873,553 shares of the Company's common
stock in the aggregate. The warrants have an initial exercise price of $1.20
(subject to adjustment pursuant to the terms of the warrants). The warrants are
exercisable for a period of five (5) years from the Closing Date. Holders of the
warrants may not exercise the warrants if the exercise would result in the
holder beneficially owning more than 4.99% of the Company's outstanding common
shares. That limitation may be waived by a holder of the warrants on not less
than 61 days written notice to the Company.

Under the Certificate of Designation, the Purchasers have a preemptive right,
from the Closing Date until the conclusion of a public offering by the Company,
to purchase any equity securities being offered by Company that may be
convertible into or exchangeable or exercisable for the Company's common stock
or its equivalent. The amount of such securities that each Purchaser may acquire
is determined based on the ratio of the total number of common stock such
Purchaser may own (assuming full conversion of the Purchaser's Preferred Shares
and full exercise of warrants) to the total number of outstanding common stock
of the Company on a fully diluted basis. The preemptive right, however, does not
extend to the following instances: (i) common stock issued pursuant to an equity
incentive plan, stock option plan, stock option agreement, restricted stock
agreement, stock ownership plan or dividend reinvestment plan of the Company
that is currently in effect and is disclosed; (ii) restricted stock or options
to purchase common stock pursuant to an equity incentive plan or stock option
plan that is currently in effect and is disclosed; (iii) stock options or
restricted stock grants to employees, officers, directors or consultants,
whether or not pursuant to an equity incentive plan; (iv) common stock issuable

                                      F-29LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 14 - SUBSEQUENT EVENT (continued)

upon the conversion or the exercise of securities, options or warrants
outstanding at the closing of this Transaction, including the warrants sold
pursuant to this Transaction, provided that the terms of such securities,
options or warrants are not amended, modified or changed on or after the Closing
Date; (v) common stock or any other security convertible into or exercisable or
exchangeable for common stock in connection with an acquisition transaction
(including by way of a merger or consolidation), the primary purpose of which is
not to raise equity capital; (vi) securities issued to customers, vendors,
licensors or joint venture partners or in connection with strategic alliances
approved by the Company's board of directors, the primary purpose of which is
not to raise equity capital; (vii) securities issued in connection with an
equipment lease financing transaction or a credit financing transaction with a
bank or institutional lender approved by the Company's board of directors, the
primary purpose of which is not to raise equity capital; or (viii) common stock
issuable upon the conversion or exercise of any convertible securities, options
or warrants issued and outstanding from the foregoing seven scenarios.

Under the Purchase Agreement, the Company has also agreed to undertake to file a
registration statement within 60 days following the Closing Date in order to
register the maximum number of common stock issuable from conversion of the
Preferred Shares and underlying the warrants that is allowable under applicable
federal securities regulations. The Company is also obligated to have the
registration statement declared effective within 120 days following the Closing
Date. If the Company is informed by the SEC that there are no comments to the
registration statement, then the registration statement must be effective within
five (5) business days thereafter or on the 60th day after the filing date,
which ever is sooner. The registration statement must be declared effective by
the 120th day after its filing if the SEC has comments. Otherwise, the Company
is subject to liquidated damages, equal to 1% of the total conversion price and
exercise price for the common stock being registered under the registration
statement, for every 30-day period following the date that the registration
statement should have been effective, prorated for any period less than 30 days,
until either all of common shares registered under the registration statement
have been sold or all such common shares may be sold in any three (3) month
period pursuant to Rule 144 promulgated under the Securities Act, whichever is
earlier. The Company must also pay the liquidated damages if sales cannot be
made pursuant to the registration statement for any reason (excepting market
conditions). The maximum amount of liquidated damages is $500,000.

The Company is also obligated, under the Purchase Agreement, to indemnify the
Purchasers against any losses, claims, damages or liabilities arising from any
untruth in or omission of material facts, or violation of applicable federal or
state securities law or regulation, in the registration statement. However, if
the Company's action is the result of the Company's reliance on the Purchasers'
representations, then the Purchasers must indemnify the Company and its
directors and officers.

                                      F-30LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 and 2006

NOTE 14 - SUBSEQUENT EVENT (continued)

In connection with the Purchase Agreement, the Founders delivered in the
aggregate 7,500,000 shares of the Company's common stock owned by them (the
"Escrow Shares") to an escrow account. Portions of the Escrow Shares are being
held in escrow subject to the Company meeting certain earning targets in fiscal
years 2007, 2008 and 2009. The target for 2007 is $8.5 million in net income.
The target for 2008 is 95% of $13.8 million in net income after eliminating the
effect of non-cash charges associated with the Transaction and adjusting for
differences in the exchange rate between Chinese Renminbi and US dollars used in
the Company's 2008 financial statements and an exchange rate of RMB 7.30 to USD
1.00. The target for 2009 is 95% of $17.5 million in net income after
eliminating the effect of non-cash charges associated with the Transaction and
adjusting for differences in the exchange rate between Chinese Renminbi and US
dollars used in the Company's 2009 financial statements and an exchange rate of
RMB 7.30 to USD 1.00. These Escrow Shares will be transferred to the Purchasers
if the Company does not meet the earning targets, and released back to the
Founders if the Company does. Another portion of the Escrow Shares is being held
in escrow subject to the Company listing on the NASDAQ Stock Market within 18
months following the Closing Date. These Escrow Shares will be transferred to
the Purchasers if the listing is not completed within that time period, and
released back to the Founders if it is. Finally, two-thirds of the Escrow Shares
are held in escrow to ensure that the Purchasers receive their full redemption
payments if they choose to redeem their Preferred Shares. Each Preferred Share
may be redeemed for $0.87 per share (adjusted for stock splits, stock dividends,
reclassification and the like). If a Purchaser receives less than the full
redemption amount for each Preferred Share being redeemed, the Purchaser will
receive a number of Escrow Shares to make up the difference, based on the
then-current market price of the common shares. Following the end of the
redemption period, these Escrow Shares, less those transferred to any Purchasers
that redeemed their Preferred Shares, will be released back to the Founders.

                                      F-31