**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**




**FORM
      10-KSB**




(Mark
      One)


x
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF
                1934**




**For
      the fiscal year ended December 31, 2006**




o
            **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
      Small Business Issuer in Its Charter)




**Nevada**
            **20-0507918**(State
                or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
                Employer Identification No.)





**Boca
      Corporate Plaza**


**7900
      Glades Road, Suite 420**


**Boca
      Raton, FL 33434**


(Address
      of Principal Executive Offices and Zip Code)




Issuer’s
      Telephone Number: (877)
      801-0344





Securities
      registered under Section 12(b) of the Exchange Act: None





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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.


Yes
x No
o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-KSB
      or any amendment to this Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act)




Yes
oNo
x




The
      issuer’s revenues for the fiscal year ended December 31, 2006 were
      $36,207,689.





The
      aggregate market value of the issuer’s common equity held by non-affiliates, as
      of April 13, 2007 was $3,440,667.





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 41,280,000 shares at April 10,
      2007.





Documents
      incorporated by reference: None




Transitional
      Small Business Disclosure Format ( *Check
      one* ):
      Yes o No
x









**TABLE
      OF CONTENTS**




**DESCRIPTION
                OF BUSINESS**
            1**RISK
                FACTORS**
            11**CAUTIONARY
                LANGUAGE REGARDING FORWARD-LOOKING****STATEMENTS
                AND INDUSTRY DATA**
            27**DESCRIPTION
                OF PROPERTY**
            28**LEGAL
                PROCEEDINGS**
            29**SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS**
            29**MARKET
                FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS**
            30**MANAGEMENT'S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
            31**FINANCIAL
                STATEMENTS**
            43**DISAGREEMENTS
                WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**
            43**CONTROLS
                AND PROCEDURES**
            43**DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT**
            44**EXECUTIVE
                COMPENSATION**
            48**SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS**
            49**CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE**
            50**EXHIBITS**
            52**PRINCIPAL
                ACCOUNTANT FEES AND SERVICES**
            55




i




**PART
      I**




**ITEM
                1.**
            **DESCRIPTION
                OF BUSINESS**





Unless
      otherwise indicated, all references to ‘‘we’’, ‘‘us’’, ‘‘our’’, the ‘‘Company’’,
“Lotus”, and similar terms, as well as references to the ‘‘Registrant’’ in this
      Annual Report on Form 10-KSB, refer to Lotus Pharmaceuticals, Inc. (including
      its subsidiaries).





**Overview**





We
      are a
      pharmaceutical company focused on developing, manufacturing and distributing
      innovative drugs in the People's Republic of China (“China” or PRC”).
      Additionally, through our 10 retail pharmacy locations in Beijing, China, we
      sell Western
      and traditional Chinese medications, and medical treatment equipment .


We
        were
        incorporated on January 28, 2004 in the State of Nevada as S.E. Asia Trading
        Company, Inc. (“SEAA”)  to sell jewelry and home accessories. The Company’s
        name was changed to Lotus Pharmaceuticals, Inc. on December 6, 2006.





On
      September 6, 2006, we entered into a definitive Share Exchange Agreement with
      Lotus Pharmaceutical International, Inc. (“Lotus International”), whereby we
      would acquire all of the outstanding common stock of Lotus International in
      exchange for newly-issued stock of Lotus to Lotus International’s shareholders.
 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 shareholders own the majority of our voting stock.
      T he
      acquisition of Lotus International by us was accounted for as a reverse merger
      because on a post-merger basis, the former shareholders 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.





PRC
      law
      currently has limits on foreign ownership of certain companies. To comply with
      these foreign ownership restrictions, we operate our pharmaceutical business
      in
      PRC through Beijing Liang Fang Pharmaceutical Co., Ltd. (“Liang Fang”), which
      was formed on June 21, 2000, and an affiliate of Liang Fang, Beijing En Zhe
      Jia
      Shi Pharmaceutical Co., Ltd. (“En Zhe Jia”), which was formed on September 17,
      1999, both of which are limited liability companies headquartered in PRC and
      organized under the laws of PRC (hereinafter, referred to together as “Lotus
      East”). We
      have
      contractual arrangements with Lotus East and its shareholders pursuant to which
      we provide technology consulting and other general business operation services
      to Lotus East. Through these contractual arrangements, we also have 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 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.





1





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




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 shall pay a quarterly consulting service fees in Renminbi (“RMB”) to Lotus
      that is equal to Lotus East’s revenue, as defined, for such
      quarter.





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 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.




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 ten (10) years from September 6, 2006 and may be extended prior
      to
      its expiration by written agreement of the parties.




2




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 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.




Based
      in
      Beijing, China, 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 owns and operates 10 drug stores throughout
      Beijing, China. These drug stores sell Western and traditional Chinese drinking
      pieces, 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.





As
      a
      result of these agreements, 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.





En
      Zhe
      Jia has 2
      shareholders: our CEO, Liu Zhong Yi and Song Zheng Hong, Liu Zhong Yi’s spouse.
      Liang Fang has 3 shareholders: Wen Li Xian, Song Zheng Hong, and Liu Zhong
      Yi.





Our
      headquarters are located in Boca Raton, Florida at Boca Corporate Plaza, 7900
      Glades Road, Suite 420, Boca Raton, FL 33434, and our telephone number at that
      address is (877) 801-0344. We maintain a web site at www.lotuseast.com.
      Information on our web site is not a part of this annual report.





The
      shares of our common stock are quoted on the Over the Counter Bulletin Board
      ("OTC Bulletin Board") under the symbol LTUS.OB.





**Business
      Description**





Our
      business is composed of three parts: (1) Manufacturing and distribution of
      pharmaceutical products, including the manufacture of pharmaceutical products
      for other distributors (OEM manufacturing), (2) retailing of Western
      and traditional Chinese medications, and medical treatment equipment through
      retail locations and (3) research and development as outlined
      below:





3







**Manufacturing
      and distribution of pharmaceutical products**





Our
      production enterprise is located in the Chaoyang District of Beijing and covers
      a floor space of approximately 50,000 square feet. We possess liquid
      phase, gas phase, spectrum, and mass spectrum equipment and all kinds of
      purification and distilling equipment, all of which can be used for production
      and R&D 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),
      we have an advanced automatic pharmacy product line which is GMP authenticated
      under certificate numbers C0849, C0850, D1645, and G3452. Medicines produced
      by
      the Company include material medicine, troches, capsules, granule medicaments;
      freeze-dried powder for injections, injections of small capacities and eye
      drops. Different
      production control zones are used with separated air conditioning system
      according to different production and control needs.





Production
      of pharmaceuticals is Lotus’ largest and most profitable business and accounts
      for approximately 83% of our revenues. Under various manufacturing contracts,
      we
      provide manufacturing services for several drug companies in which they supply
      the raw materials and we manufacture their product to their specifications
      for a
      fee.





4




Our
      principal pharmaceutical manufactured products include:





*Valsartan*





In
      2000,
      we 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 our 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.





Our
      goal
      is to make Valsartan the number one prescribed brand in its class of high blood
      pressure medications in the PRC.





Through
      October 29, 2006, we held protective manufacturing rights to produce Valsartan.
      We estimate 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. We believe that the longer our product is on the market,
      our
      market share will increase year by year due to brand recognition and continued
      sales efforts. We believe that even if the Chinese government does not take
      any
      measures to protect these products, other enterprises still can not replicate
      our 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, our market will be relatively mature and we believe that our
      production cost will be lower than those new products. Accordingly, we believe
      that our sales revenue from Valsartan can stay relatively stable.





*Brimonidine
      Tartrate Eyes Drops*





Brimonidine
      Tartrate is a drug used to constrict adrenaline receptors, an important step
      in
      treating glaucoma. We sell Brimonidine Tartrate eye drops under our brand name
      “Muxin”. The drug was first put into market in the U.S. in 1998 and in
      August 2004, we 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, our Muxin and imported Alphagan have exactly the same
      curative effect but the side-effects of Muxin are fewer than Alphagan, so our
      product has a stronger competitive advantage.





5




To
      date,
      we have done minimal advertising on this product, with sales increasing only
      by
      the customer’s natural needs. Through September 2007, we hold protective
      manufacturing rights to produce Brimonidine Tartrate. We estimate that other
      enterprises will not be able to replicate this product until March 2010, because
      we believe it takes at least 30 months to replicate an eye drop medicine.
      Currently, we have minimal competition and we believe our market share will
      not
      decrease. However, we anticipate lowers profits after 2010.





*Leflunomide*





Leflunomide
      is a medicine for the treatment of rheumatoid arthritis, systematically
      erythematic lupus, and psoriasis. It also has functions such as
      anti-rejection.





*Levofloxacin
      Lactate*





Levofloxacin
      is a popular anti-bacterial drug with indications of all kinds of bacterial
      inflections and used for medical care.





*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.





**With
      the implementation in China of macro economic policy, the 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.**





Currently,
      we market and sell the products only in PRC.





**Retail
      Drugstores**





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





•
            Xin
                Zhong Tai Drugstore


•
            Long
                Ren Tang Drugstore


•
            Wan
                Shou Road Drugstore


•
            He
                Ping Li Drugstore


•
            Feng
                Lin Lu Zhou


•
            Youth
                Lake Drugstore


•
            Capital
                Airport Drugstore


•
            Young
                An Zhong Sheng Drugstore


•
            Cheng
                Zhuang Road Drugstore


•
            Feng
                Tai Drugstore




These
      10
      drugstores all deal in over 5,000 types of Western and traditional Chinese
      medications, and medical treatment equipment. We have over 200 employees
      including registered pharmacists. The drugstores attempt to compete according
      to
      lower pricing and more efficient distribution and management practices. All
      of
      the drugstores are located in Beijing, China.




6




Through
      our retail operations, we also obtain 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.





**Research
      and Development Enterprise**





We
      have a
      research and development ("R&D") team 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. Our R&D team
      consists of experts in the fields of medical technology, biotechnology, and
      pharmaceuticals.





**Distribution
      Methods of the Products or Services and our Customers**




Currently,
      we sell our drugs through drugs distribution companies in China covering
      Beijing, Shanghai, GuangDong, Inner Mongolia, Ningxia, Henan, Hubei, LiaoNing,
      HeiLongjiang, Guangxi, Jiangsu, Hebei, Anhui provinces in the PRC.  Currently,
      we have approximately 69 distribution agents throughout the PRC.





We
      work
      with various distribution companies to distribute our 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, we have a network of connections with hospitals in the Beijing
      and
      surrounding areas. We have established contacts that provide direct access
      to
      hospitals in these areas.





Our
      drug
      products are sold through our retail drug stores. We will continue to establish
      more representative offices and engage additional distribution agents in order
      to strengthen our distribution network.





We
      recognize the importance of branding as well as packaging. All of our products
      bear a uniform brand but we also brand and package our products with specialized
      designs to differentiate the different categories of the Company’s products.





We
      conduct promotional marketing activities to publicize and enhance the Company’s
      image as well as to reinforce the recognition of the Company’s brand name and
      include:





1.
            publishing
                advertisements and articles in national as well as specialized and
                provincial newspapers, magazines, and in other media, including the
                Internet;





2.
            participation
                in national meetings, seminars, symposiums, exhibitions for
                bio-pharmaceutical and other related
                industries;





3.
            organizing
                cooperative promotional activities with distributors;
                and





4.
            sending
                direct mail to major physician offices and
                laboratories.





We
      currently have over 100 customers, including over 30 major direct customers
      in
      Beijing, Shanghai, GuangDong, Inner Mongolia, Ningxia, Henan, Hubei, LiaoNing,
      HeiLongjiang, Guangxi, Jiangsu, Hebei, Anhui provinces in the PRC.





7




**Our
      Corporate Strategy**





The
      overall development strategy of our company is to integrate medical research,
      production and commercialization to realize professional and scaled management.
      We focus on talent, knowledge and technology and will follow the direction
      of
      medical industrialization and internationalization. We are willing to cooperate
      with people of all sides to create a brilliant future on the basis of
      exploration, integrity and efficiency





**Competition**





Vertically
      integrated pharmaceutical operations are still at an early stage of development
      in China due to heavy state involvement in the past. The industry is fragmented.
      We face competition from domestic drug R&D companies, drug manufacturing
      companies which are growing rapidly. Our direct competitors are domestic
      pharmaceutical companies and new drug R&D institutes that have fairly strong
      R&D capabilities in new drug R&D such as Beijing Venture Biopharma
      Technology Co., Ltd., Fosun Group Co., Ltd. and Chongqing Pharmaceutical
      Research Institute, Co. Ltd., Zhuhai
      Lizhu and Beijing Nohua We also
      face competition of foreign companies who have strong proprietary pipeline
      and
      strong financial resources. These
      companies have significantly greater assets than us and have a larger current
      market share. Our
      advantage is our local concentration in research and discovery as well as our
      local distribution network, and lower prices. We will 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. We are in a competitive position to seize
      substantial market opportunities as the pharmaceutical industry in China rapidly
      moves toward consolidation, privatization, and commercialization. The
      Company is able to compete with these competitors because of the strong R&D
      capability, extensive sales network and lower prices. Other than these two
      competitors, most of other competitors produce only one or two products.




**Sources
      and Availability of Raw Materials and the Principal
      Suppliers**





The
      Company designs, creates prototypes and manufactures its products at its
      manufacturing facilities located at Beijing, PRC. Our principal raw materials
      include Brimonidine Tartrate, Brimonidine Tartrate and Valsartan. The prices
      for
      these raw materials are subject to market forces largely beyond our 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.




8




**Patents,
      Trademarks, Licenses, Franchises, Concessions. Royalty Agreements or Labor
      Contracts**





We
      rely
      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 our brand. We have an issued
      patented special technology in PRC, valid for 10 years, and we intend to apply
      for more patents to protect our core technologies. We also enter into
      confidentiality, non-compete and invention assignment agreements with our
      employees and consultants and nondisclosure agreements with third parties.
      “Maixing” and “Liang Fang” are our registered trademarks in the PRC.





Bio-pharmaceutical
      companies are at times involved in litigation based on allegations of
      infringement or other violations of intellectual property rights. Furthermore,
      the application of laws governing intellectual property rights in the PRC and
      abroad is uncertain and evolving and could involve substantial risks to us.





**Government
      Approval and Regulation of the Company’s Principal Products or
      Services**





Our
      principal sales market is presently in China. We are 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, we are also subject to
      various regulations and permit systems by the Chinese government.




The
      Drug
      Administration Law of the PRC governs us and our products. The State Food &
Drug Administration of the PRC regulates and implements our drug laws. The
      State
      FDA has granted the Company six government permits for us to produce the
      following products: Valsartan Capsules, the material of Valsartan, Levofloxacin
      Lactate for Injection, the material of Levofloxacin Lactate, Brimonidine
      Tartrate Eyes Drops with a density of 0.1, Brimonidine Tartrate Eyes Drops
      with
      the density of 0.3.





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.





No
      enterprise may start production at its facilities until it receives approval
      from the Ministry of Agriculture to begin operations. The Company currently
      has
      obtained the requisite approval and licenses from the Ministry of Agriculture
      in
      order to operate our production facilities.





9




**Research
      and Development**





We
      place
      great emphasis on product research and development. The Company has established
      two research and development centers. From research and development performed
      in
      fiscal 2005 and prior, w e
      have a
      product pipeline containing approximately seven products in different dosage
      forms which are ready for commercialization in China for the treatment of
      diseases. We intend to commercialize or license these drugs during year 2007
      and
      2008. Major
      projects currently being undertaken at these centers focus on the
      following:





Drug
                Name
            Target
                Treatment
            StatusCalcium
                Dibutyryl Adenosine Monophosphate for Injection
            used
                to cure angina and acute myocardial infarction
            (A)
                Expected approval date February 2008Rabeprazole
                Sodium raw material and Rabeprazole Sodium Enteric-coated
                Tablets
            used
                for curing gastric ulcer, duodenal ulcer, stomal ulcer, reflux
                esophagitis, Zollinger-Ellison symptom complex and gastrinoma
            (A)
                Expected approval date August 2007Compound
                Allantoin Dispersible Tablets
            used
                for curing gastrelcosis, duodenal bulbar ulcer and chronic gastritis
            (A)
                Expected approval date April 2008Gatifloxacin
                Lactate for Injection
            used
                for curing acute nasosinusitis, chronic bronchitis, pneumonia, gonorrhea,
                and rectum infection
            (A)
                Expected approval date September 2007Sodium
                Aescinate for Injection
            use
                for curing hydrocephalus, swelling caused by wounds or surgery operation
                and for venous return disorder.
            (A)
                Expected approval date September 2007Candesartan
                Pills
            used
                for curing essential hypertension
            (A)
                Expected approval date March 2008Nicergoline
                Pills
            used
                for the curing feeling dullness, impaired concentration, memory
                deterioration, gloom and restlessness caused by cerebral infarction
                sequela
            (A)
                Expected approval date May 2008




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




In
      2004,
      we spent approximately $1.18 million or approximately 8% of the Company’s 2004
      revenue, on research and development of various bio-pharmaceutical products.
      In
      2005, we spent approximately $1.79 million or approximately 10% of the Company’s
      2005 revenue on research and development of products. In 2006, research and
      development costs were incurred for the improvement of technology on existing
      drugs and to improve our production process for which we incurred research
      and
      development expenses of $387,337. We expect to begin new research and
      development projects in the late part of 2007.




10




**Compliance
      with Environmental Law**




We
      comply
      with the Environmental Protection Law of China and its local regulations. In
      addition to statutory and regulatory compliance, we actively ensure the
      environmental sustainability of our operations.





In
      compliance with PRC environmental regulations, the Company spent approximately
      $50,000 in 2004, $50,000 in 2005, and approximately $150,000 in 2006, mainly
      for
      waste discharge processing and dust cleaning.




**Employees**




In
      2004,
      the Company had 218 employees, of which 155 worked as full time employees.
      In
      2005, the Company had 230 employees, of which 193 worked as full time employees.
      In 2006, the Company had 266 employees, of which 215 worked as full time
      employees. Currently, the Company has 268 employees, 215 of which are full
      time
      employees. Additionally, we employ our chief financial officer on an outsourced
      basis.




**RISK
      FACTORS**




*You
      should carefully consider the risks described below before buying shares of
      our
      Common Stock in this offering. Additional risks and uncertainties not currently
      known to us or that we currently deem immaterial may impair our business
      operations. If any of the adverse events described in this risk factors section
      actually occur, our business, results of operations and financial condition
      could be materially adversely affected, the trading price of our common stock
      could decline and you might lose all or part of your investment. We have had
      operating losses to date and cannot assure that we will be profitable in the
      foreseeable future. We make various statements in this section which constitute
      “forward-looking” statements under Section 27A of the Securities
      Act.*





***FACTORS
      THAT MAY AFFECT FUTURE PERFORMANCE***





***Our
      limited operating history makes it difficult to evaluate our future prospects
      and results of operations.***





We
      have a
      limited operating history. We operate our pharmaceutical business in PRC 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 limited liability companies headquartered in PRC and organized
      under the laws of PRC (hereinafter, referred to together as “Lotus East”),
      pursuant to certain contractual arrangements with Lotus East more fully
      described under "Description of Business" above. Lotus East commenced operations
      in 1999. Accordingly, you should consider our future prospects in light of
      the
      risks and uncertainties experienced by early stage companies in evolving
      industries such as the pharmaceutical industry in China. Some of these risks
      and
      uncertainties relate to our ability to:





•
            maintain
                our market position in the pharmaceuticals business in
                China;


•
            offer
                new and innovative products to attract and retain a larger customer
                base;


•
            attract
                additional customers and increase spending per
                customer;


•
            increase
                awareness of our brand and continue to develop user and customer
                loyalty




11




•
            respond
                to competitive market conditions;


•
            respond
                to changes in our regulatory
                environment;


•
            manage
                risks associated with intellectual property
                rights;


•
            maintain
                effective control of our costs and
                expenses;


•
            raise
                sufficient capital to sustain and expand our
                business;


•
            attract,
                retain and motivate qualified personnel;
                and


•
            upgrade
                our technology to support additional research and development of
                new
                products.





If
      we are
      unsuccessful in addressing any of these risks and uncertainties, our business
      may be materially and adversely affected.





***We
      may need additional financing to execute our business
      plan.***




The
      revenues from the production and sale of pharmaceutical products and the
      projected revenues from these products are not adequate to support our expansion
      and product development programs.  We will need substantial additional
      funds to build additional production facilities, pursue further research and
      development, obtain regulatory approvals, file, prosecute, defend and enforce
      our intellectual property rights, market our products, expand our presence
      in
      the retail market by opening additional pharmacy locations, and the acquisition
      of similar businesses.  We will seek additional funds through public or
      private equity or debt financing, strategic transactions and/or from other
      sources.  We could enter into collaborative arrangements for the
      development of particular products that would lead to our relinquishing some
      or
      all rights to the related technology or products.




There
      are
      no assurances that future funding will be available on favorable terms or at
      all.  If additional funding is not obtained, we will need to reduce, defer
      or cancel development programs, planned initiatives or overhead expenditures,
      to
      the extent necessary.  The failure to fund our capital requirements would
      have a material adverse effect on our business, financial condition and results
      of operations.





***Our
      success depends on collaborative partners, licensees and other third parties
      over whom we have limited control.***




Due
      to
      the complexity of the process of developing pharmaceuticals, our 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 our products. We have one research collaboration and
      outsource other business functions.  Our license agreements could obligate
      us 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
      we will be able to establish or maintain collaborations that are important
      to
      our business on favorable terms, or at all.




12




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




•
            terminates
                or suspends its agreement with us;


•
            causes
                delays;


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


•
            fails
                to adequately perform clinical
                trials;


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


•
            otherwise
                fails to meet its contractual
                obligations.





Our
      collaborative partners could pursue other technologies or develop alternative
      products that could compete with the products we are developing.





***The
      profitability of our products will depend in part on our ability to protect
      proprietary rights and operate without infringing the proprietary rights of
      others.***




The
      profitability of our products will depend in part on our ability to obtain
      and
      maintain patents and manufacturing rights and preserve trade secrets, and the
      period our intellectual property remains protected.  We must also operate
      without infringing the proprietary rights of third parties and without third
      parties circumventing our rights. The patent positions of pharmaceutical and
      biotechnology enterprises, including ours, 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 our intellectual property rights to the same extent as the
      laws
      of the U.S.  Because patent applications are maintained in secrecy in some
      cases, we cannot be certain that we or our 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
      our 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
      our 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 our other drug products, it would have a
      material adverse effect on our revenue.





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




•
            any
                of our patent applications will result in the issuance of
                patents;


•
            we
                will develop patentable products;


•
            the
                manufacturing rights we have been issued will provide us with any
                competitive advantages;


•
            the
                patents of others will not impede our ability to do business;
                or


•
            third
                parties will not be able to circumvent our manufacturing
                rights.




13




A
      number
      of pharmaceutical, biotechnology, research and academic companies and
      institutions have developed technologies, filed patent applications or received
      patents on technologies that may relate to our business.  If these
      technologies, applications or patents conflict with ours, the scope of any
      future patents could be limited or our patent applications could be
      denied.  Our business may be adversely affected if competitors
      independently develop competing technologies, especially if we do not obtain,
      or
      obtain only narrow, patent protection.  If patents that cover our
      activities are issued to other companies, we may not be able to obtain
      manufacturing rights at a reasonable cost, or at all; develop our technology;
      or
      introduce, manufacture or sell the products we have planned.





Patent
      litigation is becoming widespread in the biotechnology industry.  Such
      litigation may affect our efforts to form collaborations, to conduct research
      or
      development, to conduct clinical testing or to manufacture or market any
      products under development.  There are no assurances that our patents would
      be held valid or enforceable by a court or that a competitor’s technology or
      product would be found to infringe our patents in the event of patent
      litigation.  Our business could be materially affected by an adverse
      outcome to such litigation.  Similarly, we may need to participate in
      interference proceedings declared by the U.S. Patent and Trademark Office or
      equivalent international authorities to determine priority of invention. 
We could incur substantial costs and devote significant management resources
      to
      defend our patent position or to seek a declaration that another company’s
      patents are invalid.





Much
      of
      our know-how and technology may not be patentable, though it may constitute
      trade secrets. There are no assurances that we will be able to meaningfully
      protect our trade secrets.  We cannot assure you that any of our existing
      confidentiality agreements with employees, consultants, advisors or
      collaborators will provide meaningful protection for our 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 our technology, for example by asserting
      that
      they developed the technology independently.





***We
      may encounter difficulties in manufacturing our
      products.***




Before
      our 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 we cannot arrange for or maintain commercial-scale manufacturing on
      acceptable terms, or if there are delays or difficulties in the manufacturing
      process, we may not be able to conduct clinical trials, obtain regulatory
      approval or meet demand for our products. Production of our products could
      require raw materials which are scarce or which can be obtained only from a
      limited number of sources.  If we are unable to obtain adequate supplies of
      such raw materials, the development, regulatory approval and marketing of our
      products could be delayed.




***We
      could need more clinical trials or take more time to complete our clinical
      trials than we have planned.***





Clinical
      trials vary in design by factors including dosage, end points, length, and
      controls.  We may need to conduct a series of trials to demonstrate the
      safety and efficacy of our products.  The results of these trials may not
      demonstrate safety or efficacy sufficiently for regulatory authorities to
      approve our products. Further, the actual schedules for our 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.




14




We
      rely
      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, we have less control
      over their timing and design than trials we sponsor.  Delays in or failure
      to commence or complete any planned clinical trials could delay the ultimate
      timelines for our product releases.  Such delays could reduce investors’
confidence in our ability to develop products, likely causing our share price
      to
      decrease.





***We
      may not be able to obtain the regulatory approvals or clearances that are
      necessary to commercialize our products.***




The
      PRC
      and other countries impose significant statutory and regulatory obligations
      upon
      the manufacture and sale of pharmaceutical products.  Each regulatory
      authority 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.  We 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.




Our
      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
      time-consuming.  If our 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:





•
            the
                commercialization of our products could be adversely
                affected;


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


•
            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 us 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.





15




In
      manufacturing our products we will be 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.  We cannot comply with regulatory requirements, including
      applicable good manufacturing practice requirements, we may not be allowed
      to
      develop or market the product candidates.  If we or our manufacturers fail
      to comply with applicable regulatory requirements at any stage during the
      regulatory process, we 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 our products obsolete or
      uncompetitive.***




Some
      of
      our competitors and potential competitors have greater product development
      capabilities and financial, scientific, marketing and human resources than
      we
      do.  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 we are
      developing.  Alternative products may be developed that are more effective,
      work faster and are less costly than our products.  Competitors may succeed
      in developing products earlier than us, obtaining approvals and clearances
      for
      such products more rapidly than us, or developing products that are more
      effective than ours.  In addition, other forms of treatment may be
      competitive with our products. Over time, our technology or products may become
      obsolete or uncompetitive.




***Our
      products may not gain market acceptance.***




Our
      products may not gain market acceptance in the pharmaceutical community. 
The degree of market acceptance of any product depends on a number of factors,
      including establishment and demonstration of clinical efficacy and safety,
      cost-effectiveness, clinical advantages over alternative products, and marketing
      and distribution support for the products.  Limited information regarding
      these factors is available in connection with our products or products that
      may
      compete with ours.




To
      directly market and distribute our pharmaceutical products, we or our
      collaborators require a marketing and sales force with appropriate technical
      expertise and supporting distribution capabilities.  We may not be able to
      further establish sales, marketing and distribution capabilities or enter into
      arrangements with third parties on acceptable terms.  If we or our partners
      cannot successfully market and sell our products, our ability to generate
      revenue will be limited.





***Our
      operations and the use of our products could subject us to damages relating
      to
      injuries or accidental contamination.***




Our
      research and development processes involve the controlled use of hazardous
      materials.  We are subject to federal, 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, we could
      be held liable for resulting damages.  We are not insured with respect to
      this liability. Such liability could exceed our resources.  In the future
      we could incur significant costs to comply with environmental laws and
      regulations.




16




***If
      we were successfully sued for product liability, we could face substantial
      liabilities that may exceed our resources.***




We
      may be
      held liable if any product we develop, or any product which is made using our
      technologies, causes injury or is found unsuitable during product testing,
      manufacturing, marketing, sale or use. These risks are inherent in the
      development of agricultural and pharmaceutical products. We currently do not
      have product liability insurance. We are not insured with respect to this
      liability. If we 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
      we
      develop may be prevented or inhibited. If we are sued for any injury caused
      by
      our products, our liability could exceed our total assets.




***We
      have 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. We do not have
      any
      business liability or disruption insurance coverage for our operations in China.
      Any business disruption, litigation or natural disaster may result in our
      incurring substantial costs and the diversion of our resources.





***Dependence
      on key personnel***




We
      depend
      on our key management and technological personnel. The unavailability or
      departure of such key personnel may seriously disrupt and harm our operations,
      business and the implementation of our business strategy and plans. Although
      most of these personnel are founders and shareholders of our company, there
      can
      be no assurance that we can be successful in retaining them.





***Our
      success depends on attracting and retaining qualified
      personnel.***




We
      depend
      on a core management and scientific team.  The loss of any of these
      individuals could prevent us from achieving our business objective of
      commercializing our product candidates.  Our future success will depend in
      large part on our 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.  We face
      competition for personnel from other companies, universities, public and private
      research institutions, government entities and other organizations.  If our
      recruitment and retention efforts are unsuccessful, our business operations
      could suffer.





***RISKS
      RELATED TO OUR CORPORATE STRUCTURE***





***PRC
      laws and regulations governing our businesses and the validity of certain of
      our
      contractual arrangements are uncertain. If we are found to be in violation,
      we
      could be subject to sanctions. In addition, changes in such PRC laws and
      regulations may materially and adversely affect our
      business.***





There
      are
      substantial uncertainties regarding the interpretation and application of PRC
      laws and regulations, including, but not limited to, the laws and regulations
      governing our business, or the enforcement and performance of our contractual
      arrangements with our affiliated Chinese entity, Lotus East, and its
      shareholders. We are considered a foreign person or foreign invested enterprise
      under PRC law. As a result, we are subject to PRC law limitations on foreign
      ownership of Chinese companies.




17




These
      laws and regulations are relatively new and may be subject to change, and their
      official interpretation and enforcement may involve substantial uncertainty.
      The
      effectiveness of newly enacted laws, regulations or amendments may be delayed,
      resulting in detrimental reliance by foreign investors. New laws and regulations
      that affect existing and proposed future businesses may also be applied
      retroactively.





The
      PRC
      government has broad discretion in dealing with violations of laws and
      regulations, including levying fines, revoking business and other licenses
      and
      requiring actions necessary for compliance. In particular, licenses and permits
      issued or granted to us by relevant governmental bodies may be revoked at a
      later time by higher regulatory bodies. We cannot predict the effect of the
      interpretation of existing or new PRC laws or regulations on our businesses.
      We
      cannot assure you that our current ownership and operating structure would
      not
      be found in violation of any current or future PRC laws or regulations. As
      a
      result, we may be subject to sanctions, including fines, and could be required
      to restructure our operations or cease to provide certain services. Any of
      these
      or similar actions could significantly disrupt our business operations or
      restrict us from conducting a substantial portion of our business operations,
      which could materially and adversely affect our business, financial condition
      and results of operations.




***We
      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:





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


•
            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
                our business, or subject us to sanctions, requirements to increase
                capital
                or other conditions or enforcement, or compromise enforceability
                of
                related contractual arrangements, or have other harmful effects on
                us.





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.




18




***In
      order to comply with PRC laws limiting foreign ownership of Chinese companies,
      we conduct our pharmaceutical business through Lotus East by means of
      contractual arrangements. If the PRC government determines that these
      contractual arrangements do not comply with applicable regulations, our business
      could be adversely affected.***




The
      PRC
      government restricts foreign investment in pharmaceutical businesses in China.
      Accordingly, we operate our business in China through Lotus East. Lotus East
      holds the licenses and approvals necessary to operate our pharmaceutical
      business in China. We have contractual arrangements with Lotus East and its
      shareholders that allow us to substantially control Lotus East. We cannot assure
      you, however, that we will be able to enforce these contracts.




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
      our business and operating licenses, require us to discontinue or restrict
      our
      operations, restrict our right 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 its shareholders may not be as
      effective in providing control over these entities as direct ownership.***




Since
      PRC
      law limits foreign equity ownership in companies in China, we operate our
      pharmaceutical business through two affiliated Chinese companies, collectively
      referred to as Lotus East. We have no equity ownership interest in Lotus East
      and rely on contractual arrangements to control and operate such business.
      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 business despite its contractual obligation to do so. If Lotus
      East fails to perform under their 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 Lotus East’s shareholders would always act in our best
      interests.




***The
      Chairman of the Board of Directors of Lotus East has potential conflicts of
      interest with us, which may adversely affect our business.***




Liu
      Zhong
      Yi, our Chief Executive Officer, is also the Chairman of the Board of Directors
      of the two affiliated companies that comprise Lotus East. Conflicts of interests
      between his duties to our company and Lotus East may arise. As Mr. Liu is a
      director and executive officer of our company, he has 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, Mr. Liu will act completely in our interests or
      that conflicts of interests will be resolved in our favor. In addition, Mr.
      Liu
      could violate his legal duties by diverting business opportunities from us
      to
      others. If we cannot resolve any conflicts of interest between us and Dr. Liu,
      we would have to rely on legal proceedings, which could result in the disruption
      of our business.





19




***RISKS
      RELATED TO DOING BUSINESS IN CHINA***





***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 our business.***




Substantially
      all of our 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 the amount of government involvement, level of
      development, growth rate, control of foreign exchange and 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 us. 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, we 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 is registered in the Liangxiang Economic Tech Development Zone
      and is entitled to an exemption from enterprise income tax until December 12,
      2008. If the new foreign investment company is founded before that and purchases
      Lotus, the new company will enjoy exemption of income tax for three additional
      years, which continues to 2010. Following the tax exemption period, we will
      enjoy a 50% tax break which means a tax rate of 7.5%.





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.





***Lotus
      East is subject to restrictions on making payments to us.***




We
      are a
      holding company incorporated in the State of Nevada and do not have any assets
      or conduct any business operations other than our investments in our affiliated
      entity in China, Lotus East. As a result of our holding company structure,
      we
      rely entirely on payments from Lotus East under our contractual arrangements.
      The PRC government also imposes controls on the conversion of RMB into foreign
      currencies and the remittance of currencies out of China. We may experience
      difficulties in completing the administrative procedures necessary to obtain
      and
      remit foreign currency. See “Government control of currency conversion may
      affect the value of your investment.”




20




Furthermore,
      if our affiliated entity in China incurs debt on its own in the future, the
      instruments governing the debt may restrict its ability to make payments. If
      we
      are unable to receive all of the revenues from our operations through these
      contractual or dividend arrangements, we may be unable to pay dividends on
      our
      ordinary shares.





***Uncertainties
      with respect to the PRC legal system could adversely affect us.***




We
      conduct our business primarily through our affiliated Chinese entity, 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, our management or the experts named in the
      prospectus.***




We
      conduct substantially all of our operations in China and substantially all
      of
      our assets are located in China. In addition, most of our senior executive
      officers reside within China. As a result, it may not be possible to effect
      service of process within the United States or elsewhere outside China upon
      our
      senior executive officers, including with respect to matters arising under
      U.S.
      federal securities laws or applicable state securities laws. Moreover, our
      PRC
      counsel has advised us that the PRC does not have treaties with the United
      States or many other countries providing for the reciprocal recognition and
      enforcement of judgment of courts.





***Governmental
      control of currency conversion may affect the value of your investment.***




The
      PRC
      government imposes controls on the convertibility of RMB into foreign currencies
      and, in certain cases, the remittance of currency out of China. We receive
      substantially all of our revenues in RMB. Under our current structure, our
      income is primarily derived from payments from Lotus East. Shortages in the
      availability of foreign currency may restrict the ability of our
      PRC affiliated entity to remit sufficient foreign currency to pay dividends
      or other payments to us, or otherwise satisfy their foreign currency denominated
      obligations. 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 PRC 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 us from obtaining sufficient foreign currency to satisfy our
      currency demands, we may not be able to pay dividends in foreign currencies
      to
      our shareholders.




21




***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.
      Our revenues and costs are mostly denominated in RMB, while a significant
      portion of our financial assets are denominated in U.S. dollars. We rely
      entirely on fees paid to us by our affiliated entity in China. Any significant
      fluctuation in value of RMB may materially and adversely affect our cash flows,
      revenues, earnings and financial position, and the value of, and any dividends
      payable on, our stock in U.S. dollars. For example, an appreciation of RMB
      against the U.S. dollar would make any new RMB denominated investments or
      expenditures more costly to us, to the extent that we 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.***




Our
      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 our business operations. For
      instance, health or other government regulations adopted in response may require
      temporary closure of our production facilities or of our offices. Such closures
      would severely disrupt our business operations and adversely affect our results
      of operations. We have 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***





***To
      date, we have not paid any cash dividends, and no cash dividends will be paid
      in
      the foreseeable future.***





We
      do not
      anticipate paying cash dividends on our common stock in the foreseeable future
      and we may not have sufficient funds legally available to pay dividends. Even
      if
      the funds are legally available for distribution, we may nevertheless decide
      not
      to pay any dividends. We intend to retain all earnings for the company's
      operations.




***The
      application of the "penny stock" rules could adversely affect the market price
      of our common stock and increase your transaction costs to sell those
      shares.***





As
      long
      as the trading price of our common shares is below $5 per share, the open-market
      trading of our common shares will be subject to the "penny stock" rules. The
      "penny stock" rules impose additional sales practice requirements on
      broker-dealers who sell securities to persons other than established customers
      and accredited investors (generally those with assets in excess of $1,000,000
      or
      annual income exceeding $200,000 or $300,000 together with their spouse). For
      transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchase of securities and have received
      the
      purchaser's written consent to the transaction before the purchase.
      Additionally, for any transaction involving a penny stock, unless exempt, the
      broker-dealer must deliver, before the transaction, a disclosure schedule
      prescribed by the Securities and Exchange Commission relating to the penny
      stock
      market. The broker-dealer also must disclose the commissions payable to both
      the
      broker-dealer and the registered representative and current quotations for
      the
      securities. Finally, monthly statements must be sent disclosing recent price
      information on the limited market in penny stocks. These additional burdens
      imposed on broker-dealers may restrict the ability or decrease the willingness
      of broker-dealers to sell our common shares, and may result in decreased
      liquidity for our common shares and increased transaction costs for sales and
      purchases of our common shares as compared to other securities.




22




***Our
      common shares are thinly traded and you may be unable to sell at or near ask
      prices or at all if you need to sell your shares to raise money or otherwise
      desire to liquidate your shares.***





The
      Company cannot predict the extent to which an active public market for its
      common stock will develop or be sustained. However, the Company does not rule
      out the possibility of applying for listing on the NASDAQ National Market or
      other exchanges.




Our
      common shares have historically been sporadically or "thinly-traded" on the
      “Over-the-Counter Bulletin Board”, meaning that the number of persons interested
      in purchasing our common shares at or near bid prices at any given time may
      be
      relatively small or non-existent. This situation is attributable to a number
      of
      factors, including the fact that we are a small company which is relatively
      unknown to stock analysts, stock brokers, institutional investors and others
      in
      the investment community that generate or influence sales volume, and that
      even
      if we came to the attention of such persons, they tend to be risk-averse and
      would be reluctant to follow an unproven company such as ours or purchase or
      recommend the purchase of our shares until such time as we became more seasoned
      and viable. As a consequence, there may be periods of several days or more
      when
      trading activity in our shares is minimal or non-existent, as compared to a
      seasoned issuer which has a large and steady volume of trading activity that
      will generally support continuous sales without an adverse effect on share
      price. We cannot give you any assurance that a broader or more active public
      trading market for our common stock will develop or be sustained, or that
      current trading levels will be sustained.





The
      market price for our common stock is particularly volatile given our status
      as a
      relatively small company with a small and thinly traded “float” and lack of
      current revenues that could lead to wide fluctuations in our share price. The
      price at which you purchase our common stock may not be indicative of the price
      that will prevail in the trading market. You may be unable to sell your common
      stock at or above your purchase price if at all, which may result in substantial
      losses to you.





The
      market for our common shares is characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price will
      continue to be more volatile than a seasoned issuer for the indefinite future.
      The volatility in our share price is attributable to a number of factors. First,
      as noted above, our common shares are sporadically and/or thinly traded. As
      a
      consequence of this lack of liquidity, the trading of relatively small
      quantities of shares by our shareholders may disproportionately influence the
      price of those shares in either direction. The price for our shares could,
      for
      example, decline precipitously in the event that a large number of our common
      shares are sold on the market without commensurate demand, as compared to a
      seasoned issuer which could better absorb those sales without adverse impact
      on
      its share price. Secondly, we are a speculative or "risky" investment due to
      our
      uncertainty of future market acceptance for our current and potential products.





23




As
      a
      consequence of this enhanced risk, more risk-adverse investors may, under the
      fear of losing all or most of their investment in the event of negative news
      or
      lack of progress, be more inclined to sell their shares on the market more
      quickly and at greater discounts than would be the case with the stock of a
      seasoned issuer. The following factors may add to the volatility in the price
      of
      our common shares: actual or anticipated variations in our quarterly or annual
      operating results; adverse outcomes; the termination of our contractual
      agreements with Lotus East; and additions or departures of our key personnel,
      as
      well as other items discussed under this "Risk Factors" section, as well as
      elsewhere in this Current Report. Many of these factors are beyond our control
      and may decrease the market price of our common shares, regardless of our
      operating performance. We cannot make any predictions or projections as to
      what
      the prevailing market price for our common shares will be at any time, including
      as to whether our common shares will sustain their current market prices, or
      as
      to what effect that the sale of shares or the availability of common shares
      for
      sale at any time will have on the prevailing market price. However, the Company
      does not rule out the possibility of applying for listing on the NASDAQ National
      Market or other exchanges.





Shareholders
      should be aware that, according to SEC Release No. 34-29093, the market for
      penny stocks has suffered in recent years from patterns of fraud and abuse.
      Such
      patterns include (1) control of the market for the security by one or a few
      broker-dealers that are often related to the promoter or issuer; (2)
      manipulation of prices through prearranged matching of purchases and sales
      and
      false and misleading press releases; (3) boiler room practices involving
      high-pressure sales tactics and unrealistic price projections by inexperienced
      sales persons; (4) excessive and undisclosed bid-ask differential and markups
      by
      selling broker-dealers; and (5) the wholesale dumping of the same securities
      by
      promoters and broker-dealers after prices have been manipulated to a desired
      level, along with the resulting inevitable collapse of those prices and with
      consequent investor losses. Our management is aware of the abuses that have
      occurred historically in the penny stock market. Although we do not expect
      to be
      in a position to dictate the behavior of the market or of broker-dealers who
      participate in the market, management will strive within the confines of
      practical limitations to prevent the described patterns from being established
      with respect to our securities. The occurrence of these patterns or practices
      could increase the volatility of our share price.





***Volatility
      in our common share price may subject us to securities
      litigation.***





The
      market for our common stock is characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price will
      continue to be more volatile than a seasoned issuer for the indefinite future.
      In the past, plaintiffs have often initiated securities class action litigation
      against a company following periods of volatility in the market price of its
      securities. We may, in the future, be the target of similar litigation.
      Securities litigation could result in substantial costs and liabilities and
      could divert management's attention and resources.





***Our
      corporate actions are substantially controlled by our principal shareholders
      and
      affiliated entities.***




Our
      principal shareholders and their affiliated entities own approximately 65%
      of
      our outstanding ordinary shares, representing approximately 65% of our voting
      power. These shareholders, 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 shareholders
      and their affiliated entities, elections of our board of directors will
      generally be within the control of these shareholders and their affiliated
      entities.




24




While
      all
      of our shareholders are entitled to vote on matters submitted to our
      shareholders for approval, the concentration of shares and voting control
      presently lies with these principal shareholders and their affiliated entities.
      As such, it would be difficult for shareholders 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 shareholders
      will
      be viewed favorably by all shareholders of the company.




***The
      elimination of monetary liability against our directors, officers and employees
      under Nevada law and the existence of indemnification rights to our directors,
      officers and employees may result in substantial expenditures by our Company
      and
      may discourage lawsuits against our directors, officers and employees.***





Our
      articles of incorporation do not contain any specific provisions that eliminate
      the liability of our directors for monetary damages to our company and
      shareholders, however we are prepared to give such indemnification to our
      directors and officers to the extent provided by Nevada law. We may also have
      contractual indemnification obligations under our employment agreements with
      our
      officers. The foregoing 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
      shareholders against our directors and officers even though such actions, if
      successful, might otherwise benefit our company and shareholders.




***Legislative
      actions, higher insurance costs and potential new accounting pronouncements
      may
      impact our future financial position and results of
      operation.***





There
      have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
      there may potentially be new accounting pronouncements or additional regulatory
      rulings that will have an impact on our future financial position and results
      of
      operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
      proposed legislative initiatives following the Enron bankruptcy are likely
      to
      increase general and administrative costs and expenses. In addition, insurers
      are likely to increase premiums as a result of high claims rates over the past
      several years, which we expect will increase our premiums for insurance
      policies. Further, there could be changes in certain accounting rules. These
      and
      other potential changes could materially increase the expenses we report under
      generally accepted accounting principles, and adversely affect our operating
      results.





***Past
      activities of the Company and its Affiliates may lead to future liability for
      the Company.***





Prior
      to
      our entry into the Share Exchange Agreement with Lotus International on
      September 6, 2006, the Company engaged in businesses unrelated to its current
      operations. Although the Lotus International Shareholders are providing certain
      indemnifications against any loss, liability, claim, damage or expense arising
      out of or based on any breach of or inaccuracy in any of their representations
      and warranties made regarding such acquisition, any liabilities relating to
      such
      prior business against which Lotus is not completely indemnified may have a
      material adverse effect on the Company.




25




***The
      market price for our stock may be volatile.***




The
      market price for our stock may be volatile and subject to wide fluctuations
      in
      response to factors including the following:





•
            actual
                or anticipated fluctuations in our quarterly operating
                results;


•
            changes
                in financial estimates by securities research
                analysts;


•
            conditions
                in pharmaceutical and agricultural
                markets;


•
            changes
                in the economic performance or market valuations of other pharmaceutical
                companies;


•
            announcements
                by us or our competitors of new products, acquisitions, strategic
                partnerships, joint ventures or capital
                commitments;


•
            addition
                or departure of key personnel;


•
            fluctuations
                of exchange rates between RMB and the U.S.
                dollar;


•
            intellectual
                property litigation;


•
            general
                economic or political conditions in
                China.




In
      addition, the securities market has from time to time experienced significant
      price and volume fluctuations that are not related to the operating performance
      of particular companies. These market fluctuations may also materially and
      adversely affect the market price of our stock.





***We
      may need additional capital, and the sale of additional shares or other equity
      securities could result in additional dilution to our shareholders.***




We
      believe that our current cash and cash equivalents, anticipated cash flow from
      operations and the net proceeds from this offering will be sufficient to meet
      our anticipated cash needs for the near future. We may, however, require
      additional cash resources due to changed business conditions or other future
      developments, including any investments or acquisitions we may decide to pursue.
      If our resources are insufficient to satisfy our cash requirements, we may
      seek
      to sell additional equity or debt securities or obtain a credit facility. The
      sale of additional equity securities could result in additional dilution to
      our
      shareholders. The incurrence of indebtedness would result in increased debt
      service obligations and could result in operating and financing covenants that
      would restrict our operations. We cannot assure you that financing will be
      available in amounts or on terms acceptable to us, if at all.





***If
      we fail to maintain an effective system of internal controls, we may not be
      able
      to accurately report our financial results or prevent fraud.***




We
      will
      be subject to reporting obligations under the U.S. securities laws. The
      Securities and Exchange Commission, or the SEC, as required by Section 404
      of
      the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company
      to
      include a management report on such company’s internal controls over financial
      reporting in its annual report, which contains management’s assessment of the
      effectiveness of the company’s internal controls over financial reporting. In
      addition, an independent registered public accounting firm must attest to and
      report on management’s assessment of the effectiveness of the company’s internal
      controls over financial reporting. Our management may conclude that our internal
      controls over our financial reporting are not effective.





26




Moreover,
      even if our management concludes that our internal controls over financial
      reporting are effective, our independent registered public accounting firm
      may
      still decline to attest to our management’s assessment or may issue a report
      that is qualified if it is not satisfied with our controls or the level at
      which
      our controls are documented, designed, operated or reviewed, or if it interprets
      the relevant requirements differently from us. Our reporting obligations as
      a
      public company will place a significant strain on our management, operational
      and financial resources and systems for the foreseeable future. Effective
      internal controls, particularly those related to revenue recognition, are
      necessary for us to produce reliable financial reports and are important to
      help
      prevent fraud. As a result, our failure to achieve and maintain effective
      internal controls over financial reporting could result in the loss of investor
      confidence in the reliability of our financial statements, which in turn could
      harm our business and negatively impact the trading price of our stock.
      Furthermore, we anticipate that we will incur considerable costs and use
      significant management time and other resources in an effort to comply with
      Section 404 and other requirements of the Sarbanes-Oxley Act.





***We
      will incur increased costs as a result of being a public company.***





As
      a
      public company, we will incur significant legal, accounting and other expenses
      that we did not incur as a private company. In addition, the Sarbanes-Oxley
      Act,
      as well as new rules subsequently implemented by SEC have required changes
      in
      corporate governance practices of public companies. We expect these new rules
      and regulations to increase our legal, accounting and financial compliance
      costs
      and to make certain corporate activities more time-consuming and costly. In
      addition, we will incur additional costs associated with our public company
      reporting requirements. We are currently evaluating and monitoring developments
      with respect to these new rules, and we cannot predict or estimate the amount
      of
      additional costs we may incur or the timing of such costs.




**CAUTIONARY
      LANGUAGE REGARDING FORWARD-LOOKING**


**STATEMENTS
      AND INDUSTRY DATA**




This
      Annual Report on Form 10-KSB contains ‘‘forward-looking statements’’ that
      involve risks and uncertainties, many of which are beyond our control. Our
      actual results could differ materially and adversely from those anticipated
      in
      such forward-looking statements as a result of certain factors, including those
      set forth below and elsewhere in this Annual Report on Form 10-KSB.
      Important factors that may cause actual results to differ from projections
      include, but are not limited to, for example:


•
              adverse
                  economic conditions;
 •
              inability
                  to raise sufficient additional capital to implement our business
                  plan;
 •
              intense
                  competition, from providers of services similar to those offered
                  by
                  us;
 •
              unexpected
                  costs and operating deficits, and lower than expected sales and
                  revenues;
 •
              adverse
                  results of any legal proceedings;
 •
              inability
                  to satisfy government and commercial customers using our
                  technology;
 •
              the
                  volatility of our operating results and financial
                  condition;
 •
              inability
                  to attract or retain qualified senior management personnel, including
                  sales and marketing, and technology personnel;
                  and
 •
              other
                  specific risks that may be alluded to in this Annual Report on
                  Form
                  10-KSB.




27




All
      statements, other than statements of historical facts, included in this Annual
      Report on Form 10-KSB regarding our strategy, future operations, financial
      position, estimated revenue or losses, projected costs, prospects and plans
      and
      objectives of management are forward-looking statements. When used in this
      Annual Report on Form 10-KSB, the words ‘‘will,’’ ‘‘may,’’ ‘‘believe,’’
‘‘anticipate,’’ ‘‘intend,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘project,’’ ‘‘plan’’ and
      similar expressions are intended to identify forward-looking statements,
      although not all forward-looking statements contain such identifying words.
      All
      forward-looking statements speak only as of the date of this Annual Report
      on
      Form 10-KSB. We do not undertake any obligation to update any forward-looking
      statements or other information contained herein. Potential investors should
      not
      place undue reliance on these forward-looking statements. Although we believe
      that our plans, intentions and expectations reflected in or suggested by the
      forward-looking statements in this Annual Report on Form 10-KSB are reasonable,
      no one can assure investors that these plans, intentions or expectations will
      be
      achieved. Important factors that could cause actual results to differ materially
      from expectations expressed herein are described under ‘‘Risk Factors’’ and
      elsewhere in this Annual Report on Form 10-KSB. These cautionary statements
      and
      risk factors qualify all forward-looking statements attributable to information
      provided in this Annual Report on Form 10-KSB and on behalf of us or persons
      acting on our behalf.





Information
      regarding market and industry statistics contained in this Annual Report on
      Form
      10-KSB is included based on information available to us that we believe is
      accurate. It is generally based on academic and other publications that are
      not
      produced for purposes of securities offerings or economic analysis. Forecasts
      and other forward-looking information obtained from these sources are subject
      to
      the same qualifications and the additional uncertainties accompanying any
      estimates of future market size, revenue and market acceptance of products
      and
      services. We have no obligation to update forward-looking information to reflect
      actual results or changes in assumptions or other factors that could affect
      those statements. See ‘‘Risk Factors’’ for a more detailed discussion of
      uncertainties and risks that may have an impact on future results.





We
      file
      reports with the Securities and Exchange Commission (“SEC”). You can read and
      copy any materials we file with the SEC at the SEC’s Public Reference Room, 100
      F. Street, NE, Washington, D.C. 20549. You can obtain additional information
      about the operation of the Public Reference Room by calling the SEC at
      1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov)
      that contains reports, proxy and information statements, and other information
      regarding issuers that file electronically with the SEC, including
      us.




**ITEM
              2.**
            **DESCRIPTION
                OF PROPERTY**




The
      Company’s U.S. headquarters is currently located in approximately
      300 square feet of office space at Boca Corporate Plaza, 7900 Glades Road,
      Suite 420, Boca Raton, Florida 33434. We sublease this space from Genesis
      Technology Group, Inc. (“Genesis”). Currently, Genesis pays all the rent for
      this space and we pay rent of $900 per month to Genesis for our space. Genesis
      owns 16.32% of the Company’s issued and outstanding common stock.





28




In
      China,
      the Company has the following properties leased in Beijing, China:





**Property
                Location (District of Beijing, China)**
            **Area
                (sq. ft)**
            **Lease
                Expiration Period**
            **Purpose**Fengtai
                District
            4,413
            August
                31, 2009
            Liang
                Fang warehouseFengtai
                District
            11,345
            December
                31, 2009
            Liang
                Fang headquartersFengtai
                District
            12,917
            July
                3, 2019
            Retail
                - Xinzhong Taita PharmacyFengtai
                District
            2,067
            December
                31, 2007
            Retail
                - Nangong PharmacyFengtai
                District
            2,153
            December
                31, 2010
            Retail
                - Chenzhuang Rd. PharmacyHaidian
                District
            3,660
            December
                31, 2009
            Retail
                - Wanshou Rd. PharmacyDongcheng
                District
            2,153
            May
                31, 2009
            Retail
                - Qingnianhu PharmacyDongcheng
                District
            807
            Month-to-Month
            Retail
                - Hepingli PharmacyChaoyang
                District
            1,550
            December
                31, 2008
            Retail
                - Capital Airport PharmacyChaoyang
                District
            2,691
            Month-to-Month
                (related party)
            Retail
                - Fenglinlvzhou PharmacyFangshan
                District
            1,615
            December
                31, 2010
            Retail
                - Yonganzhongshen PharmacyLiujia
                Village
            2,153
            October
                9, 2007
            Retail
                PharmacyChaoyan
                District
            72,118
            Property
                Owned by Lotus
            En
                Zhe Jia Shi production and manufacturing
                facility




**ITEM
              3.**
            **LEGAL
                PROCEEDINGS**




From
      time
      to time, we may be involved in litigation or other business disputes including
      patent infringement, defamation and unfair competition. The Company’s management
      is not aware of any material legal proceedings pending against the Company.




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




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.




29




In
      December 2006, the Board and the consenting stockholders unanimously adopted
      and
      approved an amendment to the Company’s Articles of Incorporation to change the
      Company’s name to Lotus Pharmaceuticals, Inc.




**PART
      II**




**ITEM
                5.**
            **MARKET
                FOR COMMON STOCK AND RELATED STOCKHOLDER
                MATTERS**




**Market
      Price of and Dividends on Common Equity and Related Stockholder
      Matters**





Our
      common stock is traded over-the-counter on the Over-the-Counter Electronic
      Bulletin Board under the symbol "LTUS.OB". The following table sets forth the
      high and low bid information for the common stock for each quarter within the
      last two fiscal years, as reported by the Over-the-Counter Electronic Bulletin
      Board. The bid prices reflect inter-dealer quotations, do not include retail
      markups, markdowns or commissions and do not necessarily reflect actual
      transactions.





LOW
            
            HIGH2006Fourth
                Quarter
            
            $
            0.40
            
            $
            2.50Third
                Quarter
            
            $
            0.40
            
            $
            0.40Second
                Quarter
            
            $
            0.40
            
            $
            0.40First
                Quarter
            
            $
            0.40
            
            $
            0.402005Fourth
                Quarter
            
            $
            0.40
            
            $
            0.40Third
                Quarter
            
            $
            0.10
            
            $
            0.40Second
                Quarter
            
            
            n/a
            
            
            n/aFirst
                Quarter
            
            
            n/a
            
            
            n/a





There
      was
      no trading of our common stock prior to August 2005.





As
      of
      April 10, 2007, there were approximately 85 stockholders of record of our common
      stock.





**Dividends**





We
      have
      never paid any dividends on the Common Stock or the Preferred Stock. We
      currently anticipate that any future earnings will be retained for the
      development of our business and do not anticipate paying any dividends on the
      Common Stock or the Preferred Stock in the foreseeable future.




30




**Transfer
      Agent**





Our
      transfer agent is Signature Stock Transfer, Inc., One Preston Park, 2301 Ohio
      Drive, Suite 100, Plano, Texas 75093. Their telephone number is (972)
      612-4120.





**Equity
      Compensation Plan Information**





The
      Company currently does not have, but in the future, intends to formally adopt
      a
      stock option or restricted share plan. Analysis is being done on the impact
      of
      recent accounting and regulatory rule changes on the Company and on its future
      incentive plans.





**Recent
      Sales of Unregistered Securities**





None




**ITEM
                6.**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION**




**Overview**




Lotus’
      revenues and results of operations could differ materially from those projected
      in the forward-looking statements as a result of numerous factors, including,
      but not limited to, the following: the risk of significant natural disaster,
      the
      inability of Lotus to insure against certain risks, inflationary and
      deflationary conditions and cycles, currency exchange rates, changing government
      regulations domestically and internationally affecting the pharmaceutical
      industry, competition and pricing, changes in external competitive market
      factors, termination of certain agreements, protocol, or inability to enter
      into
      strategic agreements, inability to satisfy anticipated working capital or other
      cash shortage requirements, changes in or developments under domestic or foreign
      laws, regulations, or changes in Lotus’ business strategy or an inability to
      execute its strategy due to unanticipated changes in the market. In light of
      these risks and uncertainties, there can be no assurance that actual results,
      performance or achievements of Lotus will not differ materially from any future
      results, performance or achievements expressed or implied by such
      forward-looking statements.





The
      following discussion of the financial condition and results of operation of
      Lotus Pharmaceuticals, Inc. should
      be
      read in conjunction with the financial statements and the notes to those
      statements included herein. This discussion includes forward-looking
      statement77s that involve risk and uncertainties. As a result of many factors,
      such as those set forth under “Risk Factors”, actual results may differ
      materially from those anticipated in the forward-looking
      statements.





On
      September 6, 2006, we entered into a definitive Share Exchange Agreement with
      Lotus Pharmaceutical International, Inc. (“Lotus International”), whereby we
      would acquire all of the outstanding common stock of International in exchange
      for newly-issued shares of our common stock to International’s shareholders.
 On September 28, 2006 (the closing date), Lotus International became
      our wholly-owned subsidiary and Lotus International’s shareholders own the
      majority of our voting stock. T he
      acquisition of Lotus International by us is accounted for as a reverse merger
      because on a post-merger basis, the former shareholders 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.




31




Additionally,
      on September 6, 2006, Lotus International entered various agreements with Liang
      Fang Pharmaceuticals Co. Ltd. (“Liang Fang”) and Beijing En Zhe Jia
      Pharmaceutical Co., Ltd. (“En Zhe Jia”) (herein referred to as “Lotus East”)
      whereby the shareholders of Lotus East transferred all operating, voting and
      control to Lotus. 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”). The acquisition of the Lotus
      International by Lotus is accounted for as a reverse merger because on a
      post-merger basis, the former Shareholders of Lotus International held
      a majority of the outstanding common stock of Lotus on a voting and
      fully-diluted basis.





As
        a
        result of these agreements, 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 our acquisition of Lotus International on September
        28,
        2006, and the financial statements of the consolidated companies from the
        acquisition date forward.


For
      purposes of the following discussion and analysis, references to ‘‘we’’,
‘‘our’’, ‘‘us’’ refers to Lotus .





Liang
      Fang is a Chinese limited liability company and was formed under laws of the
      People’s Republic of China on June 21, 2000 and 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.




Liang
      Fang owns and operates several drug stores throughout Beijing, China. These
      drugstores sell Western and traditional Chinese drinking pieces, and medical
      treatment facilities.




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 of pharmaceuticals for the Company and
      maintains facilities for the production of medicines, Chinese medicines, as well as the
      research and production of other new medicines.





**Current
      Business Operations**





Our
      business operations are located in Beijing, China and are composed of three
      parts: (1) manufacturing and distribution of pharmaceutical products, including
      the manufacture of pharmaceutical products for other distributors (OEM
      manufacturing), (2) retailing of Western
      and traditional Chinese medications, and medical treatment equipment through
      retail locations, and (3) research and development services.





The
      Company currently has 268 employees, but we do not have any employees at our
      Boca Raton, Florida headquarters offices located at Boca Corporate Plaza, 7900
      Glades Road, Suite 420, Boca Raton, Florida 33434, except our Chief Financial
      Officer who is hired on an outsourced basis.





Lotus
      currently operates one wholly owned subsidiary, Lotus Pharmaceutical
      International, Inc., a Nevada corporation (“Lotus International”). Lotus
      International has entered into management agreements with two companies, En
      Ze
      Jia Shi Pharmaceutical Co., Ltd., a People’s Republic of China corporation, and
      Liang Fang Pharmaceutical Co., Ltd., a People’s Republic of China corporation
      (collectively "Lotus East"). Both companies are based in Beijing, China and
      both
      are in the business of developing, producing, and selling pharmaceutical
      products.




32




**Results
      of Operations**




***For
      the Year Ended December 31, 2006 Versus Year Ended December 31,
      2005***




**Total
      revenues**





Total
      revenues for the year ended December 31, 2006 were $36,207,689 as compared
      to
      total revenues of $18,345,841 for the year ended December 31, 2005, an increase
      of $17,861,848 or approximately 97%. For the year ended December 31, 2006 and
      2005, net revenues consisted of the following:





2006
            
            2005Wholesale
            
            $
            25,430,069
            
            $
            16,099,036Retail
            
            
            3,532,623
            
            
            1,629,385Other
                revenues
            
            
            7,244,997
            
            
            617,420Total
                Revenues
            
            $
            36,207,689
            
            $
            18,345,841





·
            For
                the year ended December 31, 2006, wholesale revenues increased by
                $9,331,033 or 58%. The significant increase in tangible product revenues
                is mainly attributed to continued strong sales of ourbest
                selling product, VALSARTAN Capsules, a medicine for primary hypertension
                or high blood pressure.





·
            For
                the year ended December 31, 2006, retail revenues increased by $1,903,238
                or 116.8%. In 2006, due to the gradual implementation of local medication
                policy reforms, Beijing started to change the way the patient may
                obtain
                medication and separated the treatment of the patient from the obtaining
                of the medicine. Before 2005, most civil servants could only get
                treatment
                and buy medicines in the hospital, and the expenses could not get
                reimbursed if they bought medicines from pharmacy stores. Since 2005,
                patients from many companies and organizations have been allowed
                to
                purchase medicines from approved pharmacy stores after they get
                prescriptions in the hospital, and receive expense reimbursement.
                The
                convenience, better service and lower prices encourages patients
                to
                purchase medicines at pharmacy stores. In March 2006, the Beijing
                government started approving medicine expense reimbursements based
                on
                receipts from our retail pharmacy stores. As a result, our retail
                revenues
                increased substantially.





33




·
            For
                the year ended December 31, 2006, other revenues increased by $6,627,577.
                The significant increase in other revenues is attributed to the
                following:





2006
            
            2005Leasing
                revenues
            
            $
            696,637
            
            $
            617,420Third-party
                manufacturing
            
            
            4,855,402
            
            
            -Advertising
                revenues
            
            
            571,293
            
            
            -Research
                and development and lab testing services
            
            
            1,121,665
            
            
            -Total
                other revenues
            
            $
            7,244,997
            
            $
            617,420





•
            During
                2006, we began 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.





•
            In
                2006, we entered into an advertisement contract whereby we receive
                approximately $50,000 per month for the lease of counter and other
                space
                at our retail locations. We expect this revenue to increase in the
                future
                as we sign similar contracts.





•
            In
                2006, we performed research and development and lab testing projects
                for
                various third parties and performed drug testing and
                analysis.





**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 the year ended
      December 31, 2006, cost of sales amounted to $26,523,039 or approximately 73.3%
      of total revenues as compared to cost of sales of $14,584,682 or approximately
      79.5% of total revenues for the year ended December 31, 2005. The decrease
      in
      cost of sales as a percentage of total revenues for the year ended December
      31,
      2006 as compared to the year ended December 31, 2005 is attributable to
      increases in other service oriented revenues from third-party manufacturing,
      advertising revenues and research and development services and the increase
      in
      leasing revenues offset by a reduction in drug prices due to governmental
      pricing policies.





**Gross
      profit**





Gross
      profit for the year ended December 31, 2006 was $9,684,650 or 26.7% of total
      revenues, as compared to $3,761,159 or 20.5% of revenues for the year ended
      December 31, 2005. The increases in gross profits is attributable to increases
      in other revenues from third-party manufacturing, advertising revenues and
      research and development services and the increase in leasing revenues offset
      by
      a reduction in drug prices due to governmental pricing policies. Although we
      recognized higher than average gross profits during the year ended December
      31,
      2006, there could be no assurances that we will continue to recognize similar
      gross profit margin in the future.





34




**Operating
      expenses**





Total
      operating expenses for the year ended December 31, 2006 were $5,258,089, an
      increase of $2,108,969 or 67.0%, from total operating expenses in the year
      ended
      December 31, 2005 of $3,149,420. This increase included the
      following:





For
      the
      year ended December 31, 2006, selling expenses amounted to $2,154,216 as
      compared to $414,361 for the year ended December 31, 2005, an increase of
      $1,739,855 or 420%. This increase is attributable to increase in commission
      paid
      of $1,045,448 in 2006 compared to $0 in 2005, an increase in advertising costs
      of approximately $82,000, and an increase in other selling expenses of $612,407
      such as travel and entertainment, and sales conferences and training, We expect
      our selling expenses to increase as our revenues increase and expect to spend
      increased funds on adverting and promotion of our products as well as sales
      training. During fiscal 2007, we intend to expand our marketing efforts related
      to our products.





For
      the
      year ended December 31, 2006, research and development costs amounted to
      $387,337 as compared to $1,759,756 for the year ended December 31, 2005, a
      decrease of $1,372,419 or 78%. In fiscal 2006, we decreased our research and
      development activities to concentrate on the sale and marketing of developed
      products. We currently have 4 drugs in the pipeline that are in the process
      of
      obtaining government approval. As of the date of this filing, we can not predict
      when we will begin the development of new pharmaceutical products or the related
      costs.





For
      the
      year ended December 31, 2006, general and administrative expenses were
      $2,716,536 as compared to $975,003 for the year ended December 31, 2005, an
      increase of $1,741,533, or 179.0% as summarized below:





Year
                ended December 31,2006
            
            2005Salaries
                and related benefits
            
            $
            1,012,438
            
            $
            342,150Amortization
            
            
            169,517
            
            
            178,577Bad
                debt
            
            
            482,853
            
            
            26,865Depreciation
            
            
            22,102
            
            
            19,958Rent
            
            
            206,965
            
            
            238,610Travel
                and entertainment
            
            
            164,804
            
            
            13,172Professional
                fees
            
            
            105,081
            
            
            -Other
            
            
            552,776
            
            
            155,671Total
            
            $
            2,716,536
            
            $
            975,003





The
      changes in these expenses from the year ended December 31, 2006 as compared
      to
      the year ended December 31, 2005 included the following:





•
            Salaries
                and related benefits increased $670,288 or 196% due the increase
                in hours
                worked and overtime and the increased use of our part time
                employees.


•
            Amortization
                of our manufacturing rights decreased by $9,060 or approximately
                5%.


•
            An
                increase of $455,988 or 1,697%, in bad debt expenses due to an increase
                in
                our sales and accounts receivable balances during the year ended
                December
                31, 2006.


•
            Depreciation
                increased by $2,144 or approximately
                10.7%.


•
            Rent
                decreased by $31,645 or approximately
                13.3%.




35




•
            Travel
                and entertainment expenses increased by $151,632 or 1,151% due to
                increased sales-related travel.


•
            Professional
                fees increased $105,081 or 100% due to an increase in accounting
                and legal
                fees activities related to being a public entity in the United
                States.


•
            Other
                selling, general and administrative expenses, which includes utilities,
                office supplies and expenses increased by $397,105 or
                255.1%.





**Income
      from operations**





We
      reported income from operations of $4,426,561 for the year ended December 31,
      2006 as compared to income from operations of $612,039 for the year ended
      December 31, 2005, an increase of $3,814,522 or approximately
      623.2%.





**Other
      income (expense)**





For
      the
      year ended December 31, 2006, total other expense amounted to $(325,824) as
      compared to other income of $1,219,673 for the year ended December 31, 2005,
      a
      decrease of $1,545,497. This change is primarily attributable to:





•
            The
                sale of patent to a third party for a drug formula that we had developed
                in 2005 for approximately $1.2 million for the year ended December
                31,
                2005.





•
            Interest
                expense was $325,824 as compared to $0 for the year ended December
                31,
                2005, an increase of $325,824 due to our notes payable to related
                parties
                issued on December 31, 2005.





**Net
      income**





As
      a
      result of these factors, we reported net income of $4,100,737 for the year
      ended
      December 31, 2006 as compared to net income of $1,831,712 for the year ended
      December 31, 2005. This translates to net income per common share of $0.10
      and
      $.05 for the years ended December 31, 2006 and 2005, respectively.





**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, 2006, we had a cash balance of $2,089,156. Substantially all of
      the
      Company’s cash is deposited in financial institutions in China.





Our
      working capital position increased $2,694,840 to $8,646,076 at December 31,
      2006
      from $5,951,236 at December 31, 2005. This increase in working capital is
      primarily attributable to an increase of approximately $6.3 million in accounts
      receivable due from third parties offset by an increase in taxes payable. The
      increase in accounts receivable and corresponding decrease inventories reflects
      the effects of increased sales during fiscal 2006 and the corresponding
      receivables generated by those sales.





At
      December 31, 2006, our inventories of raw materials and finished goods totaled
      $3,133,677, a decrease of approximately $3.8 million, or 120.9%, from December
      31, 2005. During fiscal 2005 we introduced several new products which had been
      in development for a period of time; these new products were partially
      attributable for our increased sales in fiscal 2006. We expect to maintain
      higher inventory levels to accommodate for anticipated future sales growth
      as
      well as a wider variety of products.




36




At
      December 31, 2006, we maintain an allowance for doubtful accounts on accounts
      receivable balances of $539,627 as compared to $45,205 at December 31, 2005,
      an
      increase of $494,422 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 which 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,
      2006 our balance sheet reflected advances from customers of $231,340, an
      increase of $46,142, or approximately 25%, from December 31, 2005.




Our
      balance sheet at December 31, 2006 also reflects a balance due to related
      parties of $695,231 which was a working capital advances made to us by our
      President, vice-president and an officer of the Company and a Board member.
      These loans are non-interest bearing and are due on demand. We are currently
      repaying these balances as operating cash become available.





Our
      balance sheet at December 31, 2006 also reflects notes payable to related
      parties of approximately $4.7 million due on December 30, 2015 which is a
      working capital loan made to us by the Company’s Chief Executive Officer, two
      employees of the Company and a Board member. These loans bear a variable annual
      interest at 80% of current bank rate and are unsecured. During fiscal 2006,
      we
      repaid approximately $3.3 million of these loan balances.





Net
      cash
      provided by (used in) operating activities for the year ended December 31,
      2006
      was $4,778,264 as compared to ($343,280) for the year ended December 31, 2005.
      For the year ended December 31, 2006, net cash provided by operating activities was
      attributable primarily to our net income of $4,100,737, the add back of
      depreciation and amortization of $567,469, a decease 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. For
      the
      year ended December 31, 2005, net cash used in operating activities was
      attributable primarily to our net income of $1,831,712, a decrease
      in prepaid and other current assets of $622,007, an increase accounts payable
      and accrued expense of $137,331, and the add back of non-cash items such as
      depreciation and amortization of $429,633, bad debt of $26,865, and changes
      in
      other assets and liabilities and non-cash items of $182,188, offset by cash
      used
      to fund a net increase in accounts receivable of $597,584 and an
      increase in our inventory of $2,975,432 .





Net
      cash
      provided by investing activities for the year ended December 31, 2006 was
      $1,242,262 attributable to payment received on due from related parties. Net
      cash used in investing activities for the year ended December 31, 2005 amounted
      to $4,208,338 which consisted of $2,163,128 attributable to advances made to
      an
      affiliated company owned by one of our officers and purchases of equipment
      of
      $2,045,210.




37




Net
      cash
      used in financing activities was $4,137,109 for the year ended December 31,
      2006
      and was attributable to payments on related party advances and loans as compared
      to net cash provided by financing activities of $4,624,531 for the year ended
      December 31, 2005 and reflects proceeds received from related party
      advances.





We
      reported a net increase in cash for the year ended December 31, 2006 of
      $1,928,222 as compared to a net increase in cash of $76,277 for the year ended
      December 31, 2005.





We
      currently have no material commitments for capital expenditures. Other than
      working capital and loans from related parties, and from our recent capital
      raising transaction as discussed below, we presently have no other alternative
      source of working capital. We may not have sufficient working capital to fund
      the expansion of our production line, an upgrade of our manufacturing facilities
      and technologies, expand our retail operations, and fund research and
      development projects as well as providing working capital necessary for our
      ongoing operations and obligations. We will need to raise additional working
      capital to complete these projects. We may seek to raise additional capital
      through the sale of equity securities. 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. At this time, we have no
      commitments or plans to obtain additional capital.





**Recent
      Capital Raising Transactions**





On
      February 12, 2007, we entered into Subscription Agreements with the purchasers
      (the "Purchasers"). Pursuant to the Agreements, we issued to the Purchasers
      Secured Convertible Notes, ("Notes"), with an aggregate principle 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 commences 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, we 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.





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 our common stock 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.





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 grant 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 Ze 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.




38




The
      financing was completed through a private placement to accredited investors
      and
      is exempt from registration pursuant to Section 4(2) of the Securities Act
      of
      1933, as amended ("Securities Act"). The securities sold in the financing have
      not yet been registered under the Securities Act of 1933, as amended, and may
      not be offered or sold in the United States in the absence of an effective
      registration statement or exemption from registration requirements.





We
      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 is not filed on or before
      the Filing Date or is not declared effective on or before the Effective Date,
      then we 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.





**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.





**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
      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 collectibility is reasonably
      assured.




39




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 collectibility 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.* In
      the pharmaceutical industry, customers are normally granted the right to return
      product for a refund if the product has not been used prior to its expiration
      date. Our return policy typically allows product returns for products within
      an
      twelve-month window from six months prior to the expiration date and up to
      six
      months after the expiration date. We 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. These amounts are deducted from our gross sales
      to
      determine our net revenues. Our estimates take into consideration historical
      returns of our products and our future expectations. We periodically review
      the
      reserves established for returns and adjust them based on actual experience.
      The
      amount of actual product returns could be either higher or lower than the
      amounts we accrued. Changes in our estimates would be recorded in the income
      statement 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.





*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 ourretail 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 sheet. 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.




40




**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 collectibility 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 $539,627 at December 31, 2006 from $45,205 at
      December 31, 2005. This increase represents 1.4% of total revenues and is
      due to the increasing level of sales revenue and its corresponding exposure.
      At
      December 31, 2006, accounts receivable, net of allowance for doubtful
      accounts and sales returns, amounted to $7,277,067.





**Inventories**





Inventory
      is 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 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.





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 yearsManufacturing
                equipment
            10
                to 15 yearsOffice
                equipment and furniture
            5
                to 8 years




41




**Income
      taxes**





Taxes
      are
      calculated in accordance with taxation principles currently effective in the
      United States and PRC. The Company accounts 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
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48 (“FIN 48”), *“Accounting
      for Uncertainty in Income Taxes,”* an
      interpretation of FASB Statement No. 109 (“SFAS 109”). The
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an entity’s financial statements in accordance with SFAS 109, *“Accounting
      for Income Taxes.”* It
      prescribes a recognition threshold and measurement attribute for financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken on a tax return. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. We are currently evaluating the impact, if any, of
      FIN 48 on our financial statements.




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. We are currently assessing the impact, if any, the adoption of
      SFAS 157 will have 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. We are currently assessing the impact, if any, the
      adoption of SFAS 159 will have on our financial statements.





Other
      accounting standards that have been issued or proposed by the FASB or other
      standards-setting bodies that do not require adoption until a future date are
      not expected to have a material impact on the consolidated financial statements
      upon adoption.




42




**Off
      Balance Sheet Arrangements**




As
      of the
      date of this Annual 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. 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.




**ITEM
                7.**
            **FINANCIAL
                STATEMENTS**




See
      our
      Financial Statements beginning on page F-1.




**ITEM
                8.**
            **DISAGREEMENTS
                WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**




There
      have been no disagreements with the Company’s independent auditors.




**ITEM
              8A.**
            **CONTROLS
                AND PROCEDURES**




**Overview**





In
      connection with the preparation of our annual report on Form 10-KSB for the
      period ended December 31, 2006, our management identified material weaknesses
      in
      the Company’s internal controls over financial reporting. As defined by the
      Public Accounting Oversight Board (the “PCAOB“) in Auditing Standard No. 2., a
      material weakness is a significant deficiency, or combination of significant
      deficiencies, that result in more than a remote likelihood that a material
      misstatement of the interim financial statements will not be prevented or
      detected.





The
      identified material weaknesses in the Company’s internal controls over financial
      reporting have resulted in insufficient controls related to inventory
      accounting, accounts receivable and payable cut-offs, accrued expenses and
      segregation of duties. The conclusions of the Company’s management regarding the
      effectiveness of the Company’s disclosure controls and procedures as of December
      31, 2006 , the end of the period covered by this Annual Report of Form 10-KSB,
      are covered in more detail in the following paragraph.





**Disclosure
      Controls and Procedures**





As
      required by Rule 13a-15(e) and 15d-15(e) under the Securities and Exchange
      Act
      of 1934, as of December 31, 2006, the end of the period covered by this annual
      report, our management, with the participation of our Chief Executive Officer
      and Chief Financial Officer, concluded its evaluation of the effectiveness
      of
      the design and operation of our disclosure controls and procedures. Disclosure
      controls and procedures are controls and procedures designed to reasonably
      assure that information required to be disclosed in our reports filed under
      the
      Securities Exchange Act of 1934, such as this quarterly report, is recorded,
      processed, summarized and reported within the time periods prescribed by SEC
      rules and regulations, and to reasonably assure that such information is
      accumulated and communicated to our management, including our Chief Executive
      Officer, to allow timely decisions regarding required disclosure. Based on
      that
      evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
      concluded that our disclosure controls and procedures were not effective as
      of
      the end of the period covered by this Annual Report on Form 10-KSB.




43




**Changes
      in Internal Controls**





On
      September 28, 2006, in connection with the completion of the
      Lotus Inernational acquisition, we hired our Chief Financial Officer. Our
      CFO is becoming more familiar with the Company, its finances and accounting
      needs. Additionally, the Company’s CEO is becoming more familiar with SEC
      disclosure requirements and procedures. The Company’s management believes that
      substantial remediation measures are required in order to improve the Company’s
      internal controls. We believe that the material weaknesses identified above
      resulted in part from inadequate staffing and training within the Company’s
      finance and accounting group. We believe that we will face challenges in
      integrating procedures and operations and integration activities may affect
      our
      internal control over financial reporting. We intend on continuing to work
      to
      improve our internal controls.





**Other**





Our
      management, including our Chief Executive Officer, does not expect that our
      disclosure controls and procedures will prevent all error and all fraud. A
      control system, no matter how well designed and operated, can provide only
      reasonable, not absolute, assurance that the control system’s objectives will be
      met. Further, the design of a control system must reflect the fact that there
      are resource constraints, and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, have been detected. These
      inherent limitations include the realities that judgments in decision-making
      can
      be faulty, and that breakdowns can occur because of simple error or mistake.





The
      design of any system of controls is based in part upon certain assumptions
      about
      the likelihood of future events, and there can be no assurance that any design
      will succeed in achieving its stated goals under all potential future
      conditions.




**PART
      III**




**ITEM
              9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                ACT**




The
      following table sets forth the name, age, and position of each of the members
      of
      our board of directors, executive officers and promoters as of March 25,
      2007:




**Name**
            **Age**
            **Position**Dr.
                Liu Zhong Yi
            45
            Chief
                Executive Officer and Chairman of the BoardMr.
                Adam Wasserman
            42
            Chief
                Financial OfficerDr.
                Ian Ashley
            37
            DirectorMr.
                Li Ping
            44
            DirectorMr.
                Liu Jin
            67
            DirectorMr.
                Mel Rothberg
            59
            DirectorMs.
                Caeli Widger
            32
            DirectorMs.
                Xian Xuemei
            38
            DirectorMrs.
                Song Zhenghong
            39
            Director




44




**Current
      Management**





**Dr.
      Liu Zhong Yi** is
      the
      Chairman of the Board, Chief Executive Officer and Founder of Lotus
      Pharmaceutical International, Inc. in the United States and its Chinese
      antecedent, Liang Fang Pharmaceuticals Co., Ltd. in Beijing. Dr. Liu holds
      the
      title of Deputy Chief Physician, as a professional apothecary, in operating
      Lotus (Liang Fang) as one of China’s most innovative and fastest growing
      pharmaceutical companies. 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 his homeland of
      Inner Mongolia. The Company does not currently have terms for its directors,
      and
      Dr. Liu will serve as a director of the Company until the next annual meeting
      and until a successor is elected and qualified.




**Mr.
      Adam Wasserman** has
      served as Chief Financial Officer for Lotus. He also serves as Chief Executive
      Officer of CFO Oncall, Inc. since October 1999. CFO Oncall, Inc. provides chief
      financial officer and controller services to companies on an outsourced basis.
      Mr. Wasserman currently serves as Chief Financial Officer for Transax
      International Limited since May 2005 and Chief Financial Officer for Genesis
      Technology Group, Inc. since 2000. From June 1991 to September 1999, Mr.
      Wasserman was an audit manager at American Express Tax & Business in Fort
      Lauderdale, Florida. During his tenure as manager, Mr. Wasserman successfully
      acted as an outsourced CFO and advisor to a diversified clientele in the
      wholesale, technology, distribution, medical, retail, and service industries
      in
      both the private and public sector. Prior to this, Mr. Wasserman served as
      senior auditor and staff accountant with Deloitte & Touche, LLP from June
      1986 to May 1991. Mr. Wasserman holds a Bachelor of Administration from the
      New
      York State University at Albany, is a member of The American Institute of
      Certified Public Accountants and is the Treasurer and an Executive Board Member
      of the Gold Coast Venture Capital Association.




**Dr.
      Ian Ashley** is a
      Director on the founding Lotus Board of Directors. Previously he worked for
      Merck & Co. 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.
      The
      Company does not currently have terms for its directors, and Dr. Ashley will
      serve as a director of the Company until the next annual meeting and until
      a
      successor is elected and qualified.




45




**Mr.
      Li Ping** is a
      Director on the founding Lotus Board of Directors.  Mr. Li served as
      salesman and deputy manager of the sales department of Beijing Dongcheng
      Medicine Wholesale Company in 1984-1999.  Since 2000, he served as director
      of Lotus Pharmaceuticals and is responsible for medicine and clinic promotions.
       Mr. Li graduated from the Beijing Medical School, apothecary. The Company
      does not currently have terms for its directors, and Mr. Li will serve as a
      director of the Company until the next annual meeting and until a successor
      is
      elected and qualified.





**Mr.
      Liu Jin** is a
      Director on the founding Lotus Board of Directors.  Mr. Liu served as an
      accountant for the Finance Bureau of Liangcheng County from 1958-1970 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 Lotus
      Pharmaceuticals and has been responsible for production cost control.  Mr.
      Liu graduated from the Middling Finance School of Wulanchabu City of Inner
      Mongolia in 1958.  The Company does not currently have terms for its
      directors, and Mr. Liu will serve as a director of the Company until the next
      annual meeting and until a successor is elected and qualified.





**Mr.
      Mel Rothberg** is
      a
      Director on the founding Lotus Board of Directors.  Mr. Rothberg has, over
      the last 30 years, participated in the development of the South Florida
      bioscience industry and is presently Chairman of Bioflorida’s South Florida
      Bioscience Consortium. Since October 2005, Mr. Rothberg has been Chairman and
      CEO of Advanced Processing and Imaging, 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 Dow Chemical and Cordis Dow and was instrumental in selling Dow’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. The Company does
      not currently have terms for its directors, and Mr. Rothberg will serve as
      a
      director of the Company until the next annual meeting and until a successor
      is
      elected and qualified.





**Ms.
      Caeli Widger** is
      a
      Director on the founding Lotus Board of Directors. 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 named
      one
      of America's fastest-growing technology companies by Red Herring and the
      Deloitte Fast 50 List.  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.
       The Company does not currently have terms for its directors, and Ms.
      Widger will serve as a director of the Company until the next annual meeting
      and
      until a successor is elected and qualified.





**Ms.
      Xian Xuemei** is
      a
      Director since December 11, 2006. Ms. Xian served as clinical pharmacist of
      Chengdu Spaceflight Hospital from 1997 to 2000. Since 2001, she has been working
      with Liang Fang Pharmacy Co., Ltd, 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. The Company does not currently have terms for its directors,
      and Ms. Xian will serve as a director of the Company until the next annual
      meeting and until a successor is elected and qualified.




46




**Mrs.
      Song Zhenghong** is a
      Director on the founding Lotus Board of Directors and the spouse of Dr. Liu
      Zhong Yi. Since 1991 and currently, Mrs. Song Zhenghong has been a teacher,
      assistant teacher and senior teacher at Yungang Second Middle School in Fengtai,
      Beijing.





**Family
      Relationships**





The re
      are no
      family relationships among our executive officers and directors except for
      Liu
      Zhong Yi and Song Zhenghong who are husband and wife.




**Director
      Independence**





The
      following information concerning director independence is based on the director
      independence standards of The NASDAQ Stock Market Corporate Governance
      Rules.





The
      Board
      has determined that directors Mel Rothberg, Dr. Ian Ashley, and Caeli
      Widger **** are
      independent directors within The NASDAQ Stock Market's director independence
      standards. Directors Song Zhenghong, Xian Xuemei, Li Ping, and Liu Jin are
      not
      independent. In determining independence, the Board reviews and seeks to
      determine whether directors have any material relationship with the Company,
      direct or indirect, which would interfere with the exercise of independent
      judgment in carrying out the responsibilities of a director. The Board reviews
      business, professional, charitable and familial relationships of the directors
      in determining independence. The Board has not designated a separate
      compensation or nominating committee.




**Compliance
      with Section 16(a) of the Exchange Act**




Based
      solely upon a review of Forms 3, 4 and 5 furnished to Providence, we are unaware
      of any individuals who during the period ended December 31, 2006 was a director,
      and officer, or beneficial owner of more than ten percent of our common stock,
      and who failed to file, on a timely basis, reports required by Section 16(a)
      of
      the Securities Exchange Act of 1934.




**Audit
      Committee Financial Expert**





As
      of the
      date of this Annual Report, our Board of Directors has determined that we do
      not
      have an audit committee financial expert nor do we have an audit
      committee.





**Involvement
      in Certain Legal Proceedings**





Neither
      the Company nor any of its officers or directors are currently the subject
      of
      any material litigation or material adverse legal proceedings.




**Code
      of Ethics**





We
      have
      not adopted a Code of Ethics within the meaning of Item 406(b) of Regulation
      S-B
      of the Securities Exchange Act of 1934. We intend on adopting a Code of Ethics
      which applies to our chief executive officer and our senior financial officers
      in the near future.





47




**ITEM
                10.**
              **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, 2006. The value attributable to any option awards
      is
      computed in accordance with FAS 123R.





**Summary
      Annual Compensation Table**





**Name
                and Principal Position**
            
            **Fiscal
                Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)**
            
            **Stock
                Awards**
              **($)**
            
            **Option
                Awards ($)**
            
            **Non-Equity
                Incentive Plan Compensation ($)**
            
            **Nonqualified
                Deferred Compensation Earnings ($)**
            
            **All
                Other Compensation**
              **($)**
            
            **Total
                ($)**Dr.
                Liu Zhong Yi
            
            
            2006
            
            $
            37,500
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            $
            100,000
            
            $
            137,500current
                President and CEO (1)Thomas
                G. Miller
            
            
            2006
            
            $
            12,500
            
            
            0
            
            $
            10,900
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            $
            23,400former
                President, CEO and CFO




(1)  Dr.
      Liu
      has served as our Chief Executive Officer and President since September 28,
      2006. Dr. Liu’s fiscal 2006 other compensation includes fees paid for car
      allowances and personal expenses.





**Outstanding
      Equity Awards at Fiscal Year-End**





For
      the
      fiscal year ended 2006, and for each prior fiscal year, we did not issue any
      options or Stock Appreciation Rights to any officers, employees or
      directors.





**Employment
      Agreements, Termination of Employment, and Change-in-Control Arrangements for
      Lotus**





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. However,
      in December 2006, we agreed and the Board of Directors approved compensation
      for
      Dr. Liu Zhong Yi and Adam Wasserman.




48




Dr.
      Liu
      Zhong Yi, our Chief Executive Officer, has a compensation package that provides
      for base compensation of $150,000 per year. Dr. Liu’s compensation began on
      October 1, 2006. Dr. Liu’s salary will be reviewed annually.





Adam
      Wasserman, our Chief Financial Officer, has a compensation package that provides
      for base compensation of $93,600 per year. Mr. Wasserman's compensation began
      on
      October 1, 2006. Mr. Wasserman's salary will be reviewed annually. Mr. Wasserman
      began with the Company on October 1, 2006. Mr. Wasserman’s salary is payable as
      follows: $50,000 in cash and $43,600 in our common stock.





**Compensation
      of Directors**





In
      2006,
      members of the Board of Directors did not currently receive any cash
      compensation for their services as Directors. To attract and keep Board members
      the Company will grant options to Board members in fiscal 2007.




**ITEM
                11.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS**




**Securities
      Authorized for Issuance under Equity Compensation Plans.**





The
      Company currently does not have, but in the future, intends to formally adopt
      a
      stock option or restricted share plan. Analysis is being done on the impact
      of
      recent accounting and regulatory rule changes on the Company and on its future
      incentive plans.





**Security
      Ownership of Certain Beneficial Owners and Management.**





The
      following table sets forth, as of March 25, 2007, certain information regarding
      the ownership of the Company’s capital stock by the following persons on such
      date: each of the directors and executive officers, each person who is known
      to
      be a beneficial owner of more than 5% of any class of our voting stock, and
      all
      of our officers and directors as a group. Unless otherwise indicated below,
      to
      our knowledge, all persons listed below had sole voting and investing power
      with
      respect to their shares of capital stock, except to the extent authority was
      shared by spouses under applicable community property laws.




Beneficial
      ownership is determined in accordance with the rules of the Securities and
      Exchange Commission and generally includes voting or investment power with
      respect to securities. Shares of our common stock subject to options, warrants
      or convertible securities exercisable or convertible within 60 days of March
      25,
      2007 were deemed outstanding for computing the percentage of the person or
      entity holding such options, warrants or convertible securities but are not
      deemed outstanding for computing the percentage of any other person, and was
      based on 41,280,000 shares of the Common Stock issued and outstanding on a
      fully
      diluted basis, as of March 25, 2007.




Title
                of
              Class
            
            Name
                and Address
              Of
              Beneficial
                Owners (1)
            
            Amount
                and Nature
              Of
                Beneficial Ownership
            
            Percent
              Of
              Class
                (2)Common
                Stock
            
            
            Dr.
                Liu Zhong Yi (5)
            
            
            18,782,400
            
            
            45.50
            %Common
                Stock
            
            
            Mrs.
                Song Zhenghong (5)
            
            
            6,708,000
            
            
            16.25
            %Common
                Stock
            
            
            Genesis
                Technology Group, Inc.
            
            
            6,736,896
            
            
            16.32
            %Common
                Stock
            
            
            China
                West, LLC (3)
            
            
            3,302,400
            
            
            8.00
            %Common
                Stock
            
            
            Mr.
                Shaohua Tan (4)
            
            
            3,170,304
            
            
            7.68
            %All
                officers and directors as a group (2 persons)
            
            
            
            
            
            25,490,400
            
            
            61.75
            %


49


(1)
            Unless
                otherwise noted, the address for each of the named beneficial owners
                is:
                7900 Glades Road, Suite 420, Boca Raton, Florida
                33434.





(2)
            The
                number of outstanding shares of common stock of Lotus is based upon
                41,280,000 shares, taking into account the issuance of 40,041,600
                new
                shares and the cancellation of a total of 5,275,000 shares pursuant
                to the
                Share Exchange Agreement.





(3)
            Charles
                Tamburello is the manager of China West, LLC and exercises sole voting
                and
                investment control over such
                shares.





(4)
            Mr.
                Shaohua Tan’s address is Suite 310, Building B, Ideal Plaza, No. 3,
                Danling Street, Haidian District, Beijing 100080,
                China.(5)
            Dr.
                Liu Zhong Yi and Mrs. Song Zhenghong are husband and
                wife.




**ITEM
              12.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE**




Certain
        Relationships and Related Transactions




**Lotus’
      Contractual Arrangements with Lotus East and Its
      Shareholders**




PRC
      law
      currently limits foreign equity ownership of Chinese companies. To comply with
      these foreign ownership restrictions, we operate our business in China through
      a
      series of contractual arrangements between Lotus International and Lotus
      East and its majority shareholders that were executed on September 6, 2006.
      For
      a description of these contractual arrangements, see “Description of
      Business.”




**Related
      Party Transactions of Lotus East**





Set
      forth
      below are the related party transactions between Lotus East’s shareholders,
      officers and/or directors, and Lotus East, with whom Lotus
      International has contractual arrangements which give us the ability to
      substantially influence Lotus East’s daily operations and financial affairs,
      appoint its senior executives and approve all matters requiring shareholder
      approval.





***Revolving
      Line of Credit.***





On
      December 31, 2005, Lotus East entered into a Loan Agreement with Dr. Liu Zhong
      Yi, the Company’s Chief Executive Officer and Chairman of the Board, whereby Dr.
      Liu agreed to grant Lotus East a revolving line of credit of approximately
      US$1,268,477 for the purpose of purchasing raw materials and equipment. The
      term
      of the loan is 10 years and the interest rate is at a 20% discount to the PRC
      banking loan interest rate, payable annually.




50




On
      December 31, 2005, Lotus East entered into a Loan Agreement with Song Zhenghong,
      a director of the Company, whereby Mr. Song agreed to grant Lotus East a
      revolving line of credit of approximately US$3,035,170 for the purpose of
      purchasing raw materials and equipment. The term of the loan is 10 years and
      the
      interest rate is at a 20% discount to the PRC banking loan interest rate,
      payable annually.





***Lease
      Agreement***





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




***General
      Partnership Agreement***





On
      March
      15, 2006, Lotus East entered into a General Partnership Agreement (the
“Partnership Agreement”) with Genesis Equity Partners, LLC (“GEP”) to engage GEP
      as a non-exclusive external consultant in connection with financial and related
      matters, including assisting Lotus East in becoming a publicly traded company
      in
      the United States. The term of the Partnership Agreement is eighteen (18)
      months. Pursuant to the Partnership Agreement, GEP received 35% of the
      outstanding shares of Lotus International in connection with the signing of
      the Management Agreements between Lotus International and Lotus East and
      the Exchange Agreement between Lotus and SEAA. GEP opted to receive the shares
      in the following manner: 8.52% to GEP, 16.82% to Genesis Technology Group,
      Inc.
      (“GTEC”), GEP’s parent company, and 7.92% to Joshua Tan, one of GTEC’s
      directors. The Partnership Agreement also provides for GEP to provide
“post-registration” services to Lotus East, including assisting the Company with
      its SEC filing obligations, for a general service fee of US$10,000 per month;
      provided, however, that the service fee payment shall not start until the
      Company receives funding of a minimum of US$1,000,000.





***Chief
      Financial Officer***




Adam
      Wasserman, our Chief Financial Officer, is also the Chief Financial Officer
      of
      GTEC, which owns more than 10% of the issued and outstanding common stock of
      the
      Company. GTEC is also the parent company of GEP, with which Lotus East has
      a
      Partnership Agreement, as described above.





**Other
      Related Party Transactions**




On
      October 10, 2006, we entered into a five-year loan agreement and contract (“Loan
      Agreement and Contract”) with Wu Lan Cha Bu Emergency Hospital (“Wu Lan”),
      whereby we agreed to lend to Wu Lan approximately $3,840,000 for the
      construction of a hospital ward in Inner Mongolia, China (the “Loan”). In
      exchange for the Loan, Wu Lan agreed that
      the
      Company would 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, Liu Zhong Yi, our Chief Executive Officer, loaned these funds to Wu Lan
      on
      behalf of the Company. Accordingly, on October 10, 2006 we entered into an
      Assignment Agreement whereby we assigned all of our 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 us. 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 the Company, we agreed to
      pay
      Dr. Liu an aggregate of approximately $1,150,000 to be paid in five (5) equal
      annual installments of approximately $230,000.




Director
        Independence
 
 The
        following information concerning director independence is based on the director
        independence standards of The NASDAQ Stock Market Corporate Governance
        Rules.
 
 The
        Board
        has determined that directors Mel Rothberg, Dr. Ian Ashley, and Caeli Widger
        are
        independent directors within The NASDAQ Stock Market's director independence
        standards. Directors Song Zhenghong, Xian Xuemei, Li Ping, and Liu Jin are
        not
        independent. In determining independence, the Board reviews and seeks to
        determine whether directors have any material relationship with the Company,
        direct or indirect, which would interfere with the exercise of independent
        judgment in carrying out the responsibilities of a director. The Board reviews
        business, professional, charitable
        and familial relationships of the directors in determining independence.
        The
        Board has not designated separate audit, compensation or nominating
        committees.




51




For
      the
      year ended December 31, 2006, an assignment fee expense, which was paid during
      fiscal 2006, amounted to $56,378 and is included in general and administrative
      expenses on the accompanying consolidated statements of operations.




**ITEM
              13.**
            **EXHIBITS**




**Exhibit
                No.**
            
            **Description**2.3
            
            Share
                Exchange Agreement between S.E. Asia Trading Company, Inc., SEAA
                Shareholders and Lotus Pharmaceutical International, Inc. and the
                Lotus Pharmaceutical International, Inc. Shareholders 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
            
            Company
                Bylaws (2)4.1
            
            Form
                of Subscription Agreement (6)4.2
            
            Form
                of Warrant (6)4.3
            
            Form
                of Note (6)4.4
            
            Security
                Agreement dated as of February 12, 2007 (6)4.5
            
            Lotus
                Pharmaceutical, Inc. Pledge Agreement dated as of February 12, 2007
                (6)4.6
            
            Guaranty
                dated February 12, 2007 (6)4.7
            
            Liu
                Zhong Yi Share Pledge Agreement dated February 12, 2007 (6)4.8
            
            Song
                Zhenghong Share Pledge Agreement dated February 12, 2007 (6)4.9
            
            Equity
                Pledge Agreement between Lotus Pharmaceutical International, Inc.
                and
                Liang Fang Pharmaceutical Co., Ltd. ( Liang Fang ) and Liang Fang’s
                Majority Shareholders dated September 6, 2006 (3)4.10
            
            Operating
                Agreement between Lotus Pharmaceutical International, Inc., and Liang
                Fang, Liang Fang’s Majority Shareholders dated September 6, 2006 (3)4.11
            
            Proxy
                Agreement between Lotus Pharmaceutical International, Inc., Liang
                Fang,
                and Liang Fang s Majority Shareholders dated September 6, 2006 (3)4.12
            
            Option
                Agreement between Lotus Pharmaceutical International, Inc. and Liang
                Fang,
                Liang Fang Majority Shareholders dated September 6, 2006 (3)4.13
            
            Equity
                Pledge Agreement between Lotus Pharmaceutical International, Inc.
                and En
                Zhe Jia Shi Pharmaceutical Co., Ltd. ( En Zhe Jia Shi ) and En Zhe
                Jia
                Shi’s Majority Shareholders dated September 6, 2006 (3)




52




**Exhibit
                No.**
            
            **Description**4.14
            
            Operating
                Agreement between Lotus Pharmaceutical International, Inc., and En
                Zhe Jia
                Shi, En Zhe Jia Shi’s Majority Shareholders dated September 6, 2006
                (3)4.15
            
            Proxy
                Agreement between Lotus Pharmaceutical International, Inc., En Zhe
                Jia
                Shi, and En Zhe Jia Shi’s Majority Shareholders dated September 6, 2006
                (3)4.16
            
            Option
                Agreement between Lotus Pharmaceutical International, Inc. and En
                Zhe Jia
                Shi, En Zhe Jia Shi’s Majority Shareholders dated September 6, 2006
                (3)10.1
            
            Consulting
                Services Agreement between Lotus Pharmaceutical International, Inc.
                and
                Liang Fang Pharmaceutical Co., Ltd. dated September 6, 2006
                (3)10.2
            
            Consulting
                Services Agreement between Lotus Pharmaceutical International, Inc.,
                En
                Zhe Jia Shi Pharmaceutical Co., Ltd. dated September 6, 2006
                (3)10.3
            
            Letter
                of Resignation by Mr. Thomas Miller to the Board of Directors of
                S.E. Asia
                Trading Company (3)10.4
            
            General
                Partnership Agreement between Genesis Equity Partners, LLC and Liang
                Fang
                Pharmaceutical, Ltd. dated March 15, 2006. (3)10.5
            
            Lease
                Agreement between Beijing Aoshikai Peace Lane Shopping Center and
                Liang
                Fang Pharmaceutical Co. Ltd. dated June 1, 2002. (3)10.6
            
            Lease
                Agreement between Beijing Aoshikai Peace Lane Shopping Center and
                Liang
                Fang Pharmaceutical Co. Ltd. dated June 1, 2005. (3)10.7
            
            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)10.8
            
            Lease
                Agreement between Beijing Fengtai District 2ndSanatorium of General Logistics of P.L.A. and Liang Fang Pharmaceutical
                Co. Ltd. dated April 1, 2003. (3)10.9
            
            Lease
                Agreement between Beijing Qiji Investment and Management Center and
                Liang
                Fang Pharmaceutical Co. Ltd. dated October 10, 2005. (3)10.10
            
            Lease
                Agreement between Beijing South Palace Marketing Center and Liang
                Fang
                Pharmaceutical Co. Ltd. dated January 1, 2006. (3)10.11
            
            Lease
                Agreement between Beijing Xingfa Food Shop and Liang Fang Pharmaceutical
                Co. Ltd. dated January 1, 2006. (3)10.12
            
            Lease
                Agreement between Construction and Repair Agency of Haiying Group
                and
                Liang Fang Pharmaceutical Co. Ltd. dated December 31, 2000.
                (3)




53




10.13
            
            Lease
                Agreement between Liu Zhongyi and Liang Fang Pharmaceutical Co. Ltd.
                Dated
                December 15, 2001. (3)10.14
            
            Lease
                Agreement between Real Estate Management Agency of General Logistics
                of
                P.L.A. and Drugstore (Wanshou Round Branch) of Liang FangPharmaceutical
                Co. Ltd. dated September 1, 2004. (3)10.15
            
            Loan
                Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd.
                and Liu
                Zhongyi dated December 31, 2005. (3)10.16
            
            Loan
                Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd.
                and Ma
                Zhaozhao dated December 31, 2005. (3)10.17
            
            Loan
                Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd.
                and Song
                Guo an dated December 31, 2005. (3)10.18
            
            Loan
                Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd.
                and Song
                Zhenghong dated December 31, 2005. (3)10.19
            
            Loan
                Agreement between Beijing En Ze Jia Shi Pharmaceutical Co., Ltd.
                and Zehng
                Guixin dated December 31, 2005. (3)10.20
            
            Letter
                Agreement among S.E. Asia Trading Company, Inc., Lynn Management,
                LLC and
                Dynacap Holdings Limited LLC dated September 13, 2006. (3)10.21
            
            Bill
                of Sale between S.E. Asia Trading Company, Inc. and Charles Smith
                dated
                September 25, 2006. (3)10.22
            
            Loan
                Agreement among Beijing Liang Fang Pharmaceutical Co., Ltd. and Wu
                Lan Cha
                Bu Emergency Hospital (English version) *10.23
            
            Loan
                Agreement among Beijing Liang Fang Pharmaceutical Co., Ltd. and Wu
                Lan Cha
                Bu Emergency Hospital (Chinese version) *10.24
            
            Contract
                among Wu Lan Cha Bu Emergency Hospital Center and Beijing Liang Fang
                Pharmaceutical Co., Ltd. dated October 10, 2006 (English version)
                *10.25
            
            Contract
                among Wu Lan Cha Bu Emergency Hospital Center and Beijing Liang Fang
                Pharmaceutical Co., Ltd. dated October 10, 2006 (Chinese version)
                *10.26
            
            Assignment
                agreement among Beijing Liang Fang Pharmaceuticals Co., Ltd. and
                Dr. Liu
                Zhong Yidated
                October 10, 2006 (English version) *10.27
            
            Assignment
                agreement among Beijing Liang Fang Pharmaceuticals Co., Ltd. and
                Dr. Liu
                Zhong Yidated
                October 10, 2006 (Chinese version) *




54




16.1
            
            Letter
                regarding change of certifying accountant (4)21.1
            
            Subsidiaries
                of the Company *31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002 *31.2
            
            Certification
                of Chief Financials 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 Registrant’s Current Report on Form 8-K filed on
                September 7, 2006.(2)
            Incorporated
                by reference from the Registrant’s Registration Statement on Form SB-1
                filed on September 10, 2004.(3)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                October 5, 2006.(4)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                November 13, 2006.(5)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                December 19, 2006.(6)
            Incorporated
                by reference from the Registrant’s Current Report on Form 8-K filed on
                February 15, 2007.







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




The
      following table sets forth the fees billed by our principal independent
      accountants for each of our last two fiscal years for the categories of services
      indicated.




**Year
                Ended December 31,****Category**
            
            **2006**
            
            **2005**Audit
                Fees1
            
            $
            62,000
            
            $
            65,000Audit
                Related Fees2
            
            
            12,500
            
            
            0Tax
                Fees3
            
            
            0
            
            
            0All
                Other Fees4
            
            
            0
            
            
            0





1
            Consists
                of fees billed for the audit of our annual financial statements,
                review of
                our Form 10-KSB and services that are normally provided by the accountant
                in connection with year end statutory and regulatory filings or
                engagements.




2
            Consists
                of fees billed for the review of our quarterly financial statements,
                review of our forms 10-QSB and 8-K and services that are normally
                provided
                by the accountant in connection with non year end statutory and regulatory
                filings on engagements.




3
            Consists
                of professional services rendered by a company aligned with our principal
                accountant for tax compliance, tax advice and tax
                planning.




4
            The
                services provided by our accountants within this category consisted
                of
                advice and other services relating to SEC matters, registration statement
                review, accounting issues and client
                conferences.




55




**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**LOTUS
              PHARMACEUTICALS, INC.**April
                17, 2007
            By:
            /s/ Liu
              Zhong
              YiLiu
                Zhong Yi,Chief Executive Officer and Director




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




Signature
              
              Title
              
              Date/s/Liu Zhong Yi
              
              Chief
                  Executive Officer and Director
              
              April
                  17, 2007Dr.
                  Liu Zhong Yi/s/Adam Wasserman
              
              Chief
                  Financial Officer and Principal Accounting Officer
              
              April
                  17, 2007Adam
                  Wasserman/s/Li
                  Ping
              
              Director
              
              April
                  17, 2007Li
                  Ping/s/Liu Jin
              
              Director
              
              April
                  17, 2007Liu
                  Jin/s/Xian Xuemei
              
              Director
              
              April
                  17, 2007Xian
                  Xuemei/s/Song Zhenghong
              
              Director
              
              April
                  17, 2007Song
                  Zhenghong









**LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **December
        31, 2006**
 
 
 
 
 
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 INDEX
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
  CONTENTS
  Report
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Financial Statements:Consolidated
                  Balance Sheet
              F-3Consolidated
                  Statements of Operations
              F-4Consolidated
                  Statements of Shareholders’ Equity
              F-5Consolidated
                  Statements of Cash Flows
              F-6Notes
                  to Consolidated Financial Statements
              F-7
                  to F-22
  F-1
  REPORT
        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 sheet of Lotus Pharmaceuticals,
        Inc. and Subsidiaries as of December 31, 2006 and the related consolidated
        statements of operations, changes in shareholders' equity, and cash flows
        for
        the years ended December 31, 2006 and 2005. 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, 2006, and the results of their operations
        and their cash flows for the years ended December 31, 2006 and 2005, in
        conformity with accounting principles generally accepted in the United States
        of
        America.
  By:
              /s/ Sherb
                & Co., LLPCertified
                Public Accountants
 Boca
        Raton, Florida
 March
        17,
        2007
  F-2
  LOTUS
          PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 CONSOLIDATED
        BALANCE SHEET
 December
        31, 2006
 
 ASSETSCURRENT
                  ASSETS:Cash
              
              $
              2,089,156Accounts
                  receivable, net of allowance for doubtful accounts of
                  $539,627and
                  sales returns of $2,297,399
              
              
              7,277,067Inventories,
                  net of reserve for obsolete inventory of $280,251
              
              
              3,133,677Prepaid
                  expenses
              
              
              252,103Total
                  Current Assets
              
              
              12,752,003PROPERTY
                  AND EQUIPMENT - Net
              
              
              5,813,935OTHER
                  ASSETSIntangible
                  assets, net of accumulated amortization
              
              
              208,169Due
                  from related party
              
              
              1,826,626Total
                  Assets
              
              $
              20,600,733LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable and accrued expenses
              
              $
              705,147VAT
                  and service taxes payable
              
              
              2,047,851Advances
                  from customers
              
              
              231,340Unearned
                  revenue
              
              
              426,358Due
                  to related parties
              
              
              695,231Total
                  Current Liabilities
              
              
              4,105,927LONG-TERM
                  LIABILITIES:Notes
                  payable - related parties
              
              
              4,729,880Total
                  Liabilities
              
              
              8,835,807SHAREHOLDERS'
                  EQUITY:Common
                  stock ($.001 par value; 50,000,000 shares authorized;41,280,000
                  shares issued and outstanding)
              
              
              41,280Additional
                  paid-in capital
              
              
              5,965,323Retained
                  earnings
              
              
              5,258,007Other
                  comprehensive gain - cumulative foreign currency translation
                  adjustment
              
              
              500,316Total
                  Shareholders' Equity
              
              
              11,764,926Total
                  Liabilities and Shareholders' Equity
              
              $
              20,600,733
  See
        notes
        to consolidated financial statements
 
 F-3
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 
 For
                  the Year EndedDecember
                  31,2006
              
              2005NET
                  REVENUES:Wholesale
              
              $
              25,430,069
              
              $
              16,099,036Retail
              
              
              3,532,623
              
              
              1,629,385Other
                  revenues
              
              
              7,244,997
              
              
              617,420Total
                  Revenues
              
              
              36,207,689
              
              
              18,345,841COST
                  OF SALES
              
              
              26,523,039
              
              
              14,584,682GROSS
                  PROFIT
              
              
              9,684,650
              
              
              3,761,159OPERATING
                  EXPENSES:Selling
                  expenses
              
              
              2,154,216
              
              
              414,361Research
                  and development
              
              
              387,337
              
              
              1,759,756General
                  and administrative
              
              
              2,716,536
              
              
              975,003Total
                  Operating Expenses
              
              
              5,258,089
              
              
              3,149,120INCOME
                  FROM OPERATIONS
              
              
              4,426,561
              
              
              612,039OTHER
                  INCOME (EXPENSE):Other
                  income
              
              
              -
              
              
              1,219,512Interest
                  income
              
              
              -
              
              
              161Interest
                  expense
              
              
              (325,824
              )
              
              -Total
                  Other Income (Expense)
              
              
              (325,824
              )
              
              1,219,673INCOME
                  BEFORE INCOME TAXES
              
              
              4,100,737
              
              
              1,831,712INCOME
                  TAXES
              
              
              -
              
              
              -NET
                  INCOME
              
              $
              4,100,737
              
              $
              1,831,712COMPREHENSIVE
                  INCOME:NET
                  INCOME
              
              $
              4,100,737
              
              $
              1,831,712OTHER
                  COMPREHENSIVE INCOME:Unrealized
                  foreign currency translation gain
              
              
              326,679
              
              
              168,543COMPREHENSIVE
                  INCOME
              
              $
              4,427,416
              
              $
              2,000,255NET
                  INCOME PER COMMON SHARE:Basic
              
              $
              0.10
              
              $
              0.05Diluted
              
              $
              0.10
              
              $
              0.05WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING:Basic
              
              
              40,360,530
              
              
              40,041,600Diluted
              
              
              40,360,530
              
              
              40,041,600
  See
        notes
        to consolidated financial statements
 
 F-4
 
 LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY
 For
        the
        Years Ended December 31, 2006 and 2005
  Common
                  Stock, $.001 Par ValueNumber
                  of Shares
              
              Amount
              
              Additional
                  Paid-in Capital
              
              Retained
                  Earnings (Deficit)
              
              Other
                  Comprehensive Income
              
              Total
                  Shareholders' EquityBalance,
                  December 31, 2004
              
              
              40,041,600
              
              $
              40,042
              
              $
              5,972,243
              
              $
              (674,442
              )
              $
              5,094
              
              $
              5,342,937Member
                  Contributions
              
              
              -
              
              
              -
              
              
              818
              
              
              -
              
              
              -
              
              
              818Comprehensive
                  income:Net
                  income for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              1,831,712
              
              
              -
              
              
              1,831,712Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              168,543
              
              
              168,543Total
                  comprehensive income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,000,255Balance,
                  December 31, 2005
              
              
              40,041,600
              
              
              40,042
              
              
              5,973,061
              
              
              1,157,270
              
              
              173,637
              
              
              7,344,010Recapitalization
                  of Company
              
              
              1,238,400
              
              
              1,238
              
              
              (7,738
              )
              
              -
              
              
              -
              
              
              (6,500
              )Comprehensive
                  income:Net
                  income for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              4,100,737
              
              
              -
              
              
              4,100,737Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              326,679
              
              
              326,679Total
                  comprehensive income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,427,416Balance,
                  December 31, 2006
              
              
              41,280,000
              
              $
              41,280
              
              $
              5,965,323
              
              $
              5,258,007
              
              $
              500,316
              
              $
              11,764,926
  See
        notes
        to consolidated financial statements
 
 F-5
 
 LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 For
                  the Year EndedDecember
                  31,2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              4,100,737
              
              $
              1,831,712Adjustments
                  to reconcile net income from operations to net cash provided by
                  (used in)
                  operating activities:Depreciation
                  and amortization
              
              
              567,469
              
              
              429,633Increase
                  in allowance for doubtful accounts and sales returns
              
              
              2,732,889
              
              
              26,865Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (8,922,247
              )
              
              (597,584
              )Inventories
              
              
              3,928,236
              
              
              (2,975,432
              )Prepaid
                  and other current assets
              
              
              (75,155
              )
              
              622,007Other
                  assets
              
              
              -
              
              
              30,006Accounts
                  payable and accrued expenses
              
              
              206,516
              
              
              137,331VAT
                  and service taxes payable
              
              
              1,999,675
              
              
              2,519Unearned
                  revenue
              
              
              200,811
              
              
              38,992Advances
                  from customers
              
              
              39,333
              
              
              110,671NET
                  CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
              
              
              4,778,264
              
              
              (343,280
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Decrease
                  (increase) in due from related parties
              
              
              1,243,742
              
              
              (2,163,128
              )Purchase
                  of property and equipment
              
              
              (1,480
              )
              
              (2,045,210
              )NET
                  CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
              
              
              1,242,262
              
              
              (4,208,338
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Capital
                  contributions
              
              
              -
              
              
              818Proceeds
                  from related party advances
              
              
              -
              
              
              4,623,713Repayments
                  of related party advances
              
              
              (680,913
              )
              
              -Repayments
                  of notes payable - related parties
              
              
              (3,456,196
              )
              
              -NET
                  CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
              
              
              (4,137,109
              )
              
              4,624,531EFFECT
                  OF EXCHANGE RATE ON CASH
              
              
              44,805
              
              
              3,364NET
                  INCREASE IN CASH
              
              
              1,928,222
              
              
              76,277CASH
                  - beginning of year
              
              
              160,934
              
              
              84,657CASH
                  - end of year
              
              $
              2,089,156
              
              $
              160,934SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid for:Interest
              
              $
              325,824
              
              $
              -Income
                  taxes
              
              $
              -
              
              $
              2,319
  See
        notes
        to consolidated financial statements.
 
 F-6
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 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 own the majority of the Company’s voting
        stock. T he
        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 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.
  On
        September 6, 2006, Lotus International entered into the following
        contractual arrangements:
  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 pays a quarterly consulting service fees in Renminbi (“RMB”) to Lotus that
        is equal to Lotus East’s revenue, as defined, for such quarter.
 
 F-7
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
  NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Organization
        (continued)
 
 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 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.
  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 ten (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 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.
 
 F-8
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
  NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Organization
        (continued)
 
 Liang
        Fang Pharmaceuticals Co. Ltd. (“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.
 
 Liang
        Fang owns and operates several drug stores throughout Beijing, China. These
        drugstores sell Western and traditional Chinese medicines, and medical treatment
        accessories.
 
 Liang
        Fang’s affiliate, Beijing En Zhe Jia Pharmaceutical Co., Ltd. (“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.
 
 Basis
        of presentation
 
 The
        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 subsidiary, Lotus and companies under its control (Liang
        Fang
        and En Zhe Jia). All significant inter-company balances and transactions
        have
        been eliminated.
 
 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 2006 and 2005 include the allowance for
        doubtful accounts and sales returns, the allowance for obsolete inventory,
        the
        useful life of property and equipment and intangible assets, and accruals
        for
        taxes due.
 
 Fair
        value of financial instruments
 
 The
        carrying amounts reported in the balance sheet for cash, accounts receivable,
        accounts payable and accrued expenses, customer advances, and amounts due
        from
        related parties approximate their fair market value based on the short-term
        maturity of these instruments.
 
 F-9
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
  NOTE
        1 - BASIS
        OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (continued)
  Cash
        and cash equivalents
 
 For
        purposes of the combined 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.
 
 Accounts
        receivable
 
 The
        Company has a policy of reserving for uncollectible accounts based on its
        best
        estimate of the amount of probable credit losses in its existing accounts
        receivable. The Company periodically reviews its accounts receivable to
        determine whether an allowance is necessary based on an analysis of past
        due
        accounts and other factors that may indicate that the realization of an account
        may be in doubt. Account balances deemed to be uncollectible are charged
        to the
        allowance after all means of collection have been exhausted and the potential
        for recovery is considered remote. At December 31, 2006, the Company has
        established, based on a review of its outstanding balances, an allowance
        for
        doubtful accounts in the amount of $539,627.
 
 Sales
        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
        return, 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, price changes of competitive
        products, introductions of generic products and introductions of competitive
        new
        products. The allowance for product returns at December 31, 2006 was
        $2,297,399.
 
 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. The Company recorded an inventory
        reserve of $280,251 for the year ended December 31, 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.
 
 F-10
 
 LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
  NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 I mpairment
        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,
        2006 and 2005.
 
 Advances
        from customers
 
 Advances
        from customers at December 31, 2006 of $231,340 consist of prepayments from
        third party customers to the Company for merchandise that had not yet
        shipped. The Company will recognize the deposits 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.
 
 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
        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 collectibility 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.
 
 F-11
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
 
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Revenue
        recognition (continued)
 
 The
        Company’s net product revenues represent total product revenues less allowances
        for returns.
 
 *Allowance
        for returns* —
        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 SFAS No. 48 and SAB 104 in
        establishing its return estimates. The allowance for product returns at
        December 31, 2006 was $2,297,399. This allowance has been netted with
        accounts receivable on the Company’s balance sheet.
 
 *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 a 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 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.
 
 Shipping
        costs
 
 Shipping
        costs are included in cost of sales and totaled $963,504 and $236,237 for
        the
        years ended December 31, 2006 and 2005, respectively.
 
 F-12
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
 
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 A dvertising
 
 Advertising
        is expensed as incurred. Advertising expenses amounted to $81,888 and $683
        for
        the years ended December 31, 2006 and 2005, respectively.
 
 Foreign
        currency translation
 
 The
        reporting currency is the U.S. dollar. The functional currency of the Company
        is
        the local currency, the Chinese Renminbi (“RMB”). The financial statements of
        the Company are translated into United States dollars using year-end rates
        of
        exchange for assets and liabilities, and average rates of exchange for the
        period for revenues, costs, and expenses. 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, 2006 was $44,805.
 
 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. Research and development costs for
        the
        years ended December 31, 2006 and 2005 were approximately $387,000 and
        $1,760,000, respectively, and are included in operating expenses.
 
 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, 2006 and 2005, accumulated other
        comprehensive income was $326,679 and $168,543, respectively.
 
 Recent
        Accounting Pronouncements
 
 In
        July
        2006, the Financial Accounting Standards Board (“FASB”) issued FASB
        Interpretation No. 48 (“FIN 48”), *“Accounting
        for Uncertainty in Income Taxes,”* an
        interpretation of FASB Statement No. 109 (“SFAS 109”). The
        interpretation clarifies the accounting for uncertainty in income taxes
        recognized in an entity’s financial statements in accordance with SFAS 109, *“Accounting
        for Income Taxes.”* It
        prescribes a recognition threshold and measurement attribute for financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken on a tax return. FIN 48 is effective for fiscal years beginning after
        December 15, 2006. The Company is currently evaluating the impact, if any,
        of FIN 48 on its financial statements.
  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.
 
 F-13
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
 
 NOTE
        1 - ORGANIZATION
        AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 
 Recent
        Accounting Pronouncements (continued)
 
 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.
        Accordingly, adoption of the FSP had no effect on its 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 Company is currently assessing the impact, if
        any, the adoption of SFAS 159 will have on its financial statements.
 
 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 - INVENTORIES
 
 At
        December 31, 2006, inventories consisted of the following:
 
 Raw
                  materials
              
              $
              2,500,564Finished
                  goods
              
              
              913,3643,413,928Less:
                  Reserve for obsolete inventory
              
              
              (280,251
              )$
              3
                ,133,677
  NOTE
        3 - PROPERTY
        AND EQUIPMENT
 
 At
        December 31, 2006, property and equipment consist of the following:
  Useful
                    LifeOffice
                    equipment and furniture
                
                
                5-8
                    Years
                
                $
                136,609Manufacturing
                    equipment
                
                
                10
                    - 15 Years
                
                
                4,708,531Building
                    and building improvements
                
                
                20
                    - 40 Years
                
                
                2,385,6567,230,796Less:
                    accumulated depreciation
                
                
                
                
                
                (1,416,861
                )$
                5,813,935
  For
        the
        year ended December 31, 2006 and 2005, depreciation expense amounted to $397,951
        and $251,056, respectively.
  F-14
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
  NOTE
        4 - INTANGIBLE
        ASSETS
 
 At
        December 31, 2006, the Company holds 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 have a life of 6.5 years. The manufacturing
        rights for Brimonidine became effective on August 27, 2005 and have a life
        of 5
        years.
 
 At
        December 31, 2006, intangible assets consist of the following:
 
 Manufacturing
                  rights
              
              $
              1,111,097Less:
                  accumulated amortization
              
              
              (902,928
              )$
              208,169
 
 Amortization
        expense amounted to approximately $170,000 and $179,000 for the year ended
        December 31, 2006 and 2005.
 
 Amortization
        expense attributable to future periods is as follows:
 
 Year
                  ending December 31:2007
              
              $
              79,3092008
              
              
              76,7512009
              
              
              52,109$
              208,169
  NOTE
        5 - RELATED
        PARTY TRANSACTIONS
  **Due
        from related parties**
 
 At
        December 31, 2006, the Company had a receivable from affiliated entity owned
        by
        the Company’s chief executive officer. During fiscal 2006, this related party
        repaid $1,243,742 of these advances and is currently repaying this balance
        monthly at approximately $84,000 per month until paid in full. At December
        31,
        2006, the Company has a receivable from this related party amounting to
        $1,826,626. These advances are payable on demand and were personally guaranteed
        by the officer. The Company is aware that the receivable from this related
        party
        may be in violation of the Sarbanes-Oxley Act of 2002. Through monthly payments,
        the Company intends on rectifying this situation during fiscal 2007.
 
 F-15
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
  NOTE
        5 - RELATED
        PARTY TRANSACTIONS (continued)
 
 **Notes
        payable - related parties**
 
 Notes
        payable - related parties consisted of the following at December 31,
        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 (5.1% at December 31, 2006), and
                  unsecured
              
              $
              1,880,397Note
                  to Zheng Gui Xin, employee, due on December 30, 2015 with with
                  variable
                  annual interest at 80% of current bank rate (5.1% at December 31,
                  2006),
                  and unsecured
              
              
              1,446,114Note
                  to Ma Zhao Zhao, employee, due on December 30, 2015 with variable
                  annual
                  interest at 80% of current bank rate (5.1% at December 31, 2006),
                  and
                  unsecured
              
              
              579,165Note
                  to Liu Zhong Yi, officer and director, due on December 30, 2015
                  with
                  variable annual interest at 80% of current bank rate (5.1% at December
                  31,
                  2006), and unsecured
              
              
              568,367Note
                  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 (5.1% at December 31, 2006),
                  and
                  unsecured
              
              
              255,837Total
                  notes payable - related parties, long term
              
              $
              4,729,880
  For
        the
        years ended December 31, 2006 and 2005, interest expense related to these
        related loans amounted to $325,824 and $0, respectively.
 
 **Due
        to related parties**
 
 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
        fiscal 2006, the Company repaid $302,871 of these advances. At December 31,
        2006, the Company had a payable to the chief executive officer and his spouse
        amounting to $547,481. These advances are short-term in nature and non-interest
        bearing.
 
 Prior
        to
        fiscal 2006, an employee of the Company, from time to time, provided advances
        to
        the Company for operating expenses. During fiscal 2006, the Company repaid
        $378,042 of these advances. At December 31, 2006, the Company had a payable
        to
        this employee amounting to $147,750. These advances are short-term in nature
        and
        non-interest bearing.
 
 F-16
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
 
 NOTE
        5 - RELATED
        PARTY TRANSACTIONS (continued)
 
 **Other**
 
 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 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 $1,150,000 to be paid
        in 5
        equal annual installments of approximately $230,000.
 
 For
        the
        year ended December 31, 2006, assignment fee expense, which was paid during
        fiscal 2006, amounted to $56,378 and is included in general and administrative
        expenses on the accompanying consolidated statements of operations.
 
 NOTE
        6 - OTHER
        INCOME
 
 In
        2005,
        the Company recorded other income of $1,219,512 related to the sale of a
        patent
        to a third party for a drug formula that it had developed.
 
 NOTE
        7 - 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.
 
 The
        Company has a net operating loss carryforward for United States income tax
        purposes totaling approximately $153,800 at December 31, 2006, expiring through
        the year 2026 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
        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 substantially all of
        its
        income tax in the 2006 and 2005 period. The
        estimated tax savings due to the tax exemption for the years ending December
        31,
        2006 and 2005 amounted to approximately $1,400,000 and $603,000, respectively.
        The net effect on earnings per share if the income tax had been applied would
        decrease earnings per share for December 31, 2006 and 2005 to $0.03 and $0.02,
        respectively.
 
 F-17
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
 
 NOTE
        7 - 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, 2006
        and 2005:
 
 2006
              
              2005Computed
                  "expected" provision
              
              
              34.0
              %
              
              34.0
              %State
                  tax provision, net of federal effect
              
              
              4.0
              %
              
              4.0
              %Effect
                  of foreign income tax exemption
              
              
              (39.0
              )%
              
              (37
              )%Change
                  in valuation allowance
              
              
              1.0
              %
              
              0.0
              %0.0
              %
              
              1.0
              %
 
 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:
 2006Tax
                  benefit of net operating loss carryforward
              
              $
              58,444Valuation
                  allowance
              
              
              (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, 2006, due to the uncertainty
        of
        realizing the deferred income tax assets related to the U.S. net operating
        loss
        carryforward.
 
 **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 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, 2006, the Company has
        accrued
        $2,047,851 of underpaid business and value-added taxes.
 
 F-18
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
  NOTE
        8 - 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, 2006 and 2005, 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, 2006 and 2005 is as follows:
  **Wholesale
                  and third-party manufacturing**
              
              **Retail
                  Operations**
              
              **Unallocated**
              
              **Total****2006****Net
                  Revenues**
              
              $
              30,285,471
              
              $
              4,800,553
              
              $
              1,121,665
              
              $
              36,207,689**Cost
                  of Sales (excluding depreciation)**
              
              
              21,807,867
              
              
              4,309,542
              
              
              29,780
              
              
              26,147,189**Operating
                  expenses (excluding depreciation and
                  amortization)**
              
              
              -
              
              
              -
              
              
              5,066,470
              
              
              5,066,470**Depreciation
                  and Amortization**
              
              
              357,058
              
              
              18,792
              
              
              191,619
              
              
              567,469**Interest
                  Expense**
              
              
              -
              
              
              -
              
              
              325,824
              
              
              325,824**Net
                  Income**
              
              $
              8,120,546
              
              $
              472,219
              
              $
              (4,492,028
              )
              $
              4,100,737**2005****Net
                  Revenues**
              
              $
              16,099,036
              
              $
              2,246,805
              
              $
              -
              
              $
              18,345,841**Cost
                  of Sales (excluding depreciation)**
              
              
              12,487,753
              
              
              1,865,831
              
              
              -
              
              
              14,353,584**Operating
                  expenses (excluding depreciation and
                  amortization)**
              
              
              -
              
              
              -
              
              
              2,950,585
              
              
              2,950,585**Depreciation
                  and Amortization**
              
              
              212,128
              
              
              18,970
              
              
              198,535
              
              
              429,633**Other
                  income**
              
              
              -
              
              
              -
              
              
              (1,219,673
              )
              
              (1,219,673
              )**Interest
                  Expense**
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Net
                  Income**
              
              $
              3,399,155
              
              $
              362,004
              
              $
              (1,929,447
              )
              $
              1,831,712
  The
        Company does not allocate research and development, 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. All of the Company’s assets are located
        in China.
 
 F-19
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
 
 NOTE
        9 - 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
                  Ended December 31,2007
              
              $
              241,0572008
              
              
              212,6892009
              
              
              184,3462010
              
              
              95,9392011
                  and thereafter
              
              
              830,828Total
                  minimum lease payments
              
              $
              1,564,859
 
 For
        the
        years ended December 31, 2006 and 2005, rent expense amounted to $206,965
        and
        $238,610, respectively.
 
 NOTE
        10 - 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 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 should this occur.
 
 (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 companies could be affected.
 
 F-20
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
 
 NOTE
        11 - SUBSEQUENT
        EVENT
 
 On
        February 12, 2007, the Company entered into Subscription Agreements with
        the
        purchasers (the "Purchasers"). Pursuant to the Agreements, the Company issued
        to
        the Purchasers Secured Convertible Notes, ("Notes"), with an aggregate principle
        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 commences 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.
 
 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.
 
 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 grant 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 Ze 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.
 
 The
        financing was completed through a private placement to accredited investors
        and
        is exempt from registration pursuant to Section 4(2) of the Securities Act
        of
        1933, as amended ("Securities Act"). The securities sold in the financing
        have
        not yet been registered under the Securities Act of 1933, as amended, and
        may
        not be offered or sold in the United States in the absence of an effective
        registration statement or exemption from registration requirements.
 
 F-21
  LOTUS
        PHARMACEUTICALS, INC. AND SUBSIDIARIES
 (FORMERLY
        S.E. ASIA TRADING COMPANY, INC.)
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
  NOTE
        11 - SUBSEQUENT
        EVENT (continued)
 
 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 is not filed on or before
        the Filing Date or is 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.
  F-22