The rapid increase in the per capita disposable income of Chinese urban residents and the increase in the number of elderly people in China in recent years have resulted in increasing spending on prescription and OTC medicines, including traditional Chinese medicine. The International Monetary Fund, or IMF, reported that per capita GDP in China increased from US$945.6 in 2000 to US$1,708.6 in 2005, representing a CAGR of 12.6%.

According to the China Statistical Abstract 2006, the annual per capita disposable income of Chinese urban residents increased to RMB10,493 (US$1,344.5) in 2005 from RMB6,280 (US$804.7) in 2000, representing a CAGR of 10.8%, and during the same period the annual per capita expenditures on healthcare and medical services by Chinese urban residents increased to RMB600.9 (US$77.0) in 2005 from RMB318.1 (US$40.8) in 2000, representing a CAGR of 13.6%.

According to the Chinese Medical Statistical Yearbook 2005, China’s pharmaceutical market, based on both prescription and OTC medicine sales, increased at a CAGR of 60.7% from 2002 to 2004, and traditional Chinese medicine accounted for approximately 30% of the market in each of those years.

In China, each urban resident over age 60 on average spent approximately RMB984.0 (US$126.1) on medicines in 2000, five times the average spending by an urban resident below age 60 in the same year, according to the China Industry Development Report for the Pharmaceutical Industry 2004 published by the China National Information Center. The portion of the Chinese population aged 60 and above has increased in both absolute numbers and as a percentage of the total population, and this trend is likely to continue in the next few decades.

The Company sells Xianling Gubao both as a prescription and as an OTC medicine. As a prescription medicine, Xianling Gubao is approved by the SFDA for the treatment of osteoporosis, osteoarthritis, ischemic bone necrosis and bone fractures. As an OTC medicine, it is approved for the treatment of osteoporosis. Xianling Gubao is a formulation comprised of extracts of six different plants, including barrenwort.

Zaoren Anshen Capsules are an OTC medicine used to treat insomnia and improve sleep quality. Zaoren Anshen Capsules are a formulation comprised of three plant extracts and contain active ingredients previously described in traditional Chinese medicine literature as having sedative and sleep-inducing properties.

Moisturizing and Anti-Itching Capsules, based on a formulation comprised of six plant extracts, are an OTC medicine used for the treatment of severe itchiness caused by multiple conditions, including dry skin, skin rashes, dermatitis and aging skin. In pre-clinical trials, Moisturizing and Anti-Itching Capsules were shown to reduce the reaction of guinea pigs to histamine, a substance that causes local inflammation and itchiness and is the target for antihistamines, one of the leading western medicines prescribed for itchiness.

Dianbaizhu Syrup is a prescription medicine used to treat vertigo, which is a feeling of dizziness when one’s sense of balance has been disrupted. It is made up of an extract from Gaultheria yunnanensis (Franch) Rehd. The efficacy of Dianbaizhu Syrup may be due to its effect in increasing the volume of blood flow in the patient’s heart and brain.

Cost of revenues increased by 14.0% from RMB141.8 million for the year ended December 31, 2005 to RMB161.7 million (US$20.7 million) for the year ended December 31, 2006.

Gross profit increased by 58.2% from RMB204.4 million for the year ended December 31, 2005 to RMB323.3 million (US$41.4 million) for the year ended December 31, 2006.

Research and development expenses increased by 88.4% from RMB2.5 million for the year ended December 31, 2005 to RMB4.7 million (US$600,000) for the year ended December 31, 2006.

Net income increased by 21.2% from RMB110.8 million for the year ended December 31, 2005 to RMB134.3 million (US$17.2 million) for the year ended December 31, 2006.