10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2009

or

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________________

Commission file number: 000-32581

LOTUS PHARMACEUTICALS, INC.

(Name of registrant as specified in its charter)

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

16 Cheng Zhuang Road, Feng Tai District, Beijing100071 People’s Republic of China	N/A
(Address of principal executive offices)	(Zip Code)

86-10-63899868

(Registrant's telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

Yes o No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if smaller reporting company)	Smaller reporting company x

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

Yes o No x

Indicated the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date, 43,377,932 shares of common stock are issued and outstanding as of May 15, 2009.

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements.	F-1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	37
Item 4T	Controls and Procedures.	37
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	38
Item 1A.	Risk Factors.	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	38
Item 3.	Defaults Upon Senior Securities.	38
Item 4.	Submission of Matters to a Vote of Security Holders.	38
Item 5.	Other Information.	38
Item 6.	Exhibits.	39

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to enforce the Contractual Arrangements, Lotus East's strategic initiatives, economic, political and market conditions and fluctuations, U.S. and Chinese government and industry regulation, interest rate risk, U.S., Chinese and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place substantial reliance on these forward-looking statements and readers should carefully review this report in its entirety together with our Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC, including the risks described in Item 1A. Risk Factors. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

2

OTHER PERTINENT INFORMATION

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

CERTAIN DEFINED TERMS USED IN THIS REPORT

Unless specifically set forth to the contrary, when used in this report the terms:

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

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

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

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

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

· "Lotus East" collectively refers to Liang Fang and En Ze Jia Shi,

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

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

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

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

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

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

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

· "RMB" refers to the renminbi which is the currency of mainland PRC of which the yuan is the principal currency.

3

PART 1. - FINANCIAL INFORMATION

Item 1. Financial Statements.

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,		December 31,
	2009		2008
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	1,228,769	$	1,278,808
Accounts receivable, net of allowance for doubtful accounts		1,395,054		6,132,912
Other receivable		15,777		15,757
Other receivable-employee		730,396		-
Other receivable-related party		-		2,027,954
Inventories, net of reserve for obsolete inventory		3,726,128		3,787,802
Prepaid expenses and other assets		77,380		121,274
Deferred debt costs		364,894		398,067
Total Current Assets		7,538,398		13,762,574
PROPERTY AND EQUIPMENT - Net		9,591,554		7,554,817
OTHER ASSETS
Deposit on patent license		2,921,585		2,917,919
Installments on intangible assets		35,301,508		38,175,134
Intangible assets, net of accumulated amortization		8,885,346		1,231,730
Deferred debt costs		-		66,344
Total Assets	$	64,238,391	$	63,708,518
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	856,345	$	2,170,165
Taxes Payable		1,994,388		5,015,908
Unearned revenue		794,516		565,629
Due to related parties		1,715,742		1,588,689
Series A convertible redeemable preferred stock, $.001 par value; 10,000,000 shares authorized; 6,206,890 and 5,747,118 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively, net		4,341,124		-
Total Current Liabilities		9,702,115		9,340,391
LONG-TERM LIABILITIES:
Due to related parties		460,150		525,225
Notes payable - related parties		5,062,803		5,056,451
Series A convertible redeemable preferred stock, $.001 par value; 10,000,000 shares authorized; 6,206,890 and 5,747,118 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively, net		-		3,652,341
Total Liabilities		15,225,068		18,574,408
SHAREHOLDERS' EQUITY:
Common stock ($.001 par value; 200,000,000 shares authorized; 43,377,932 and 42,420,239  shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively)		43,378		42,420
Additional paid-in capital		11,802,423		11,554,381
Statutory reserves		4,167,174		3,750,529
Retained earnings		28,708,994		25,557,537
Other comprehensive gain - cumulative foreign currency translation adjustment		4,291,354		4,229,243
Total Shareholders' Equity		49,013,323		45,134,110
Total Liabilities and Shareholders' Equity	$	64,238,391	$	63,708,518

See notes to unaudited consolidated financial statements

F-1

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months Ended
	March 31,
	2009			2008
NET REVENUES:
Wholesale	$	8,940,405		$	8,437,298
Retail		2,137,188			2,016,547
Other revenues		746,694			1,255,332
Total Net Revenues		11,824,287			11,709,177
COST OF SALES		5,186,158			7,768,425
GROSS PROFIT		6,638,129			3,940,752
OPERATING EXPENSES:
Selling expenses		1,701,799			1,122,337
Research and development		-			710,225
General and administrative		747,206			626,417
Total Operating Expenses		2,449,005			2,458,979
INCOME FROM OPERATIONS		4,189,124			1,481,773
OTHER INCOME (EXPENSE):
Debt issuance costs		(99,517	)		(62,886	)
Interest income		1,319			561
Interest expense		(448,097	)		(423,349	)
Total Other Income (Expense)		(546,295	)		(485,674	)
INCOME BEFORE INCOME TAXES		3,642,829			996,099
INCOME TAXES		74,727			-
NET INCOME	$	3,568,102		$	996,099
COMPREHENSIVE INCOME:
NET INCOME		3,568,102			996,099
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain		62,111			1,454,203
COMPREHENSIVE INCOME	$	3,630,213		$	2,450,302
NET INCOME PER COMMON SHARE:
Basic	$	0.08		$	0.02
Diluted	$	0.07		$	0.02
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		43,048,060			42,035,958
Diluted		49,254,950			47,783,076

See notes to unaudited consolidated financial statements

F-2

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Three Months Ended
	March 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,568,102		$	996,099
Adjustments to reconcile net income from operations to net cash provided by (used in) operating activities:
Depreciation and amortization		362,467			148,884
Amortization of deferred debt issuance costs		99,517			62,512
Amortization of debt discount		-			208,355
Amortization of discount on convertible redeemable preferred stock		288,783			84,709
Amortization of prepaid expense attributable to warrants		14,849			-
Increase in allowance for doubtful accounts		-			53,305
Changes in assets and liabilities:
Accounts receivable		4,744,877			(115,927	)
Inventories		66,423			(3,161,360	)
Prepaid expenses and other current assets		1,329,083			(2,012,656	)
Accounts payable and accrued expenses		(666,522	)		(98,515	)
Taxes payable		(3,027,383	)		41,792
Unearned revenue		228,143			217,749
Advances from customers		-			(35,197	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		7,008,339			(3,610,250	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Installments on intangible assets		2,921,162			-
Purchase of intangible asset		(7,887,138	)		-
Purchase of property and equipment		(2,153,243	)		-
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		(7,119,219	)		-
CASH FLOWS FROM FINANCING ACTIVITIES:
repayment of convertible debt		-			(2,520,000	)
Proceeds from sale of convertible redeemable peferred stocks		-			5,000,000
Payment of debt issuance costs		-			(468,568	)
Proceeds from related party advances		59,314			357,382
NET CASH PROVIDED BY  FINANCING ACTIVITIES		59,314			2,368,814
EFFECT OF EXCHANGE RATE ON CASH		1,527			272,856
NET (DECREASE) INCREASE IN CASH		(50,039	)		(968,580	)
CASH  - beginning of period		1,278,808			4,557,957
CASH – end of period	$	1,228,769		$	3,589,377
SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:
Cash paid for:
Interest	$	-		$	-
Income taxes	$	-		$	-
Non-cash investing and financing activities:
Warrants issued for prepaid financing costs and consulting expense	$	-		$	505,752
Common stock issued for prior compensation	$	249,000		$	-
Common stock issued for conversion of convertible debt	$	-		$	250,000
Debt discount for grant of warrants and beneficial conversion feature	$	-		$	2,033,025
Preferred stock issued for dividend payable	$	400,000		$	-

See notes to unaudited consolidated financial statements.

F-3

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

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

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

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

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

4

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

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

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

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

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

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

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

As of March 31, 2009, Liang Fang owns and operates 10 drug stores throughout Beijing, China. These drugstores sell Western and traditional Chinese medicines, and medical treatment accessories.

Liang Fang’s affiliate, En Ze Jia Shi is a Chinese limited liability company and was formed under laws of the People’s Republic of China on September 17, 1999. En Ze Jia Shi 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.

5

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

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

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

Basis of presentation

The interim consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in an annual financial statement prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the interim consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the statement of the results for the interim periods presented. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, as well as the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2008 included in its Annual Report on Form 10-K. Interim financial results are not necessarily indicative of the results that may be expected for a full year.

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

The accompanying unaudited consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The consolidated statements include the accounts of Lotus Pharmaceuticals, Inc. and its wholly-owned subsidiaries, Lotus and Lotus Century and variable interest entities under its control (Liang Fang and En Ze Jia Shi). 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 2009 and 2008 include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, fair value of warrants and beneficial conversion features related to the convertible notes, fair value of warrants granted 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, convertible debt, customer advances, and amounts due from related parties approximate their fair market value based on the short-term maturity of these instruments.

6

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

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

Cash and cash equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC and the United States. Balances in the United States are insured up to $250,000 at each bank. Balances at financial institutions or state-owned banks within the PRC are not covered by insurance. Non-performance by these institutions could expose the Company to losses for amounts in excess of insured balances. At March 31, 2009 and December 31, 2008, the Company’s China bank balances of approximately $1.2 million and $1.3 million, respectively, are uninsured. The Company has not experienced, nor does it anticipate, non-performance by these institutions.

Accounts receivable

The Company records accounts receivable, net of an allowance for doubtful accounts and sales returns. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, customer’s historical payment history, its current credit-worthiness and current economic trends. The amount of the provision, if any is recognized in the consolidated statement of operations within “General and administrative expenses”. Accounts are written off after exhaustive efforts at collection. The Company policy regarding sales returns is discussed below. The activity in the allowance for doubtful accounts and sales returns accounts for accounts receivable at March 31, 2009 and December 31, 2008 is as follows:

	Allowance for doubtful accounts			Allowance for sales returns		Total
Balance- December 31, 2007	$	548,083			-		548,083
Additions (Reductions)		(575,781	)		-		(575,781	)
Foreign currency translation adjustments		27,698			-		27,698
Balance- December 31, 2008		-			-		-
Additions (Reductions)		-			-		-
Foreign currency translation adjustments		-			-		-
Balance- March 31, 2009	$	-			-		-

Inventories

Inventories, consisting of raw materials, work-in-process and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the moving average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates and reflected in cost of sales. The Company did not consider it necessary to record any inventory reserve during the three months ended March 31, 2009 and the year ended December 31, 2008.

7

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

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

Property and equipment

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

Impairment of long-lived assets

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not consider it necessary to record any impairment charges during the three months ended March 31, 2009 and the year ended December 31, 2008.

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.

Value added tax

The Company is subject to value added tax (“VAT”) for manufacturing products and business tax for services provided. The applicable VAT rate is 17% for products sold in the 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 VAT 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 on 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, and will be charged to operations in the period if and when a determination is been made by the taxing authorities that a penalty is due.

8

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

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

Earnings per common share

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

	For the Three months Ended March 31,
	2009		2008
	(Unaudited)		(Unaudited)
Net income for basic and diluted earnings per share	$	3,568,102	$	996,099
Weighted average shares outstanding – basic		43,048,060		42,035,958
Effect of dilutive securities:
Unexercised warrants		-		-
Convertible debentures		6,206,890		5,747,118
Weighted average shares outstanding– diluted		49,254,950		47,783,076
Earnings per share – basic	$	0.08	$	0.02
Earnings per share – diluted	$	0.07	$	0.02

At March 31, 2009 and 2008, a total of 5,166,999 and 5,227,000 outstanding warrants have not been included in the calculation of diluted earnings per shares as the effect would be anti-dilutive. The closing market price of all outstanding warrants of the Company on March 31, 2009 and 2008 was lower than the exercise price of all outstanding warrants. Because of that, the Company assumes that none of the outstanding warrants at that date would have been exercised and therefore none were included in the computation of the diluted earnings per share at March 31, 2009 and 2008. Accordingly, the Company has excluded any effect of outstanding warrants as their effect would be anti-dilutive.

Revenue recognition

Product sales

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

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

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

9

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

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

 Allowance for returns

The Company accounts for sales returns in accordance with Statements of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of Return Exists, by establishing an accrual in an amount equal to its estimate of sales recorded for which the related products are expected to be returned. The Company determines the estimate of the sales return accrual primarily based on historical experience regarding sales returns, but also by considering other factors that could impact sales returns. These factors include levels of inventory in the distribution channel, estimated shelf life, product discontinuances, and price changes of competitive products, introductions of generic products and introductions of competitive new products. In general, for wholesale sales, the Company provides credit for product returns that are returned six months prior to and up to six months after the product expiration date. Upon sale, the Company estimates an allowance for future product returns. The Company provides additional reserves for contemporaneous events that were not known and knowable at the time of shipment. In order to reasonably estimate future returns, the Company analyzed both quantitative and qualitative information including, but not limited to, actual return rates, the level of product manufactured by the Company, the level of product in the distribution channel, expected shelf life of the product, current and projected product demand, the introduction of new or generic products that may erode current demand, and general economic and industry wide indicators. The Company also utilizes the guidance provided in SAB 104 in establishing its return estimates. Historically, approximately 49% of our total revenues consist of sales of four principal products and product returns from these principal products, as well as the Company’s other products, have been immaterial.  Accordingly, based upon the Company’s experience, it historically does not record a reserve at the time of sale and there have been no accounting entries related to its product return policy which have reduced its gross revenues or had any material impact on its financial statements.

Other revenues 

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

10

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

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

Advertising

Advertising is expensed as incurred. Advertising expenses were included in selling expenses and amounted to $6,500 and $153,295 for the three months ended March 31, 2009 and 2008, respectively.

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. For the three months ended March 31, 2009 and 2008, the Company expensed $0 and $710,225 as research and development expense, respectively.

Foreign currency translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the Company is the local currency, the Chinese Renminbi (“RMB”). Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

Asset and liability accounts on March 31, 2009 and December 31, 2008 were translated at 6.8456 RMB to $1.00 USD and at 6.8542 RMB to $1.00 USD, respectively. Equity accounts were stated at their historical rate. The average translation rates applied to income statements for the three month ended March 31, 2009 and 2008 were 6.84659 RMB and 7.1757 RMB to $1.00 USD, respectively.  In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Accumulated other comprehensive income

Accumulated other comprehensive income consisted of unrealized gains on foreign currency translation adjustments from the translation of financial statements from Chinese RMB to US dollars. For the three months ended March 31, 2009 and 2008, unrealized foreign currency translation gain was $62,111 and $1,454,203, respectively.

Recent Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133" (FAS

161). FAS 161 amends and expands disclosures about derivative instruments and hedging activities. FAS 161 required qualitative disclosures about the objectives and strategies of derivative instruments, quantitative disclosures about the fair value amounts of and gains and losses on derivative instruments, and disclosures of credit-risk-related contingent features in hedging activities. FAS 161 is effective for fiscal years beginning after November 15, 2008 and will be effective for the Company in fiscal year 2010. Early adoption is prohibited; however, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The Company has not yet determined the effect, if any, that the adoption of this standard will have on its financial position or results of operations.

In April 2008, FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”) was issued. This standard amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company has not determined the impact on its financial statements of this accounting standard.

11

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

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

Recent Accounting Pronouncements(Continued)

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We will adopt FSP APB 14-1 beginning in the first quarter of fiscal 2010, and this standard must be applied on a retrospective basis. We are evaluating the impact the adoption of FSP APB 14-1 will have on our consolidated financial position and results of operations.

In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect SFAS No. 162 to have a material impact on the preparation of our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60.”  SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation.  This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements.  SFAS 163 will be effective for financial statements issued for fiscal years beginning after December 15, 2008.  The Company does not expect the adoption of SFAS 163 will have a material impact on its financial condition or results of operation.

In June 2008, the FASB ratified EITF 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”. EITF 07-5 addresses how an entity should evaluate whether an instrument or embedded feature is indexed to its own stock, carrying forward the guidance in EITF 01-6 and superseding EITF 01-6. Other issues addressed in EITF 07-5 include addressing situations where the currency of the linked instrument differs from the host instrument and how to account for market-based employee stock options. EITF 07-5 is effective for fiscal years beginning after December 15, 2008 and early adoption is not permitted. The Company has evaluated this statement and estimated that it is not expected to have an impact on its financial position and results of operations.

On June 16, 2008, the FASB issued Final Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. The FSP determines that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of EITF 03-6-1 will have a material impact on its financial condition or results of operation.

12

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

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

Recent Accounting Pronouncements (continued)

 On October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on our financial position or results.

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99“Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our consolidated financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on net income.

NOTE 2 - ACCOUNTS RECEIVABLE

At March 31, 2009 and December 31, 2008, accounts receivable consisted of the following:

	March 31, 2009		December 31, 2008
Accounts receivable	$	1,395,054	$	6,132,912
Less: allowance for sales returns		-		-
Less: allowance for doubtful accounts		-		-
	$	1,395,054	$	6,132,912

NOTE 3 - OTHER RECEIVABLE-EMPLOYEE

In January 2009, an employee borrowed cash of $730,396 from The Company after she got the board of directors approval and signed the loan contract. On May 9, 2009, she paid off the loan to The Company.

NOTE 4 – INVENTORIES

At March 31, 2009 and December 31, 2008, inventories consisted of the following:

	March 31, 2009		December 31, 2008
Raw materials	$	2,294,695	$	2,884,092
Work in process		-		-
Packaging materials		14,003		16,100
Finished goods		1,417,430		887,610
		3,726,128		3,787,802
Less: reserve for obsolete inventory		-		-
	$	3,726,128	$	3,787,802

13

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 5 - PROPERTY AND EQUIPMENT

At March 31, 2009 and December 31, 2008, property and equipment consist of the following:

	Useful Life	March 31, 2009			December 31, 2008
Office equipment and furniture	3-8 Years	$	243,025		$	228,673
Manufacturing equipment	10 – 15 Years		5,578,746			5,585,793
Building and building improvements	20 – 40 Years		3,140,104			3,136,164
Construction in progress			3,336,797			1,181,757
			12,298,672			10,132,387
Less: accumulated depreciation			(2,707,118	)		(2,577,570	)
		$	9,591,554		$	7,554,817

At March 31, 2009, construction in progress amounted to $3,336,797, representing construction for a new manufacturing plant located in Cha Ha Er Industrial Garden District in Inner Mongolia, China. The amount included costs for road, electrical, sewage, heating and water pipes constructions.

For the three months ended March 31, 2009 and 2008, depreciation expense amounted to $126,291 and $112,302 of which $119,775 and $91,058 is included in cost of sales, respectively.

NOTE 6 – DEPOSIT ON PATENT AND INSTALLMENT ON INTANGIBLE ASSETS 

Deposit and Installments on a Chinese Class I drug patent-Laevo-Bambutero

Pursuant to the technology transfer agreement the Company’ entered into in April 2008 (See note 13), the Company made a deposit to acquire a Chinese Class I drug patent. Accordingly, the Company recorded $2,921,585 as deposit on patent as of March 31, 2009.

Also, the Company has made an installment on the Chinese Class I drug patent to obtain the patent according to the signed contract. Therefore, the Company recorded $2,629,426 as installment on intangible assets as of March 31, 2009. The Company will need to make additional installments of approximately $4,382,000 to obtain the patent.

In addition, we expect to incur approximately $14.5 million expenses related to our Laevo-Bambutero drug that was recently accepted by the Chinese SFDA for clinical trial evaluations in the next 21 to 27 months.

Installments on land use right 

As of March 31, 2009, the Company paid $32,672,082 (RMB 223.66 million) for land use rights to property in the Cha Ha Er Industrial Park ( See note 13), located in Inner Mongolia. The amount has reflected as an installment payment on intangible assets on its balance sheet at March 31, 2009. The installment payment is refundable if the Chinese local government would not grant it land use rights certificate.

14

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 7 - INTANGIBLE ASSETS

The Company purchased manufacturing rights for two approved drugs. The manufacturing rights issued are in connection with the Company’s products Valsartan and Brimonidine. The manufacturing rights for Valsartan became effective in November 2000 and had a life of 6.5 years, which expired in 2007. The manufacturing rights for Brimonidine became effective on August 27, 2005 and will expire in August 2009.

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 $4,382,000 for the construction of a hospital ward in Inner Mongolia, China. In exchange for agreeing to lend to Wu Lan the funds, Wu Lan agreed that the Company will be the exclusive provider for all medicines and disposable medical treatment apparatus to Wu Lan for a period of twenty (20) years. In October 2006, the Company’s chief executive officer, Mr. Liu, lent these funds to Wu Lan on behalf of the Company. The Company entered into an assignment agreement whereby the Company assigned all of its rights, obligations, and receipts under the Loan Agreement to Mr. Liu, except for the rights to revenues from the sale of medical and disposable medical treatment apparatus which will remain with the Company. As compensation to Mr. Liu for accepting the assignment under the loan agreement including all of the risks and obligations and for Liu not accepting the rights to revenues from the 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 $1,315,000 in 5 equal annual installments of approximately $263,000. Accordingly, the Company recorded an intangible asset of approximately $1,315,000 related to exclusive rights to provide all medicines and disposable medical treatment apparatus to Wu Lan for a period of twenty (20) years. The Company will amortize this exclusive right over a term of 20 years.

The Company entered into an intellectual rights transfer contract with Beijing Yipuan Bio-Medical Technology Co., Ltd. in December 2008 to acquire the drug Yipubishan, a highly effective and stable octreotide acetate injection solution, according to a clinical research report issued by Beijing Union Medical College Hospital Center for Clinical Pharmacology, used to treat the symptoms of gastric ulcers and hemorrhages of the upper digestive tract since 2004. We have paid off the new drug certificate and intellectual property right transfer fee to Yipuan as of March 31, 2009.

At March 31, 2009 and December 31, 2008, intangible assets consist of the following:

	March 31, 2009			December 31, 2008
Manufacturing rights	$	1,265,923		$	1,264,334
Revenue rights		1,314,713			1,313,064
Intellectual rights		7,888,278			-
Software		10,810			10,796
		10,479,724			2,588,194
Less:  accumulated amortization		(1,594,378	)		(1,356,464	)
	$	8,885,346		$	1,231,730

Amortization expense amounted to approximately $236,176and $36,582 for the three months ended March 31, 2009 and 2008, respectively.

The projected amortization expense attributed to future periods is as follows:

Period ending March 31:	Expense
2010	$	894,788
2011		857,193
2012		855,610
2013		854,564
Thereafter		5,423,191
Total	$	8,885,346

15

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 8 - RELATED PARTY TRANSACTIONS

Notes payable – related parties

Notes payable - related parties consisted of the following at March 31, 2009 and December 31, 2008:

	March 31, 2009 (Unaudited)		December 31, 2008
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 (4.75% and 4.75%  at March 31, 2009 and December 31, 2008, respectively), and unsecured	$	762,851	$	761,894
Note to Zheng Gui Xin, employee, due on December 30, 2015 with with variable annual interest at 80% of current bank rate (4.75% and 4.75%  at March 31, 2009 and December 31, 2008, respectively), and unsecured		1,651,426		1,649,354
Note to Ma Zhao Zhao, employee, due on December 30, 2015 with variable annual interest at 80% of current bank rate (4.75% and 4.75%  at March 31, 2009 and December 31, 2008, respectively), and unsecured		661,392		660,562
Note to Liu Zhong Yi, officer and director, due on December 30, 2015 with variable annual interest at 80% of current bank rate (4.75% and 4.75%  at March 31, 2009 and December 31, 2008, respectively), and unsecured		1,407,860		1,406,094
Note to Song Zheng Hong, director and spouse of the Company chief executive officer, Liu Zhong Yi, due on December 30, 2015 with variable annual interest at 80% of current bank rate (4.75% and 4.75%  at March 31, 2009 and December 31, 2008, respectively), and unsecured		579,274		578,547
Total notes payable – related parties, long term	$	5,062,803	$	5,056,451

For the three months ended March 31, 2009 and 2008, interest expense related to these related loans amounted to $59,314 and $76,258, respectively.

Due to related parties

The chief executive officer of the Company and his spouse and several employees of the Company, from time to time, provided advances to the Company for operating expenses. During the three months ended March 31, 2009 and 2008, the Company did not repay any of these advances. At March 31, 2009 and December 31, 2008, the Company had a payable to the chief executive officer and his spouse and these employees amounting to $719,439 and $718,536, respectively. These advances are short-term in nature and non-interest bearing.

On October 9, 2006, the Company entered into a five-year loan agreement and a contract with Wu Lan Cha Bu Emergency Hospital ("Wu Lan"), whereby the Company agreed to lend to Wu Lan approximately $4,382,000 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

16

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)

Due to related parties (continued)

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 $1,315,000 to be paid in 5 equal

annual installments of approximately $263,000. Accordingly, the Company recorded an intangible asset of approximately $1,315,000 related to exclusive rights to provide all medicines and disposable medical treatment apparatus to Wu Lan for a period of twenty (20) years and a corresponding related party liability. For the three months ended March 31, 2009 and for the year ended December 31, 2008, the Company did not pay any of this related party liability. At March 31, 2009 and December 31, 2008, amounts due under this assignment agreement amounted to $1,032,323 and $1,031,028 of which $460,150 and $525,225 is included in long-term liabilities and has been included in due to related parties on the accompanying balance sheets, respectively.

At March 31, 2009 and December 31, 2008, the Company has recorded accrued interest relating to notes payable - related parties of $424,130 and $364,350, respectively, which have been included in due to related parties on the accompanying balance sheets.

For the three months ended March 31, 2009 and for the year ended December 31, 2008, a summary of activities in due to related parties is as follows:

	Assignment fee payable		Working capital advances		Accrued interest		Total
Balance  - December 31, 2007	$	966,198		34,072		61,208		1,061,478
Additions		-		682,179		299,036		981,215
Payments made		-		-		-		-
Foreign currency fluctuations		64,830		2,285		4,106		71,221
Balance  - December 31, 2008	$	1,031,028		718,536		364,350		2,113,914
Additions		-		-		59,322		59,322
Payments made		-		-		-		-
Foreign currency fluctuations		1,295		903		458		2,656
Balance  - March 31, 2009	$	1,032,323		719,439		424,130		2,175,892

NOTE 9 - CONVERTIBLE REDEEMABLE PREFERRED STOCKS

On February 25, 2008 (“Closing Date”), the Company sold, pursuant to a Convertible Redeemable Preferred Share and Warrant Purchase Agreement (the “Purchase Agreement”) by and among the Company, Dr. Liu Zhongyi and Mrs. Song Zhenghong (the “Founders”), and accredited investors (each a “Purchaser” and collectively, the “Purchasers”), 5,747,118 shares of the Company’s series A convertible redeemable preferred stock (the “Preferred Stock”) and warrants (the “Warrants”) to purchase 2,873,553 shares of the Company’s common stock, in a private placement (the “February 2008 Private Placement”) pursuant to Regulation D under the Securities Act of 1933, for the aggregate purchase price of $5 million (the “Transaction”). Net proceeds, exclusive of expenses of the transaction were $4.6 million in cash, after the Company paid fees of approximately $469,000 in cash of which $400,000 was paid to Maxim Group, LLC, the placement agent for the Transaction. The Company recorded the approximately $796,000 in fees, of which $327,565 was related to value of the warrants granted to placement agent, as a deferred debt cost and amortized approximately $ 99,517 and $33,172 of the deferred cost during the three months ended at March 31, 2009 and 2008, respectively. The convertible redeemable preferred stock is deemed debt due to the mandatory redeemable feature of the preferred stocks.

The Company used $2,576,556 of the net proceeds of the Transaction to repay in full all of its outstanding principal obligations including accrued interest under the 14% Secured Convertible Notes due February 2008 and the Company has at contrary to use the remainder of the net proceeds for working capital and general corporate purposes.

17

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

 NOTE 9 - CONVERTIBLE REDEEMABLE PREFERRED STOCKS (Continued)

Each of these Preferred Shares is convertible  into one share of the Company’s common stock (as adjusted for stock splits, stock dividends, reclassification and the like), pays an 8% dividend annually, payable in additional Convertible Preferred Shares and  also pays any dividend to be paid on the common shares on an as-converted basis. Until May 25, 2010, the Preferred Shares may be redeemed at the option of the Purchasers at the redemption price of $0.87 per share (as adjusted for stock splits, stock dividends, reclassification and the like), and no other capital stock of the Company may be redeemable prior to the Preferred Shares. Holders of Preferred Shares may not convert Preferred Shares to common shares if the conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common shares. That limitation may be waived by a holder of Preferred Shares on not less than 61 days written notice to the Company.

The Warrants have an initial exercise price of $1.20 (subject to adjustment pursuant to the terms of the warrants), are exercisable for a period of five (5) years and may not be exercised  if exercise would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common shares. That limitation may be waived by a holder of the warrants on not less than 61 days written notice to the Company.

Other key provisions of the February 2008 Private Placement:

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

• The Company agreed to undertake to file a resale registration statement within 60 days following the Closing Date registering the maximum number of shares common stock issuable upon conversion of the Preferred Shares and exercise of  the warrants allowable under applicable federal securities regulations. If the Company was informed by the SEC that there were no comments to the registration statement, then the registration statement was required to be declared  effective within five (5) business days thereafter or on the 60th day after the filing date, whichever is sooner. If the SEC issued comments to the registration statement, then the registration statement was required to be declared effective by the 120th day after it was filed.  If the registration statement was not declared effective by the applicable date, the Company would be subject to liquidated damages, equal to 1% of the total conversion price and exercise price for the common stock being registered under the registration statement, for every 30-day period following the date that the registration statement should have been effective, prorated for any period less than 30 days, until either all of common shares registered under the registration statement have been sold or all such common shares may be sold in any three (3) month period pursuant to Rule 144 promulgated under the Securities Act, whichever is earlier. The Company must also pay the liquidated damages if sales cannot be made pursuant to the registration statement for any reason (excepting market conditions). The maximum amount of liquidated damages is $500,000.  The Company filed the resale registration statement on May 13, 2008 and received comments from the SEC.  The SEC declared the resale registration statement effective on July 25, 2008.

18

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 9 - CONVERTIBLE REDEEMABLE PREFERRED STOCKS (Continued)

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

In connection with the issuance of the Preferred Shares and Warrants, the Company recorded a total debt discount of $ 2,310,263 to be amortized over the term of the Purchase Agreement. For the three months ended March 31, 2009 and 2008, amortization of debt discount amounted to $ 288,783 and $84,709, respectively, have been included in interest expense.

The Company classified the series A Convertible redeemable preferred stock as liability because of its mandatory redeemable feature according to SFAS 150.

On February 25, 2009, the Company issued 459,772 additional shares of Series A Preferred Stock to the holders of Series A Preferred Stock for the mandatory 8% annual dividends.

The series A convertible redeemable preferred stock on March 31, 2009 and December 31, 2008 is as follows:

	March 31, 2009			December 31, 2008
	(Unaudited)
Series A convertible redeemable preferred stock	$	5,400,000		$	5,000,000
Less: unamortized discount		(1,058,876	)		1,347,659
Series A convertible redeemable preferred stock, net	$	4,341,124		$	3,652,341

NOTE 10 – TAXES PAYABLE

Value Added Tax Payable

The Company is subject to value added tax ("VAT") for manufacturing products. The applicable VAT tax rate is 17% for products sold in the 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") 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

19

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 10 – TAXES PAYABLE (Continued)

Value Added Tax Payable (continued)

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 March 31, 2009 and December 31, 2008, the Company accrued $1,716,963 and $5,015,908, respectively, of unpaid value-added taxes.

Income tax payable

Prior to January 1, 2008, companies established in the PRC were generally subject to an enterprise income tax ("EIT") rate of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax. 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. On March 16, 2007, the National People's Congress of China passed the new Enterprise Income Tax Law ("EIT Law"), and on November 28, 2007, the State Council of China passed the Implementing Rules for the EIT Law ("Implementing Rules") which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT rate of 25.0% on all domestic-invested enterprises and Foreign Interest Enterprises (“FIEs”), unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the FEIT, and its associated preferential tax treatments, beginning on January 1, 2008.

In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with "de facto management bodies" within China is considered a resident enterprise and will normally be subject to an EIT of 25.0% on its global income. The Implementing Rules define the term "de facto management bodies" as "an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise." If the PRC tax authorities subsequently determine that the Company should be classified as a resident enterprise, then the organization's global income will be subject to PRC income tax of 25.0%. Beijing Liang Fang was subject to 25% income tax rate since January 1, 2009.

Taxes payable are as follows:

	March 31, 2009		December 31, 2008
	(Unaudited)
Value added taxes	$	1,716,963	$	5,015,908
Income taxes		74,738		-
Other taxes		202,687		-
Total	$	1,994,388	$	5,015,908

20

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 11 - -SHAREHOLDERS’ EQUITY

Common Stock

In February 2009, the Company issued 842,308 shares of common stock to Mr. Liu Zhongyi, Chairman and CEO of the Company, for his services rendered through December 31, 2008 as the Company’s chief executive officer. The stock was valued at the fair value of $0.26 per share on the grant date.

In February 2009, the Company issued 67,308 shares of common stock to Adam Wasserman (former CFO) using a fair value of $0.26 per share on the grant date for his services rendered through December 31, 2008 as the Company’s chief financial officer.

In February 2009, the Company issued 48,077 shares of common stock to Mel Rothberg using a fair value of $0.26 per share on the grant date for his services as an independent director from January 1, 2008 to April 15, 2008 and consulting services rendered through November 30, 2008.

Statutory Reserves

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC ("PRC GAAP"). Appropriations to the statutory surplus reserve is required to be at least 10% of the after tax net income determined in accordance with PRC GAAP until the reserve is equal to 50% of the entities' registered capital. Appropriations to the discretionary surplus reserve are made at the discretion of the Board of Directors.

The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years' losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

The discretionary surplus fund may be used to acquire fixed assets or to increase the working capital to expend on production and operation of the business. The Company's Board of Directors decided not to make an appropriation to this reserve for fiscal year 2009.

Pursuant to the Company's articles of incorporation, the Company is to appropriate 10% of its net profits as statutory surplus reserve. For the three months ended March 31, 2009 and 2008, the Company appropriated to the statutory surplus reserve in the amount of $416,645 and $156,851, respectively.

Stock warrants issued, terminated/forfeited and outstanding during the three months ended March 31, 2009 (unaudited) are as follows:

	Shares		Average Exercise price per share
Warrants outstanding on December 31, 2008		5,166,999	$	1.13
Warrants issued		-		-
Warrants terminated/forfeited		-		-
Warrants exercised		-		-
Warrants outstanding on March 31, 2009		5,166,999	$	1.13

21

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 12 - SEGMENT INFORMATION

The following information is presented in accordance with SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information.  In the three months ended March 31, 2009 and 2008, the Company operated in two reportable business segments - (1) the manufacture and distribution of pharmaceutical products and examination of other companies’ 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 and rental 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 three months ended March 31, 2009 and 2008 is as follows:

For the three months ended March 31, 2009	Wholesale and third-party manufacturing and examination		Retail operations		Rent and advertising		Unallocated			Total
Net revenues	$	9,488,971		2,137,188		198,128		-			11,824,287
Cost of sales		3,665,352		1,509,909		10,897		-			5,186,158
Operating expenses		-		-		-		2,449,005			2,449,005
Other expense (income)		-		-		-		546,295			546,295
Income tax		-		-		-		74,727			74,727
Net income	$	5,823,619		627,279		187,231		(3,070,027	)		3,568,102

For the three months ended March 31, 2008	Wholesale and third-party manufacturing and examination		Retail operations		Rent and advertising		Unallocated			Total
Net revenues	$	9,512,895		2,016,547		179,735		-			11,709,177
Cost of sales		6,558,497		1,209,928		-		-			7,768,425
Operating expenses		-		-		-		2,458,979			2,458,979
Other expense (income)		-		-		-		485,674			485,674
Income tax		-		-		-		-			-
Net income	$	2,954,398		806,619		179,735		(2,944,653	)		996,099

22

 

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 12 - SEGMENT INFORMATION (Continued)

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

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

NOTE 13—COMMITMENTS AND CONTINGENCIES

Technology Transfer Agreement

In April 2008, one of the Company’s affiliates, En Ze Jia Shi, entered into a Technology Transfer Agreement with Dong Guan Kai Fa Biological Medicine LTD (“Dong Guan”) pursuant to which Dong Guan agreed to transfer the technology material, new medicine research and rights to the Chinese patent of the anti-asthma new medicine R-BM to En Ze Jia Shi on an exclusive basis in exchange for a transfer technology fee of approximately $7 million (RMB 48 million) to be paid at various intervals. Under the terms of the agreement, En Ze Jia Shi is obligated to:

• complete the filing with the Chinese State Food and Drug Administration (SFDA) of the medicine’s clinical research ratification document,

• complete the clinical research,

• complete the medicine’s trial production, and

• provide raw materials and formulation related documentation and apply for the new medicine certification and production approval.

 In addition to the payment of the technology transfer fee, En Ze Jia Shi is responsible for paying all costs associated with its responsibility under the agreement which are presently estimated at $2.3 million (RMB 16 million). Lotus East intends to use its working capital to fund the project costs.

Dong Guan is responsible for preparing and transferring the clinical research and application documents as well as assisting En Ze Jia Shi in the completing the clinical research and applying for the new medicine certification and production approval documents.

Under the terms of the agreement, the technology transfer fee is to be paid upon the following schedule: 

• Approximately $1.46 million (RMB 10 million) is due by the 15th business day following the receipt of the processing notice of the receipt of the clinical application and all related material from SFDA is received,

• Approximately $1.17 million (RMB 8 million) is due by the 10th business day after the receipt of the medicine’s clinical ratification document,

23

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 13—COMMITMENTS AND CONTINGENCIES (Continued)

• Approximately $1.46 million (RMB 10 million) is due by the 15th business day after the medicine’s Phase I clinical study is completed and ratification from the SFDA is obtained, and

• Approximately $2.92 million (RMB 20 million) is due by the 10th business day after the medicine’s Phase II clinical study is completed and ratification from the SFDA is obtained.

En Ze Jia Shi paid Dong Guan a deposit of approximately $2.92 million (RMB 20 million) in April 2008 which is to be returned to En Ze Jia Shi within 10 days after the transfer technology fee is fully paid. In the event Dong Guan should be unable to timely return the deposit, it will pay En Ze Jia Shi a late fee and En Ze Jia Shi is entitled to damages for Dong Guan’s failure to timely return the deposit.

The intellectual property arising from the agreement will be jointly shared by the parties. In addition, En Ze Jia Shi has guaranteed that both parties must jointly apply for related government grants prior to when the new medicine is marketed. Upon receipt of the government grants En Ze Jia Shi guaranteed that the grant monies will be shared equally by both parties. As of March 31, 2009, the Company has not received any government grant. The agreement can be terminated by Dong Guan if En Ze Jia Shi should fail to make any of the aforedescribed payments in which event the patent rights would revert to Dong Guan and it is entitled to transfer the project rights to a third party.

New Manufacturing Facility

In June 2008, one of the Company’s affiliates, Liang Fang, entered into an agreement with Cha You Qian Qi Economy Commission, a governmental agency (“Cha You”) related to the construction of a pharmaceutical plant in Cha You’s Cha Ha Er Industrial Garden District in Inner Mongolia. The new facility, which will be comprised approximately 40,000 square meters situated on 600 MU of land (approximately 400,200 square meters), will be used to expand Liang Fang’s current manufacturing capacity. The Company was subsequently granted the right to expand the land use right area to 1,000 MU (approximately 667,000 square meters). The new facility, which will manufacture medical injection products, including 0.9% physiological saline injection, hydroxyethyl starch 130/0.4 injection and hydroxyethyl starch 200/0.5 injection, Qiang Yi Ji starch, a medical corn starch commonly known as O-2-hydeoxyethyl starch, dextran and additional pharmaceuticals, will require a total investment of RMB 623.66 million, or approximately $91 million. The construction began on the project in August 2008 and the Company anticipates that it will take between 12 to 30 months to complete the construction. As of March 31, 2009, the Company has incurred approximately $3.3 million related to this project and the amount has been included as construction in progress in the consolidated financial statements.

Included in the total cost of the project is land cost of approximately $32.7 million (RMB 223.66 million) which was paid off to Cha You. Other components of the project include construction costs of approximately $17.5 million (RMB 120 million) costs associated with the various production lines estimated at approximately $33.6 million (RMB 230 million) and working capital of approximately $7.3 million (RMB 50 million).

 Liang Fang intends to use its present working capital together with bank loans and government grants to fund the project. The funds are required to be invested over the next 15 months under a specified schedule ending in December 2010. As of March 31, 2009, Liang Fang has paid approximately $36 million (approximately RMB 246.5 million) of the total investment. Liang Fang, however, has not secured either the bank loans or government grants and does not have sufficient working capital to complete this project without securing substantial funds from those third party sources.

Under the terms of the agreement, Cha You agreed to abate fees associated with water resources, waste and other relative supplies for a period of 30 years and agreed to ensure that the land use tax to be paid by Liang Fang after it begins normal production will be at the lowest tax rate imposed for five years. Once the project is completed, for a period of eight years the local reserved portion of the imposed corporation income tax will be returned to Liang Fang.

24

LOTUS PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)

NOTE 14 - OPERATING RISK

(a) Country risk

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

(b) Products risk

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

(c) Political risk

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

25

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

Overview

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

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

Based in Beijing, China, Lotus East is engaged in the production, trade and retailing of pharmaceuticals, focusing on the development of innovative medicines and investing in strategic growth to address various medical needs. Lotus East owns and operates 10 drug stores throughout Beijing, China that sell Western and traditional Chinese medications, lease medical treatment facilities to licensed physicians, and generate revenues from the leasing of retail space to third party vendors and the leasing of advertising locations at its retail stores.

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

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 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 collectability is reasonably assured.

26

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

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

PRODUCT RETURNS

The Company accounts for sales returns in accordance with Statements of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of Return Exists, by establishing an accrual in an amount equal to its estimate of sales recorded for which the related products are expected to be returned. The Company determines the estimate of the sales return accrual primarily based on historical experience regarding sales returns, but also by considering other factors that could impact sales returns. These factors include levels of inventory in the distribution channel, estimated shelf life, product discontinuances, and price changes of competitive products, introductions of generic products and introductions of competitive new products. In general, for wholesale sales, the Company provides credit for product returns that are returned six months prior to and up to six months after the product expiration date. Upon sale, the Company estimates an allowance for future product returns. The Company provides additional reserves for contemporaneous events that were not known and knowable at the time of shipment. In order to reasonably estimate future returns, the Company analyzed both quantitative and qualitative information including, but not limited to, actual return rates, the level of product manufactured by the Company, the level of product in the distribution channel, expected shelf life of the product, current and projected product demand, the introduction of new or generic products that may erode current demand, and general economic and industry wide indicators. The Company also utilizes the guidance provided in SAB 104 in establishing its return estimates.

OTHER REVENUE

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

ACCOUNTS RECEIVABLE

Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management judgment and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

27

INVENTORIES

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

PROPERTY AND EQUIPMENT

Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", we examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

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

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

INCOME TAXES

Taxes are calculated in accordance with taxation principles currently effective in the United States and PRC. We account for income taxes using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

RECENT ACCOUNTING PRONOUNCEMENTS

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

In May 2008, the Financial Accounting Standards Board (FASB”) issued FASB Staff Position (FSP”) APB 14-1,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14,Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We will adopt FSP APB 14-1 beginning in the first quarter of fiscal 2010, and this standard must be applied on a retrospective basis. We are evaluating the impact the adoption of FSP APB 14-1 will have on our consolidated financial position and results of operations.

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In May 2008, the FASB issued Statement of Financial Accounting Standards (SFAS”) No. 162,The Hierarchy of Generally Accepted Accounting Principles. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (SEC”) of the Public Company Accounting Oversight Board’s amendments to AU Section 411,The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect SFAS No. 162 to have a material impact on the preparation of our consolidated financial statements.

On June 16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. The FSP determines that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. We are currently evaluating the requirements of (FSP) No. EITF 03-6-1.

On October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on our financial position or results.

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on our consolidated financial statements.

Results of Operations

For the Three Months Ended March 31, 2009 versus Three Months Ended March 31, 2008

Total Net Revenues

Total revenues for the three months ended March 31, 2009 were $11,824,287 as compared to total revenues of $11,709,177 for the three months ended March 31, 2008, an increase of $115,110 or approximately 0.98%. For the three months ended March 31, 2009 and 2008, net revenues consisted of the following:

	2009		2008
	(Unaudited)		(Unaudited)
Wholesale	$	8,940,405	$	8,437,298
Retail		2,137,188		2,016,547
Other revenues	$	746,694	$	1,255,332
Total		11,824,287		11,709,177

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· For the three months ended March 31, 2009, wholesale revenues increased by $503,107 or 5.96%. For the three months ended March 31, 2009, While the unit price sold for our wholesale drugs decreased by an average of approximately 38% compared to the three months ended March 31, 2008, the increase in the total wholesale revenue was primarily attributable to the increase by approximately 67% of our wholesale quantities compared to three months ended March 31, 2008. For our long term growth perspective and the purpose to incentivize our distributors, we lowered our average wholesale drugs price in a planned way. The significant increase in tangible product revenues is mainly attributed to strong sales in Valsartan Capsules, Brimonidine Tartrate Eye Drops and Octreotide Acetate Injection. The increase in revenue was offset by the decrease in sales in Levofloxacin Lactate for Injection, Recombinant Human Granulocyte Colony Stimulating Factor Injection and Deproteinized Calfblood Extractives Injection. The significant increased sales in Valsartan Capsules and Brimonidine Tartrate Eye Drops were primarily due to our strong sales effort on promoting this drug. The substantial increased sales in Octreotide Acetate Injection were attributable to our acquirement of the drug’s distribution channels, including sales representatives, in phases by purchase of the drug’s certificate and intellectual property right. In December 2008, we entered into a new drug certificate and intellectual property right transfer contract with Beijing Yipuan Bio-Medical Technology, Co., Ltd. related to the drug of Octreotide Acetate Injection. Octreotide Acetate Injection is a highly effective and stable octreotide acetate injection solution and used to treat the symptoms of gastric ulcers and hemorrhages of the upper digestive tract. We paid off the purchase amount in first quarter of fiscal 2009. So, we own all intellectual property rights associated with the drug. In late 2007, we obtained exclusive distribution rights from a third party Beijing based pharmaceutical company for four drugs: Octreotide Acetate Injection, Recombinant Human Erythropoietin Injection, Recombinant Human Granulocyte Colony-stimulating Factor Injection, and Recombinant Human Interleukin-2 for Injection. In 2008, we obtained exclusive distribution rights for Cervus and Cucumis Polypeptide Injection. Additionally, we also strengthen our relationships with the several large drug manufacturers in 2008. As a result, we experienced a significant increase in our third party manufactured drug sales during the three months ended March 31, 2009. As majority of our wholesale products are prescription drugs that are in demand by patients in China, we believe the demand for our wholesale products will not be impacted by the overall softening economy. We expect the sales will continue to have steady growth in our rest fiscal year of 2009.

· For the three months ended March 31, 2009, retail revenues increased by $120,641 or 5.98%. The increase is attributable to our continuous efforts to diversify products carried by our retail stores to provide more varieties as well as better quality products and the favorable RMB currency appreciation which converted our revenue in RMB into higher US dollar amounts. As a result, our retail revenue increased. We expect our retail revenue will stably increase in our rest fiscal year of 2009.

· For the three months ended March 31, 2009, other revenues decreased by $508,638 or 40.52%. The decrease in other revenues is attributed to the following:

	2009		2008
	(Unaudited)		(Unaudited)
Leasing revenues	$	198,128	$	179,523
Third-party manufacturing		513,651		908,890
Advertising revenues		-		212
Research and development and lab testing services		34,915		166,707
Total other revenues	$	746,694	$	1,255,332

· We sublease certain portion our retail stores and counter spaces to various other vendors and generate leasing revenue. The leasing revenue remained materially consistent with prior year same period. The slight increase was primarily due to the favorable RMB currency appreciation which converted our revenue in RMB into higher US dollar amounts. We expect our leasing revenue to remain flat in the remaining part of the 2009 fiscal year. 

· For third-party manufacturing, customers supply the raw materials and we are paid a fee for manufacturing their products. We had less large manufacturing contracts during the three months ended March 31, 2009 as the demand for the third-party manufacturing decreased as compared to the same period in 2008. Many of our prior customers built their own facilities and can manufacture their products at lower costs in their own factories. As a result, our third-party manufacturing revenue decreased. We anticipate the third-party manufacturing revenue will continue to decrease in the remaining part of fiscal 2009 as we do not expect to have new customers with large third party manufacturing contracts.

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· We receive advertising fee for the lease of counter and other space at our retail locations in Beijing. We do not have any advertising revenue during the three months ended March 31, 2009. Because the local government tightens the advertising rules and regulations in the pharmaceutical industry, we do not anticipate signing any advertisement contracts in the near future.

· We performed research and development and lab testing projects for various third parties and performed drug testing and analysis. We preformed less R&D testing services and drug testing and analysis work for third parties during the three months ended March 31, 2009 as compared to the same period in 2008. Some of our historical customers for these services purchased relative machinery and they can do similar R&D and lab testing in their own labs at a lower price and decided not to use our services in 2009. We expect the revenue from R&D and lab testing will maintain at its current level with minimal growth in the remaining part of 2009 fiscal year.

Cost of Sales

Cost of sales includes raw materials, packing materials, direct labor, manufacturing costs, which includes allocated portion of overhead expenses such as Labor fee, utilities and depreciation directly related to product production, and related taxes. For the three months ended March 31, 2009, cost of sales amounted to $5,186,158 or approximately 44% of total net revenues as compared to cost of sales of $7,768,425 or approximately 66% of total net revenues for the three months ended March 31, 2008. The decrease in cost of sales as a percentage of total net revenue was primarily due to better purchase pricing management and more efficient production cost controls.

Gross Profit

Gross profit for the three months ended March 31, 2009 was $6,638,129 or 56% of total net revenues, as compared to $3,940,752 or 34% of total net revenues for the three months ended March 31, 2008. The increase in gross profit was attributable to the decrease in cost of sales as a percentage of revenue. The decrease in cost of sales as a percentage of revenue was primarily contributed to better managed raw material and third party manufactured finished goods purchase prices and more efficient control in labor fees. Although we recognized higher than average gross profits during the three months ended March 31, 2009, there could be no assurance that we will continue to recognize similar gross profit margin in the future.

Operating Expenses

Total operating expenses for the three months ended March 31, 2009 were $2,449,005, a decrease of $9,974 or 0.41% from total operating expenses in the three months ended March 31, 2008 of $2,458,979. This decrease included the following:

For the three months ended March 31, 2009, selling expenses amounted to $1,701,799 as compared to $1,122,337 for the three months ended March 31, 2008, an increase of $579,462 or 51.63% from the comparable period in fiscal 2008. This increase is primarily attributable to the increase of our sales revenues and the improvement of our collections on accounts receivables and cash flows. In order to generate sufficient cash to meet our near term capital commitments such as new manufacture plant construction project, purchase of new drug certificate and intellectual property right of Octreotide Acetate Injection and acquiring Chinese Class I drug patent, management incentivized our sales and collection personnel’s performance. We expect our selling expenses to increase as our revenues increase and expect to spend increased funds on advertising and promotion of our products.

For the three months ended March 31, 2009, we do not have any research and development costs. So, as compared to $710,225 for the three months ended March 31, 2008, a decrease of $710,225 or 100% from the comparable period in 2008. In late 2007, we entered into several research and development agreements with third parties for the design, research and development of designated pharmaceutical projects. We fulfilled these research and development agreements on June 30, 2008. We did not enter into any new research and development agreement in the second half of fiscal 2008 and in the first quarter of fiscal 2009. As a result, expenses related to research and development project is zero during the three months ended March 31, 2009.

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For the three months ended March 31, 2009, general and administrative expenses were $747,206 as compared to $626,417 for the three months ended March 31, 2008, an increase of $120,789 or 19.28% from the comparable period in fiscal 2008.  These changes are summarized below:

	Three Months Ended March 31,
	2009		2008
	(Unaudited)		(Unaudited)
Salaries and related benefits	$	172,100	$	269,468
Amortization and depreciation expenses		242,692		57,826
Rent		75,355		51,168
Travel and entertainment		165,651		19,762
Professional fees		41,709		39,980
Other		49,699		188,213
Total	$	747,206	$	626,417

The changes in these expenses from the three months ended March 31, 2009 as compared to the three months ended March 31, 2008 included the following:

· Salaries and related benefits decreased $97,368 or 36.13% primarily due to a decrease in bonuses paid to administrative personnel. We continue our efforts to control corporate spending. As a result, the salaries and related benefits costs decreased accordingly.

· Depreciation on our fixed assets and amortization of our intangible assets increased by $184,866 or approximately 319.69% which is primarily attributable to the purchase of new intangible assets in the first quarter of fiscal 2009.

·  Rent increased by $24,187 or approximately 47.27% which is primarily attributable to the RMB currency appreciation which converted our rent expenses in RMB into higher US dollar amounts.

· Travel and entertainment expenses increased by $145,889 or 738.23% which is primarily attributable to the increased spending in our travel in order to more efficiently manage our business and increased entertainment expenditure to enhance our visibility.

· Professional fees increased $1,729 or 4.33% due to the RMB currency appreciation which converted our professional fees in RMB into higher US dollar amounts.

· Other general and administrative expenses, which includes postage, office expenses, other management fees, officers’ car insurance and meeting expenses, decreased by $138,514 or approximately 73.59% reflecting efforts at reducing non-sales related corporate activities as well as stricter controls on corporate spending.

Income from Operations

We reported income from operations of $4,189,124 for the three months ended March 31, 2009 as compared to income from operations of $1,481,773 for the three months ended March 31, 2008, an increase of $2,707,351 or approximately 182.71%.

Other Expense

For the three months ended March 31, 2009, total other expense amounted to $546,295 as compared to other expense of $485,674 for the three months ended March 31, 2008, an increase of $60,621 or 12.48% from the comparable period in 2008. This change is primarily attributable to:

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· For the three months ended March 31, 2009, our debt issuance costs of $99,517 compared to $62,886 for the three months ended March 31, 2008, an increase of $36,631 or approximately 58.25%, due to the debt issuance costs on our February 2008 funding for which we began our amortization in March 2008.

· For the three months ended March 31, 2009, we recorded interest income of $1,319 as compared to $561 for the three months ended March 31, 2008, an increase of $758 or 135.12% which is primarily attributable to the favorable RMB currency appreciation which converted our interest income in RMB into higher US dollar amounts.

· For the three months ended March 31, 2009, interest expense was $448,097 as compared to $423,349 for the three months ended March 31, 2008, an increase of $24,748 or 5.85% which is primarily attributable to our February 2008 financing for which we began our amortization of the debt discount and to accrue the dividend on preferred stock in March 2008.

NET INCOME, OTHER COMPREHENSIVE INCOME AND COMPREHENSIVE INCOME

As a result of these factors, we reported net income of $3,568,102 for the three months ended March 31, 2009 as compared to net income of $996,099 for the three months ended March 31, 2008. This translates to basic and diluted net income per common share of $0.08, $0.07 and $0.02, $0.02 for the three months ended March 31, 2009 and 2008, respectively.

During the three months ended March 31, 2009, our unrealized gain on foreign currency translation of $62,111, a decrease of $1,392,092, or approximately 95.73%, from the same period in 2008. We report in U.S. dollars, but the functional currency of Lotus East is the RMB. Translation adjustments result from the process of translating the local currency financial statements into U.S. dollars, with the average translation rates applied to our income statement of 6.84659 RMB to $1.00 during the three months ended March 31, 2009. As a result of this non-cash gain, we reported comprehensive income of $3,630,213 for the three months ended March 31, 2009 as compared to $2,450,302 for the same period in 2008.

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 March 31, 2009, we had a cash balance of $1,228,769. These funds are located in financial institutions located as follows:

China	$	1,228,346
USA		423
Total	$	1,228,769

             Our working capital position decreased $6,585,900 to $ (2,163,717) at March 31, 2009 from $4,422,183 at December 31, 2008. This decrease in working capital is primarily attributable to a decrease in accounts receivablenet of allowance of approximately $4.74 million, a decrease in other receivable- related party of approximately $2.03 million, a decrease in accounts payable and accrued expenses of approximately $1.31 million, a decrease in taxes payable of approximately $3.02 million, an increase in other receivable-employee of approximately $0.73 million, an increase in unearned revenue of approximately $0.23 million and an increase in due to related parties of approximately $0.13 million.

At March 31, 2009, our accounts receivable, net of allowance for doubtful accounts, was $1,395,054 as compared to $6,132,912 at December 31, 2008, a decrease of $4,737,858. The decrease was primarily due to our strong collection effort which significantly improved our accounts receivable aging days. We expect our accounts receivable will maintain at the current level.

At March 31, 2009, we have an other receivable-employee of $730,396. This is a loan made to our employee. In May 2009, the employee paid back the money to the Company. We did not have any other receivable-employee on December 31, 2008.

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At March 31, 2009, our other receivable- related party was $0 as compared to $2,027,954 at December 31, 2008, a decrease of $2,027,954. The decrease was attributable to one loan made to our CEO to register a subsidiary in Inner Mongolia. After a few days, in January 2009, our CEO paid back the money to the Company.

At March 31, 2009, our inventories of raw materials, work in progress, packaging materials, finished goods and reserve for obsolete inventories totaled $3,726,128, a decrease of approximately $61,674 from December 31, 2008. Included in this change were a decrease of $589,397 in raw materials and a decrease of $2,097 in packing materials offset by increase in finished goods of $529,820. We expect to maintain slight higher raw materials, packaging materials and finished goods inventory levels to accommodate for anticipated future sales growth and productions.

             At March 31, 2009, we have a prepaid expenses and other assets of $77,380 as compared to $121,274 at March 31, 2008, a decrease of $43,894. The decrease was primarily due to the completion of our research and development contracts which were recorded as a prepayment on March 31, 2008 and we did not have similar research and development contract prepayments on March 31, 2009.

             At March 31, 2009, we have a deferred debt cost of $364,894 as compared to $464,411 at December 31, 2008, a decrease of $ 99,517. The decrease was primarily attributed to the issuance of the series A convertible redeemable preferred stock and warrants to purchase 2,873,553 shares of the company’s common stock in February 2008 financing. We recorded a total deferred debt cost of $796,133 and amortized it began March 2008.

 At March 31, 2009, we have a deposit on patent of $2,921,585 as compared to $2,917,919 at December 31, 2008, an increase of $3,666. We made the deposit on patent in order to acquire a new Chinese Class I anti-asthma medicine drug patent in accordance with a technology transfer agreement the Company entered into in April 2008. The increase is attributable to the favorable RMB currency appreciation which converted our deposit on patent in RMB into higher US dollar amounts.

At March 31, 2009, we have an installmentson intangible assets of $35,301,508 as compared to $38,175,134 at December 31, 2008, a decrease of $2,873,626. The decrease was primarily attributable to the transfer of our installments in a new drug certificate and intellectual property right-- Yipubishan (common name: Octreotide Acetate Injection) to intangible assets.

At March 31, 2009, we have an intangible assets, net of accumulated amortization, of $8,885,346 as compared to $1,231,730 at December 31, 2008, an increase of $7,653,616. The increase was primarily attributable to purchase of a new drug certificate and intellectual property right.

 At March 31, 2009, we have an accounts payable and accrued expenses of $856,345 as compared to $2,170,165 at December 31, 2008, a decrease of $1,313,820. The decrease was primarily attributed to the decrease in payables for construction in progress for our new facility in Inner Mongolia.

 At March 31, 2009, we have a taxes payable of $1,994,388 as compared to $5,015,908 at December 31, 2008, a decrease of $3,021,520. The decrease in the taxes payable is primarily due to our payments for accrued unpaid taxes made to taxes authority in China.

 Our balance sheet at March 31, 2009, also reflects a balance due to related parties of $2,175,892 which was a working capital advance made to us by our president, vice-president and an officer of the Company and a Board member as well as an amount payable of approximately $1 million related to an assignment agreement as discussed elsewhere in this report. These advances are non-interest bearing and are due on demand. We are currently repaying these balances as operating cash become available.

              At March 31, 2009, we have a series A convertible redeemable preferred stock of $4,341,124 as compared to $3,652,341 at December 31, 2008, an increase of $688,783. The increase was primarily attributed to the amortization of discount on convertible redeemable preferred stock of $288,783 and the issued additional convertible redeemable preferred stock of $400,000 as dividend.

                Our balance sheet at March 31, 2009 also reflects notes payable to related parties of approximately $5 million due on December 30, 2015 which is a working capital loan made to us in December 31, 2005 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 the three months ended March 31, 2009, we did not repay any portion of these loan balances.

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The changes in asset and liabilities discussed above is based on a comparison of amounts on our balance sheets at March 31, 2009 and December 31, 2008 and does necessarily reflect changes in assets and liabilities reflected on our cash flow statement, which we use the average foreign exchange rate during the period to calculate these changes.

              Net cash provided by operating activities for the three months ended March 31, 2009 was $7,008,339 as compared to net cash used in operating activities of $3,610,250 for the three months ended March 31, 2008. For the three months ended March 31, 2009, net cash provided by operating activities was attributable primarily to decrease in accounts receivable of $4,744,877, decrease in inventories of $66,423, decrease in prepaid expenses and other current assets of $1,329,083 and increase in unearned revenue of $228,143 and the add back of net income of $3,568,102, depreciation and amortization of $362,467, amortization of debt issuance costs of  $99,517, amortization of discount on convertible redeemable preferred stock of $288,783, amortization of prepaid expense attributable to warrants of $14,849 offset by decrease in accounts payable and accrued expenses of $666,522 and decrease in taxes payable of $3,027,383. For the three months ended March 31, 2008, net cash used in operating activities was attributable primarily to increase in accounts receivable of $115,927, increase in inventories of $3,161,360, increase in prepaid expenses and other current assets of $2,012,656, decrease in accounts payable and accrued expenses of $98,515 and decrease in advances from customers of $35,197 and the add back of net income of $996,099,  depreciation and amortization of $148,884, amortization of debt issuance costs of $62,512 and amortization of debt discount of $208,355 and amortization of discount on convertible redeemable preferred stock of $84,709, increase in allowance for doubtful accounts and sales return of $53,305, offset by increase in taxes payable of $41,792 and increase in unearned revenue of $217,749.

Net cash used in investing activities for the three months ended March 31, 2009 amounted to $7,119,219. For the three months ended March 31, 2009, net cash used in investing activities was attributable to the purchase of intangible assets of $7,887,138 and the purchase of property and equipment of $2,153,243 offset by the decrease in installments on intangible assets of $2,921,162. Net cash used in investing activities for the three months ended March 31, 2008 amounted to $0.

Net cash provided by financing activities was $59,314 for the three months ended March 31, 2009 and was attributable to the proceeds from related party advances of $59,314. Net cash provided by financing activities was $2,368,814 for the three months ended March 31, 2008 and was attributable to the receipt of net proceeds of $5,000,000 from our private financing and proceeds from related party advances of $357,382 offset by payments on convertible debt of $2,520,000 and debt issuance costs of $468,568.

We reported a net decrease in cash for the three months ended March 31, 2009 of $50,039 as compared to a net decrease in cash of $968,580 for the three months ended March 31, 2008.

In 2007, we made advanced approximately $2 million to Lotus East which it used as working capital.  We obtained the funds to make the loan out of the net proceeds received from the sale of $3 million principal amount our convertible debt in February 2008.  These advances are unsecured and interest free. During the first quarter of 2008, we used a portion of the proceeds from the sale of Preferred Shares to satisfy these notes, lent Lotus East an additional $1.6 million and retained the balance to fund our operating expenses. We have no operations other than the Contractual Arrangements with Lotus East and, accordingly, we are dependent upon the quarterly service fees due us to provide cash to pay our operating expenses. Such payments have not been tendered to us and those funds are being retained by Lotus East to fund their operations. At March 31, 2009, Lotus East owned us approximately $21.96 million for such fees and we do not know when such funds will be paid to us. Our CEO is also the CEO and principal shareholder of Lotus East. Accordingly, we are solely reliant upon his judgment to ensure that the funds advanced to Lotus East are repaid to us. If these funds should not be repaid, or if Lotus East use the funds for options and not pay the quarterly service fee due us under the Contractual Arrangement, it is possible that we will not have sufficient funds to pay our operating expenses in future periods.

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Other than our existing cash we presently have no other alternative source of working capital. We believe that our working capital may not be sufficient to fund our current operations for the next 12 months and we estimate that we will require additional working capital of at least $350,000 to fund our current operations for the next 12 months. Lotus East has historically funded its capital expenditures from their working capital and has advised us that they believe this capital is sufficient for their current needs. Lotus East has contractual commitments for approximately $62.81 million related to a Technology Transfer Agreement and the construction of the new manufacturing facility.  While it intends to fund the costs associated with the Technology Transfer Agreement and a portion of the construction of the new manufacturing facility with its existing working capital, it is dependent upon the continued growth of its operations and prompt payment of outstanding accounts receivables by its customers to ensure that it has sufficient cash for these commitments. In addition, its ability to fully fund the costs associated with the new manufacturing facility is materially dependent upon its ability to secured bank financing and/or government grants. As the banking industry is tightening the credit/lending policy, we expect the bank financing will become more challenging and the time to obtain the bank funding might be longer than expected. Although the Chinese government has recently announced an economic simulation plan, there is no guarantee that we will successfully be awarded the government grant. As it has no firm commitments for either, while its management believes the company will be successful in securing the necessary funding through its increasing revenue, quicker collections on receivables, current discussions with various commercial banks there are no assurances the funding will be available in the amounts or at the time required to meet Liang Fang's commitment.  In the event Lotus East is not successful in obtaining the funds it needs for the Technology Transfer Agreement, it is possible that it could default under the terms of the agreement and forfeit any funds paid to date.  If Lotus East is not successful in obtaining all of the funding necessary to complete the construction of the new facility, which is estimated to be approximately $58 million, it would get back approximately $36,009,000 spent to date, including the $32,672,081 for the deposit on the land use rights which is refundable if the Chinese local government would not grant it land use rights certificate.

However, the ability of Lotus East to raise any significant capital to expand their operations is very limited. We believe that it is in our best long term interests to assist Lotus East in their growth plans. Accordingly, it is likely that we will seek to raise working capital not only for our operating expense but also to provide capital to Lotus East for these projects as well as providing working capital necessary for its ongoing operations and obligations. No assurances can be given that we will be successful in obtaining additional capital, or that such capital will be available in terms acceptable to our company, particularly given the current conditions in the capital markets. If we are unable to raise capital as necessary for our operations, and we were no longer able to timely file our reports with the Securities and Exchange Commission, our common stock would no longer be eligible for quotation on the OTC Bulletin Board. In this event (i) the ability of our stockholders to liquidate their investment in our company would be adversely impacted and (ii) would could be deemed to have defaulted on our obligations under various agreements we are a party to with the purchasers of our Preferred Shares.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The total of contractual obligations and commitments does not include any payments made by us.

The following tables summarize our contractual obligations as of March 31, 2009, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments due by period
Contractual obligations:	Total		Less than 1 year		1-3 Years		3-5 Years		5+ Years
Series A convertible redeemable preferred stock	$	5,400,000	$	5,400,000	$	-	$	-	$	-
Related parties indebtedness	$	7,238,695	$	1,715,742	$	460,150	$	-	$	5,062,803
Patent purchase obligations	$	4,382,377	$	1,460,792	$	2,921,585	$	-	$	-
Construction obligations	$	58,431,693	$	17,529,508	$	40,902,185	$	-	$	-
Total contractual obligations	$	75,452,765	$	26,106,042	$	44,283,920	$	-	$	5,062,803

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Off-balance Sheet Arrangements

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

Item 3.              Quantitative and Qualitative Disclosures About Market Risk.

Not applicable for a smaller reporting company.

Item 4T.              Controls and Procedures.

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but no absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. 

As required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2009.  As discussed in more detail below, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are ineffective as of March 31, 2009, due to material weaknesses that we identified in internal control over financial reporting in our annual report on Form 10-K for the fiscal year ended December 31, 2008 (the “Form 10-K).

Remediation Measures of Material Weaknesses

We have implemented, or plan to implement, the measures described below under the supervision and guidance of our management to remediate the control deficiencies identified in the Form 10-K and to strengthen our internal controls over financial reporting. Key elements of the remediation effort include, but are not limited to, the following initiatives, which have been implemented, or are in the process of implementation, as of the date of filing of this interim report:

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1. We have increased efforts to enforce internal control procedures.  We have also reorganized the structure of our China financial department and clarified the responsibilities of each key personnel in order to increase communications and accountability.

2. We have recruited and will continue to bring in additional qualified financial personnel for the accounting department to further strengthen our China financial reporting function.

3. We continually review and improve our standardization of our monthly and quarterly data collection, analysis, and reconciliation procedures. To further improve the timeliness of data collection, we are selecting and will install new point of sale systems and enterprise resource planning systems for our wholesale and retail operations.

4. We plan on significantly increasing the level of communication and interaction among our China management, independent auditors, our directors of the Board, and other external advisors.

5. We are in the process of searching for qualified internal control consultants to help us be in compliance with internal control obligations, including Section 404. We also plan to dedicate sufficient resources to implement required internal control procedures.

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

Changes in Internal Control over Financial Reporting

Except as described above, there have been no changes in our internal control over financial reporting during our first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

            None.

Item 1A. Risk Factors.

            Not applicable to smaller reporting company.

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

            None. 

Item 3. Defaults Upon Senior Securities.

             None.

Item 4. Submissions of Matters to a Vote of Security Holders.

           None. 

Item 5. Other Information.

          None.

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Item 6. Exhibits.

No.	Description
31.1	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Lotus Pharmaceuticals, Inc.
Date:  May 15, 2009	By:	/s/ Liu Zhong Yi
		Liu Zhong Yi
		Chief Executive Officer and President, principal executive officer

Date:  May 15, 2009	By:	/s/ Yan Zeng
		Yan Zeng
		Chief Financial Officer, principal financial and accounting officer

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EX-31.1

Exhibit 31.1

Rule 13a-14(a)/15d-14(a) Certification

I, Liu Zhong Yi, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2009 of Lotus Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 15, 2009	/s/ Liu Zhong Yi
	Liu Zhong Yi, CEO and President, principal executive officer

EX-31.2

Exhibit 31.2

Rule 13a-14(a)/15d-14(a) Certification

I, Yan Zeng, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2009 of Lotus Pharmaceuticals, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 15, 2009	/s/ Yan Zeng
	Yan Zeng, Chief Financial Officer, principal financial and accounting officer

EX-32.1

Exhibit 32.1

Section 1350 Certification

In connection with the quarterly report of Lotus Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2009 as filed with the Securities and Exchange Commission (the "Report"), I, Liu Zhong Yi, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. SS. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

May 15, 2009	/s/ Liu Zhong Yi
	Liu Zhong Yi, CEO and President, principal executive officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the company and will be retained by the company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Section 1350 Certification

In connection with the Quarterly Report of Lotus Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, Yan Zeng, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. SS. 1350, as adopted pursuant to SS. 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

May 15, 2009	/s/ Yan Zeng
	Yan Zeng, Chief Financial Officer, principal financial and accounting officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the company and will be retained by the company and furnished to the Securities and Exchange Commission or its staff upon request.