UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION




WASHINGTON,
D.C. 20549




FORM
10-K




xANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF


THE
SECURITIES EXCHANGE ACT OF 1934




FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008




OR




 ̈TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(D) OF


THE
SECURITIES EXCHANGE ACT OF 1934




FOR
THE TRANSITION PERIOD FROM _______ TO ___________




COMMISSION
FILE NO. 000-26293




CHINA
YONGXIN PHARMACEUTICALS INC.




(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)





Delaware
                      
                      20-1661391(State
      or other jurisdiction of incorporation or
                        organization)
                      
                      (I.R.S.
      Employer Identification No.)927
      Canada Court
                        City
      of Industry, California
                      
                      91748(Address
      of principal executive offices)
                      
                      (Zip
      Code)




REGISTRANT'S
TELEPHONE NUMBER, INCLUDING AREA CODE: (626) 581-9098




SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


None.


SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


Common
Stock, $.0001 par value




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes  ̈ No x









Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   ̈




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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  ̈




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




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




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




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





As of
March 31, 2009, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $4.62 million based on a
closing price of $0.22 per share of common stock as reported on the Over-the
Counter Bulletin Board on such date.  On March 31, 2009, we had
31,400,540 shares of our common stock issued and outstanding.




Documents
Incorporated by Reference: None.




2




TABLE
OF CONTENTS


TO
ANNUAL REPORT ON FORM 10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





PagePART I
                      
                      5Item
      1.
                      Business.
                      5Item
      1A.
                      Risk
      Factors.
                      16Item
      1B.
                      Unresolved
      Staff Comments.
                      32Item
      2.
                      Properties.
                      32Item
      3.
                      Legal
      Proceedings.
                      32Item
      4.
                      Submission
      of Matters to a Vote of Security Holders.
                      32PART
      II
                      
                      33Item
      5.
                      Market
      For Common Stock and Related Stockholder Matters.
                      33Item
      6.
                      Selected
      Financial Data
                      34Item
      7.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      34Item
      7A.
                      Quantitative
      and Qualitative Disclosures about Market Risk.
                      41Item
      8.
                      Financial
      Statements and Supplementary Data.
                      42Item
      9.
                      Changes
      in and Disagreements With Accountants on Accounting and
      Financial Disclosure
                      42Item
      9A.
                      Controls
      and Procedures
                      42Item
      9B.
                      Other
      Information
                      43PART
      III
                      
                      43Item
      10.
                      Directors,
      Executive Officers and Corporate Governance
                      43Item
      11.
                      Executive
      Compensation
                      45Item
      12.
                      Security
      Ownership of Certain Beneficial Owners and
Management
                      47Item
      13.
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      49Item
      14
                      Principal
      Accountant Fees and Services
                      49PART
      IV
                      
                      50Item
      15.
                      Exhibits,
      Financial Statement Schedules.
                      50Signatures
                      
                      52




3




CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS




The
information contained in this Form 10-K, includes some statements that are not
purely historical and that are "forward-looking statements." Such
forward-looking statements include, but are not limited to, statements regarding
our company's and our management's expectations, hopes, beliefs, intentions or
strategies regarding the future, including our financial condition, results of
operations, and the expected impact of the share exchange. In addition, any
statements that refer to projections, forecasts or other characterizations of
future events or circumstances, including any underlying assumptions, are
forward-looking statements. The words "anticipates," "believes," "continue,"
"could," "estimates," "expects," "intends," "may," "might," "plans," "possible,"
"potential," "predicts," "projects," "seeks," "should," "will," "would" and
similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that a
statement is not forward-looking.




The forward-looking statements
contained in this Form 10-K are based on current expectations and beliefs
concerning future developments and the potential effects on the parties and the
transaction. There can be no assurance that future developments actually
affecting us will be those anticipated. These forward-looking statements involve
a number of risks, uncertainties (some of which are beyond the parties' control)
or other assumptions that may cause actual results or performance to be
materially different from those expressed or implied by these forward-looking
statements, including the following:




·
            Our reliance on our major
      customers for a large portion of our net
  sales;


·
            Our ability to develop and market
      new products;


·
            Our ability to establish and
      maintain a strong brand;


·
            Protection of our intellectual
      property rights;


·
            The market acceptance of our
      products;


·
            Exposure to product liability and
      defect claims;


·
            Changes in the laws of the PRC
      that affect our operations;


·
            Any recurrence of severe acute
      respiratory syndrome, or
SARS;


·
            Our ability to obtain and
      maintain all necessary government certifications and/or licenses to
      conduct our business;


·
            Development of a public trading
      market for our securities;


·
            The cost of complying with
      current and future governmental regulations and the impact of any changes
      in the regulations on our operations;
and


·
            The other factors referenced in
      this Form 10-K, including, without limitation, under the sections entitled
      "Risk Factors," "Financial Information," "Management's Discussion and
      Analysis of Financial Condition and Results of Operations," and
      "Business."




These
risks and uncertainties, along with others, are also described above under the
heading "Risk Factors." Should one or more of these risks or uncertainties
materialize, or should any of the parties' assumptions prove incorrect, actual
results may vary in material respects from those projected in these
forward-looking statements. Moreover, we operate in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and we
cannot predict all such risk factors, nor can we assess the impact of all such
risk factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained
in any forward looking statements. We undertake no obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as may be required under applicable
securities laws.




4




PART
I





Item
1. BUSINESS




With
respect to this discussion, the terms, "we," "us," "our," and "Company" refer to
China Yongxin Pharmaceuticals Inc. (formerly Digital Learning Management
Corporation and Nutradyne Group, Inc.) (the “Company"), and its 80%-owned
subsidiary, Changchun Yongxin Dirui Medical Co., Ltd., a company organized under
the laws of the PRC ("Yongxin"), and (i) Yongxin's wholly-owned subsidiary Jilin
Province Yongxin Chain Drugstore Ltd., a company organized under the laws of the
PRC (“Yongxin Drugstore”); (ii) Yongxin's 90%-owned subsidiary Jilin Dingjian
Natural & Health Products Co., Ltd., a company organized under the laws of
the PRC (“Dingjian”); (iii) Yongxin Drugstore's 90%-owned subsidiary, Tianjin
Jingyongxin Chain Drugstore Ltd., a company organized under the laws of the PRC
(“Jingyongxin Drugstore”); and (iv) Yongxin Drugstore's wholly-owned subsidiary,
Baishan Caoantang Chain Drugstore Ltd., a company organized under the laws of
the PRC (“Caoantang Drugstore”).




Through
its Chinese subsidiaries, the Company is engaged in the wholesale distribution
of pharmaceuticals and medical-related products, and the sale and distribution
of pharmaceuticals, health and beauty products, ginseng and herbal supplements,
and other healthcare products through retail operations in the PRC. Our
corporate headquarters are located in City of Industry, California, but the
Company’s distribution operations are based in Changchun City, Jilin Province,
PRC.   Substantially all of our employees are located in
China.  At December 31, 2008, we had approximately 642 full time
employees, with 166 employees holding pharmaceutical licenses, and 31 of such
licensed pharmacists working at our retail drugstores. Our business mainly
operates in three segments: the wholesale of pharmaceuticals and other
medical-related products; the operation of retail drugstores; and the
cultivation and processing of ginseng.


The
Company also owns a digital e-learning business through our wholly-owned
subsidiary, Digital Learning Institute Inc., a Delaware corporation (“Digital
Learning”); and (i) Digital Learning’s wholly-owned subsidiary Software
Education of America, Inc., a California corporation; (ii) Digital Learning’s
wholly-owned subsidiary McKinley Educational Services, Inc., a California
corporation; (iii) Digital Learning’s wholly-owned subsidiary Digital Knowledge
Works, Inc., a Delaware corporation; and (iv) Digital Learning’s wholly-owned
subsidiary Coursemate, Inc., a California corporation (referred to collectively
herein as the "Digital E-learning Business"). The Digital E-learning Business
constitutes a minimal portion of our overall business. While we intend to
operate the current Digital E-learning Business and pursue opportunities related
to the business, it is our intention to divest ourselves of the current Digital
E-learning Business in the near future.




CORPORATE
HISTORY




The
Company was incorporated in Delaware on February 18, 1999 under the name of
FreePCSQuote. The Company through its Chinese subsidiaries is engaged in the
wholesale distribution of pharmaceuticals and medical-related products, and the
sale and distribution of pharmaceuticals, health and beauty products, ginseng
and herbal supplements, and other healthcare products through retail operations
in the PRC.


On
December 21, 2006, Yongxin and all of the shareholders of Yongxin entered into a
share exchange agreement with the Company. The agreement was amended on June 15,
2007.  On November 16, 2007, Yongxin and the Company closed on the
share exchange under the Amended Exchange Agreement. In accordance with the
Amended Exchange Agreement, the Company issued 21,000,000 shares of newly issued
common stock and 5,000,000 shares of Series A Preferred Stock to the Yongxin
shareholders or their designees, representing, immediately following closing,
70% of the total issued and outstanding shares of common stock of the Company in
exchange for 80% shares of Yongxin.





The
Series A Convertible Preferred Stock is convertible over a 3 year period, into
up to 30 million shares of common stock. In particular, the holder of any shares
of Series A Convertible Preferred Stock shall have the right, at its option, (i)
at any time hereafter (except that upon any liquidation of the Company, the
right of conversion shall terminate at the close of business on the business day
fixed for payment of the amount distributable on the Series A Convertible
Preferred Stock) to convert, any such shares of Series A Convertible Preferred
Stock into such number of fully paid and nonassessable shares of Common Stock on
a six (6) for one (1) basis. No more than 1,666,666 shares of the Series A
Convertible Preferred Stock may be converted in each of the three periods
following issuance as detailed below. The conversion formula is conditioned on
the Company earning no less than $3 million of net income in for the fiscal year
ending December 31, 2007; $4 million of net income in the fiscal year ending
December 31, 2008 and $5 million of net income in the fiscal year ending
December 31, 2009. In the event that in any of the three fiscal years, the
Company earns less than required net income amounts for conversion, then the
conversion right shall be proportionately reduced by the amount of the shortfall
below the required net income amount, with the "catch-up" right to convert
additional shares to the extent that the net income exceeds $3 million; $4
million and $5 million respectively in each of the three consecutive years. In
no event shall this conversion right allow for the conversion of the Series A
Preferred Stock into more than 6 common shares for each share of Series A
Preferred Stock over the course of the aforementioned three calendar years. The
net income requirements shall be based upon an audit of the revenues for each
fiscal year. All conversions shall be made within 30 days of the completion of
such audit.




5




For
accounting purposes, this transaction has been accounted for as a reverse
merger, since the stockholders of Yongxin own a majority of the issued and
outstanding shares of common stock of the Company, and the directors and
executive officers of Yongxin became the directors and executive officers of the
Company.  This acquisition was accounted for at historical cost in a
manner similar to that in pooling of interests method since after the
acquisition, the former shareholders of Yongxin acquired majority of the
outstanding shares of the Company. The financial statements of the legal
acquirer are not significant; therefore, no pro forma financial information is
submitted. The historical financial statements are those of "Changchun Yongxin
Dirui Medical Co, Inc. & Subsidiaries."





Yongxin
was established in 1993. The Company is engaged in medicines wholesale and
retail. The Company’s operations are based in Changchun City, Jilin Province,
China.





In
2004, Yongxin established Yongxin Drugstore with an investment of RMB 2,500,000
(equivalent to $303,000) to develop customer-terminal network market. In July
2005, the Company obtained the franchise rights in Jilin Province from American
Medicine Shoppe (Mixing International Medical Chains) and by now has developed 4
chains of “Meixin Yongxin.”  As of December 31, 2008, Yongxin
Drugstore has developed 21 retail chains drug stores in the name of Yongxin
Drugstore which cover a business area of 5,940 M2,
throughout Changchun city in China. These drugstores sell over-the counter
western and traditional Chinese medicines and other medical-related
products.





On
March 16, 2007, Yongxin Drugstore entered into various agreements with retail
drug stores in Tianjin, established Jingyongxin Drugstore with an investment of
$116,868, in which the Company has 90% ownership of the Jinyongxin
Drugstore.The Company
is located in Tianjin City, China. As of December 31, 2008, Jinyongxin Drugstore
has developed 20 retail chain drug stores which cover a business area of 2,928
M2,
throughout Tianjin City in China.





On
May 15, 2007, Yongxin established Dingjian with an investment of $116,868
whereby the shareholders of the company have 90% ownership of Dingjian. Dingjian was formed under
laws of the People's Republic of China and is located in Changchun City, Jilin
Province.





On
June 15 2007, Yongxin Drugstore established Caoantang Drugstore with an
investment of $328,430, including $144,509 in cash and $183,921 cash to purchase
the property and equipment with Yongxin agreed to pay $80,076 evenly over the
next 30 months for this investment. Caoantang Drugstore is a 100% owned
subsidiary of Yongxin Drugstore. Caoantang Drugstore owns 31 chain retail
drugstores and covers a business area of 3,000 M2,which
sell over-the counter western and traditional Chinese medicines and other
medical-related products.





On
May 5, 2008 the Company changed its name from Nutradyne Group, Inc to China
Yongxin Pharmaceuticals Inc.




INDUSTRY




China
represents one of the world's largest pharmaceutical markets. With its
population of over one billion people and fast-growing economy, China presents
significant potential for the pharmaceutical and retail drugstore industry. The
rise in disposable income of many Chinese residents has resulted in greater
demand and affordability of prescription and over-the-counter medicines and
other personal care products. The increasing population of elderly people in
China has resulted in a stronger demand for such medicines and other
healthcare-related products, because elderly people tend to spend more money on
medicine than younger people, on average. As living standards across China
improve and the Chinese population continues to age, we expect the demand for
healthcare-related products to continue to rise. The PRC government has also
recently attempted to regulate the pharmaceutical industry by enacting a series
of regulatory measures that are expected to favor non-hospital drugstores more
than hospital pharmacies.




6




In
China, consumers can purchase pharmaceutical and other related products at
either hospital pharmacies or non-hospital drugstores, including independent
drugstores and drugstore chains. Because hospital patients usually purchase
prescription medicines at hospital pharmacies, sales by hospital pharmacies have
traditionally accounted for a larger percentage of retail sales of prescription
medicines than non-hospital drugstores. However, most Chinese people choose to
purchase over-the-counter ("OTC"), non-prescription medicines from non-hospital,
retail pharmacies. Retail pharmacies in China include pharmacy chains,
individual stores, retail stores with OTC counters and other retailers and
supermarkets with OTC counters.




The
Chinese government owns and operates most of the hospitals throughout China. The
hospitals purchase their supplies of healthcare-related products from
wholesalers and distributors. A hospital's decision to purchase certain products
is typically based on a number of factors, and is sometimes affected in part by
corrupt practices, such as illegal kickbacks. Recently, the PRC government has
stepped-up its effort to combat such anti-corruption practices, such as by
amending its criminal code in 2006 to increase the penalties for corrupt
business practices. We expect the increased enforcement of such anti-corruption
practices will create growth opportunities for our company as we can compete for
business from hospitals on fair and equal terms with other suppliers. The PRC
Ministry of Health proposed regulations in March 2007 to require hospitals to
permit prescriptions to be filled at non-hospital pharmacies, which we also
except to increase sales of prescription medications at retail
drugstores.




Additionally,
reimbursements are available for sales of certain medicines by authorized
pharmacies to participants in the PRC national medical insurance program. The
provincial and municipal authorities responsible for the administration of the
social medical insurance funds to cover such reimbursements have gradually
increased funding in recent years. We expect the funding to increase
significantly in the future, which should help boost our sales of products
eligible for such reimbursements.




MARKET
FOCUS




Our
business operates in three segments: the wholesale of pharmaceuticals and other
medical-related products; the operation of retail drugstores; and the
cultivation, processing of ginseng. The following table reflects the revenue
contribution percentage from our business operations for the years ended
December 31, 2008, 2007 and 2006, respectively:




For
      the Years EndedDecember
      31, 2008
                  
                  
                  December
      31, 2007
                  
                  
                  December
      31, 2006Wholesale
      Operations
                  
                  
                  81.6
                  %
                  
                  
                  84
                  %
                  
                  
                  87
                  %Retail
      Drugstore Operations
                  
                  
                  18.4
                  %
                  
                  
                  16
                  %
                  
                  
                  13
                  %Ginseng
      Processing and Manufacturing Operations
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  *Total
      Revenues
                  
                  
                  100
                  %
                  
                  
                  100
                  %
                  
                  
                  100
                  %




* less
than one percent.




WHOLESALE
OPERATIONS




Through
Yongxin, we engage in the wholesale distribution of pharmaceutical products,
medical products and equipment, herbal and nutritional supplements and cosmetics
to over 3,500 customers, which include hospitals, large clinics and retail
pharmacies.  Yongxin has received the State Food and Drug
Administration approval and Good Supply Practices, or GSP,
certification.




7




We
opened our "Logistics Center" in January 2005 which contains a storage area of
over 43,000 square meters, where we have the ability to store our pharmaceutical
inventory at various temperatures. The Logistics Center is able to process over
30,000 orders per day from our customers and from our retail
outlets.




Our
wholesale business has a relationship with over 760 pharmaceutical and original
equipment manufacturers throughout China. Typically, we enter into master
agreements with our suppliers at the beginning of each year, which provide the
general terms, prices and conditions for transactions in the supplier's products
over the year. We then enter into separate purchase agreements each time we
actually purchase products from a supplier. When we purchase the products from
our suppliers, we take title to the items and book them as inventory. We then
distribute the products to our wholesale customers.




RETAIL
OPERATIONS




We
provide our retail drugstore customers with convenient and professional pharmacy
services. Each of our stores is staffed with a licensed pharmacist and a staff
trained to provide pharmacy services to our customers. Additionally, we sell an
assortment of other merchandise in our stores, including traditional Chinese
medicines, health and natural products, skin care products and cosmetics in our
stores. Our stores typically carry over 8,000 different types of products,
including our proprietary brand of ginseng-based products. We frequently review
and update the selection of products available in our stores to in response to
changing consumer preferences.




In
July 2005, Yongxin signed an agreement with American Medicine Shoppe
International ("AMS") to become AMS's exclusive agent for AMS in the Jilin
Province and develop a drug store franchise system under license from AMS within
the Jilin Province. We operate 4 drugstores pursuant to our relationship with
AMS under the "Meixin Yongxin" name.




Sales
made to retail customers are made by cash or debit or credit cards, or by
medical insurance cards under the PRC national medical insurance program. We
obtain reimbursement from the relevant government social security bureaus, for
sales made to eligible participants in the PRC national medical insurance
program on a monthly basis.  As of December 31, 2008, 31 of our
drugstores were designated stores under the PRC national medical insurance
program.




We
currently procure the merchandise for our stores from over 1,500 suppliers,
including both manufacturers and wholesalers. For the years ended December 31,
2008, 2007 and 2006, our largest five suppliers accounted for 8.5%, 8.2% and
10.4% of our total purchases, respectively. We believe that the products we
carry in our stores are readily available from multiple sources and do not
anticipate any difficulties in continuing to procure such products.




CULTIVATION
AND PROCESSING OF GINSENG




In
May 2007, Yongxin formed Dingjian to engage in the cultivation, processing,
manufacturing and distribution of ginseng electuary, pellets and liquid extracts
that are distributed by wholesalers and in retail drugstores. Dingjian markets
and distributes its ginseng and ginseng by-products under its proprietary
“Gaoliyuan,"  “Zinuo," " Longlife," and " Yongxintang," brand names to
various pharmaceutical, health supplement, and cosmetic manufacturers and
distributors. With the
assistance of the Institute of Agricultural Sciences of China, Dingjian
established a ginseng plantation in the city of Zuojia in the Jilin province, a
region that produces a large amount of ginseng.  Under Dingjian, we
also sell flower-infused tea and certain health and organic products along with
our ginseng and ginseng byproducts.




Dingjian
distributes its products to customers throughout mainland China, Southeast Asia,
Europe and the United States. Although Dingjian has agreements with many of its
customers, such agreements do not specify any minimum quantity that must be
purchased. The customer may return the product if it is not satisfied with
quality of the product upon inspection. Prices are based upon market
prices.




8




We
intend to focus our efforts on enhancing the reputation of our products and
developing new products. Our established ginseng plantation, which encompasses
20,000 square meters, allows us to grow our own ginseng for use in our
products.  Additionally, we opened a research and development center
in March 2007 to develop and test new ginseng-based products.  In 2007
and 2008, we developed more than 50 new products under Dingjian which we expect
to market and sell in 2009.




SOURCES
AND AVAILABILITY OF RAW MATERIALS




Ginseng
can only be cultivated in certain environmental conditions, needing the almost
perfect combination of terrain, altitude, and temperature. The growth cycle
requires 5-6 years and once harvested, the land cannot be used again (for
ginseng planting) for at least 25-30 years. Due to the long growth cycle for
ginseng, suitable land on which to grow ginseng is a major challenge of this
ginseng-cultivation industry. We are continually researching new techniques to
increase production per acre.




Currently
we control 5 acres of land approved by the Chinese government specifically for
the cultivation of ginseng. We produce more than enough ginseng for our current
use, and anticipate our crop supply to be more than sufficient through year
2009.




MARKETING
AND SALES




We
have a staff of approximately 180 dedicated to marketing and sales who design
our adverting campaigns and regional promotional activities. We generate
business by marketing directly to hospitals, retail drugstores and medical
clinics in China. Additionally, we advertise our business and products through
marketing activities and print advertisements in newspapers to promote our
brand, our proprietary ginseng-based products and the other products available
for sale in our stores.  In 2008 and 2007, we spent approximately
$26,124 and $69,697, respectively, on advertising.




RESEARCH
AND DEVELOPMENT




As
of December 31, 2008, we employed 18 staff members dedicated to researching and
developing new ginseng-based products. Our research and development staff
members specialize in medicine, pharmacology, chemistry, biology, and medicine
production equipment.




In
an attempt to capitalize on the abundance of ginseng in the Jilin Province,
Dingjing established a research and development center in cooperation with the
Jilin Agricultural College. This research and development center focuses on
developing new techniques of extraction, purification and quality control and
developing new ginseng-based herbal products.




QUALITY
CONTROL




We
have stringent quality control systems that are implemented by more than 195
company-trained staff members to ensure quality control over our products,
services and production processes.




We
conduct random quality control testing of the products procured from our
suppliers in our wholesale and retail operations. We replace suppliers that do
not meet our quality inspections. Additionally, we monitor the services provided
in our drugstores by sending inspectors to our stores to observe the quality of
services provided by our drugstore pharmacists and staff.




Our
ginseng processing facilities are designed and maintained with a view towards
conforming to good practice standards. To comply with Good Manufacturing
Practice ("GMP") operational requirements, we have implemented a quality
assurance plan setting forth our quality assurance procedures. Our quality
control procedures at our processing facilities are designed to maintain the
quality standards throughout the production process. Quality control executes
the following functions at our processing facilities:




·
            setting internal controls and
      regulations for semi-finished and finished
  products;




9




·
            implementing sampling systems and
      sample files;




·
            maintaining quality of equipment
      and instruments;




·
            auditing production records to
      ensure delivery of quality
products;




·
            evaluating the quality of raw
      materials, semi-finished products and finished products;
      and




·
            articulating the responsibilities
      of the quality control
staff.




COMPETITION




The
pharmaceutical distribution, retail drugstore and herbal supplement
manufacturing industries in China are fragmented and intensely
competitive.  While our primary competition currently comes from other
retail drugstore chains and drugstores, we face increasing competition from
discount and convenience stores and supermarkets for our non-pharmaceutical
products and services. We compete for customers based on store location,
selection of products and our brand name.




Many
of our competitors are more established than we are, and have significantly
greater financial, technical, marketing and other resources than we do.
Additionally, many of them have greater name recognition and a larger customer
bases than us. These competitors may be able to respond more quickly to changing
consumer preferences and new business opportunities than us. Moreover,
competition is expected to increase due to the expected consolidation of the
drugstore industry and new store opening by our competitors. Our major
competitors include: China Nepstar Chain Drugstore Ltd., Shenzhen Accord
Pharmacy Co., Ltd., Shenzhen Associate Pharmacy Co., Ltd., Guangzhou
Pharmaceutical Company, Jianmin Chain Drugstore, Guangzhou Caizhilin Chain
Drugstore, Liaoning Chengda Co., Ltd., Hangzhou Wulin Drugstore Co., Ltd. and
Ningbo Siming Dayaofang Co., Ltd.




The
market for ginseng products is occupied by a number of competitors, most of
which have a longer operating and manufacturing history and higher visibility,
name recognition and financial resources than we do. Our competitors in the
ginseng processing business include China Beijing Tongrentang Group Co.,Ltd.
Many of these entities have substantially greater research and development
capabilities and financial, scientific, manufacturing, marketing and sales
resources than we do, as well as more experience in research and development,
regulatory matters, manufacturing, marketing and sales.




MAJOR
CUSTOMERS




Our
major customers include government owned and operated hospitals, large clinics
and other retailers. No single customer accounted for 10% or more of the
Company’s net sales during the years ended December 31, 2008, 2007 and
2006.  Our top five customers accounted for approximately 15%, 13.9%
and 16% of our net sales generated for the years ended December 31, 2008, 2007
and 2006, respectively. None of our directors, their associates or any
significant shareholder of the Company has any interest in any of our five
largest customers.




INTELLECTUAL
PROPERTY




We
rely on a combination of trademark and trade secret protection and other
unpatented proprietary information to protect our intellectual property rights
and to maintain and enhance our competitiveness. We currently have four
registered trademarks in China, which include Longlife, Zinuo, Yongxintang,
Gaoliyuan.




We
also rely on unpatented technologies to protect the proprietary nature of our
product and manufacturing processes. We require that our management team and key
employees enter into confidentiality agreements that require the employees to
assign the rights to any inventions developed by them during the course of their
employment with us. The confidentiality agreements include noncompetition and
non-solicitation provisions that remain effective during the course of
employment and for periods following termination of employment, which vary
depending on position and location of the employee.




10




GOVERNMENT
REGULATIONS




As
a business operating in the PRC, we are subject to various regulations and
permit systems by the Chinese government. These regulations cover many of our
products, including herbal products, over-the-counter medicines and prescription
medications.




Pharmaceutical
Product Distribution




We
currently only manufacture herbal supplements containing ginseng. We sell and
distribute pharmaceuticals, health and beauty products, dietary and herbal
supplements, and other healthcare products.  Pharmaceuticals, which
have certain identified medical functions and are designed to treat a specific
illnesses or symptoms, can be available by prescription only or over-the-counter
and require the approval of China's State Food and Drug Administration ("SFDA")
before they can be sold. Our herbal products, also known as dietary supplements
or nutritional supplements, are basically prophylactic or preventive in nature
and are available over-the-counter, and, in China, only require approval of the
local government for their production.


We
are subject to the Drug Administration Law of China, which governs the
licensing, manufacturing, marketing and distribution of pharmaceutical products
in China and sets penalties for violations of the law. Distributors of
pharmaceutical products are required to obtain permits from the appropriate
provincial or county level SFDA where the pharmaceutical distribution enterprise
is located. The grant of such permits is subject to an inspection of a
distributor's facilities, warehouses, hygienic environment, quality control
systems, personnel and equipment. Such permits have five year terms and
distributors must apply for renewal no later than six months prior to the
expiration date of the permit. We have a wholesale pharmaceutical distribution
permit which expires in March 2010. Each of our retail locations also has a
pharmaceutical distribution permit, which expire on various dates. We do not
have a permit to manufacture pharmaceutical products.




Additionally,
under the Supervision and Administration Rules on Pharmaceutical Product
Distribution disseminated by the SFDA on January 31, 2007, and effective May 1,
2007, a pharmaceutical product distributor is accountable for its procurement
and sales activities and is liable for the actions of its employees or agents in
connection with their conduct of distribution on behalf of the distributor.
Retail distributors may not sell prescription pharmaceutical products, or Tier A
over-the-counter pharmaceutical products, listed in the national or provincial
medical insurance catalogs without certified in-store pharmacist being
present.




Foreign
Ownership of Wholesale or Retail Pharmaceutical Businesses in China




Under
current PRC law on foreign investment, foreign companies are allowed to
establish or invest in wholly foreign-owned enterprises or joint ventures that
engage in wholesale or retail sales of pharmaceuticals in China. These
regulations limit the number and size of retail pharmacy outlets that a foreign
investor may establish. If a foreign investor owns more than 30 outlets that
sell a variety of branded pharmaceutical products sourced from different
suppliers, the foreign investor's ownership interests in the outlets are limited
to 49.0%.




Nutritional
Supplements and Other Food Products




Distributors
of nutritional supplements and other food products must obtain a food hygiene
certificate from the appropriate provincial or local health regulatory
authorities pursuant to the PRC Food Hygiene Law and Rules on Food Hygiene
Certification. In order to obtain a certificate, a distributor's facilities,
warehouses, hygienic environment, quality control systems, personnel and
equipment are subject to inspection. Food hygiene certificates are valid for
four years, and must be renewed within six months prior to their
expiration.




The
Chinese Food Sanitation Law promulgates food sanitation standards.  In
the PRC only products manufactured at Government Good Manufacturing Practice
("GMP") certified facilities are available for sale in China. The China Food and
Drug Administration conducts the GMP inspections.




11




Good
Supply Practice Standards




We
are required to operate in accordance with Good Supply Practice (the "GSP")
standards that regulate wholesale and retail pharmaceutical product
distributors. The GSP standards ensure the quality of distribution of
pharmaceutical products in China. Pursuant to applicable GSP standards, we must
implement strict controls on the distribution of our pharmaceutical products,
including those concerning staff qualifications, distribution premises,
warehouses, inspection equipment and facilities, management and quality control.
Additionally, we are subject to inspections organized by the local drug
regulatory department of the people's government of the province, autonomous
region or municipality directly under the PRC central government. We received a
GSP Certificate from the Jilin Province SFDA Bureau with a term of five years,
which expired at the end of 2008.  Such GSP Certificate has been
renewed at the end of 2008 for another term of five years, which shall expire at
the end of 2013.




Insurance
Catalogue




The
Insurance Catalogue is divided into Parts A and B. The medicines included in
Part A are designated by the Chinese governmental authorities for general
application. Local governmental authorities may not adjust the content of
medicines in Part A. Although the medicines included in Part B are designated by
Chinese governmental authorities in the first instance, provincial level
authorities may make limited changes to the medicines included in Part B,
resulting in some regional variations in the medicines included in Part B from
region to region.




Patients
purchasing medicines included in Part A are entitled to reimbursement of the
costs of such medicines from the social medical fund in accordance with relevant
regulations in China. Patients purchasing medicines included in Part B are
required to pay a predetermined proportion of the costs of such
medicines.




The
medicines included in the Insurance Catalogue are selected by the Chinese
government authorities based on various factors including treatment
requirements, frequency of use, effectiveness and price. Medicines included in
the Insurance Catalogue are subject to price control by the Chinese government.
The Insurance Catalogue is revised every two years. In connection with each
revision, the relevant provincial drug authority collects proposals from
relevant enterprises before organizing a comprehensive appraisal. The SFDA then
makes the final decision on any revisions based on the preliminary opinion
suggested by the provincial drug administration.




Approximately
24% of all the medicines distributed by Yongxin were listed in the Insurance
Catalogue during the fiscal years ended December 31, 2008, 2007 and 2006,
representing 35%, 35% and 33% respectively, of our total revenues for those
periods.




Price
Controls




Pursuant
to the Decision of the State Council on the Establishment of the State Basic
Medical Insurance System for Urban Employees and the Implementation Measures for
the Administration of the Scope of Medical Insurance Coverage for
Pharmaceuticals for Urban Employees, the Ministry of Labor and Social Security
in China established the Insurance Catalogue. The retail prices of certain
pharmaceutical products, including many of those listed in the Insurance
Catalog, are subject to price controls in the form of fixed prices or price
ceilings by the Chinese government. Manufacturers and distributors are not
permitted to set or change the retail price for any price-controlled product
above the applicable price ceiling or deviate from the applicable fixed price
imposed by the PRC government. The prices of other medicines that are not
subject to price control are determined by the pharmaceutical manufacturers,
subject, in certain cases, to providing notice to the provincial pricing
authorities.




The Price Control Office of the NDRC,
as well as provincial and regional price control authorities, set the retail
prices of products that are subject to price controls. The wholesale price of
the pharmaceutical products subject to the price controls are generally
determined by the set retail price. The maximum prices of such medicine products
are published by the state and provincial administration authorities from time
to time. Only the pharmaceutical product manufacturer can apply for an increase
in the retail price of the product. While all of our pharmaceutical products are
subject to price controls, because our products are priced below the price
control level, price controls currently do not affect our sales of these
products.




12




PRC
National Medical Insurance Program




Eligible
participants in the PRC national medical insurance program, mainly consisting of
urban residents, can purchase medicines in an authorized pharmacy by presenting
their medical insurance cards if the medicines purchased are included in the
national or provincial medical insurance catalogues. Authorized pharmacies can
generally either sell medicine on credit and obtain reimbursement from relevant
government social security bureaus on a monthly basis, or accept payments from
the participants at the of the purchase, and the participants in turn obtain
reimbursement from relevant government social security
bureaus.




Purchases
of Tier A pharmaceutical products are generally fully reimbursable, except for
certain Tier A pharmaceutical products that are only reimbursable to the extent
the medicine is used the purposes stated in the insurance catalogs. Only a
portion of purchases of Tier-B pharmaceutical are reimbursable; participants
purchasing Tier B pharmaceutical products must a certain co-payment which is not
reimbursable. Participants have varying amounts in their individual accounts,
which vary based on the contributions made by the participants and his or her
employer. Different regions in China have different requirements regarding the
caps of reimbursements in excess of the amounts in the individual
accounts.




Pharmaceutical
Product Advertisement




The
Standards for Examination and Publication of Advertisements of Pharmaceutical
Products and Rules for Examination of Advertisement of Pharmaceutical Products,
promulgated by the PRC State Administration of Industry and Commerce and the
SFDA, prevents the deceptive and misleading advertising of pharmaceutical
products. These regulations prohibit the advertisement of certain pharmaceutical
products and mandate that prescription pharmaceuticals only be advertised in
certain authorized medical magazines upon obtaining proper approval from the
provincial level of food and drug administration.




Environmental
Regulations




The
major environmental regulations applicable to us include the PRC Environmental
Protection Law, the PRC Law on the Prevention and Control of Water Pollution and
its Implementation Rules, the PRC Law on the Prevention and Control of Air
Pollution and its Implementation Rules, the PRC Law on the Prevention and
Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control
of Noise Pollution.




We
constructed our manufacturing facilities with the PRC's environmental laws and
requirements in mind. We have not been named as a defendant in any legal
proceedings alleging violation of environmental laws and have no reasonable
basis to believe that there is any threatened claim, action or legal proceedings
against us that would have a material adverse effect on our business, financial
condition or results of operations due to any non-compliance with environmental
laws.  To the knowledge of our management, we have been in full
compliance with environmental protection regulations during at least the past
three years.




Intellectual
Property Protection in China




The
PRC has domestic laws for the protection of rights in copyrights, patents,
trademarks and trade secrets. The PRC is also a signatory to most of the world's
major intellectual property conventions, including:




·
            Convention establishing the World
      Intellectual Property Organization (WIPO Convention) (June 4,
      1980);


·
            Paris Convention for the
      Protection of Industrial Property (March 19,
  1985);


·
            Patent Cooperation Treaty
      (January 1, 1994); and


·
            The Agreement on Trade-Related
      Aspects of Intellectual Property Rights (TRIPs) (November 11,
      2001).




13




Patents




Patents
in the PRC are governed by the China Patent Law and its Implementing
Regulations, each of which went into effect in 1985. Amended versions of the
China Patent Law and its Implementing Regulations came into effect in 2001 and
2003, respectively.




The
PRC is signatory to the Paris Convention for the Protection of Industrial
Property, in accordance with which any person who has duly filed an application
for a patent in one signatory country shall enjoy, for the purposes of filing in
the other countries, a right of priority during the period fixed in the
convention (12 months for inventions and utility models, and 6 months for
industrial designs).




The
Patent Law covers three kinds of patents, i.e., patents for inventions, utility
models and designs respectively. The Chinese patent system adopts the principle
of first to file. This means that, where more than one person files a patent
application for the same invention, a patent can only be granted to the person
who first filed the application. Consistent with international practice, the PRC
only allows the patenting of inventions or utility models that possess the
characteristics of novelty, inventiveness and practical applicability. For a
design to be patentable, it should not be identical with or similar to any
design which, before the date of filing, has been publicly disclosed in
publications in the country or abroad or has been publicly used in the country,
and should not be in conflict with any prior right of another.




PRC
law provides that anyone wishing to exploit the patent of another must conclude
a written licensing contract with the patent holder and pay the patent holder a
fee. One rather broad exception to this, however, is that, where a party
possesses the means to exploit a patent but cannot obtain a license from the
patent holder on reasonable terms and in reasonable period of time, the PRC
State Intellectual Property Office, or SIPO, is authorized to grant a compulsory
license. A compulsory license can also be granted where a national emergency or
any extraordinary state of affairs occurs or where the public interest so
requires. SIPO, however, has not granted any compulsory license up to now. The
patent holder may appeal such decision within three months from receiving
notification by filing a suit in a people's court.




PRC
law defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. A patent holder who believes his patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. Preliminary injunction may be issued by the People's
Court upon the patentee's or the interested parties' request before instituting
any legal proceedings or during the proceedings. Evidence preservation and
property preservation measures are also available both before and during the
litigation. Damages in the case of patent infringement is calculated as either
the loss suffered by the patent holder arising from the infringement or the
benefit gained by the infringer from the infringement. If it is difficult to
ascertain damages in this manner, damages may be reasonably determined in an
amount ranging from one to more times of the license fee under a contractual
license. The infringing party may be also fined by Administration of Patent
Management in an amount of up to three times the unlawful income earned by such
infringing party. If there is no unlawful income so earned, the infringing party
may be fined in an amount of up to RMB500,000, or approximately
$62,500.




Trademarks




Trademarks
in the PRC are government by the PRC Trademark Law and the PRC Trademark
Implementing Regulations. The State Administration of Industry and Commerce is
responsible for the registration and administration of trademarks in China. The
PRC has adopted a "first-to-file" principle with respect to
trademarks.




Trademark
infringement in the PRC includes using a mark that is identical or similar to a
registered trademark with the same or similar products without the trademark
registrant's consent, selling products that infringe upon a trademark
registrant's exclusive right to use the trademark, counterfeiting or changing or
altering a registered trademark and selling products with the unauthorized
altered trademark.




14




A
registered trademark owner who believes his trademark is being infringed may
file a complaint with the state or local Administration for Industry and
Commerce, or AIC, which can order the immediate cessation of the infringing
behavior, seize and destroy infringing products and representations of the
trademark, close the facilities used to produce the infringing products or
impose a fine. Additionally, the trademark owner may file a civil suit against
the infringing party seeking an injunction and/or monetary damages. In addition,
the infringing party may be fined by Administration of Patent Management in an
amount of up to three times the unlawful income earned by such infringing party,
or an amount up to RMB500,000, or approximately $62,500 if there is no unlawful
income earned.




Tax




Pursuant
to the Provisional Regulation of China on Value Added Tax ("VAT") and their
implementing rules, all entities and individuals that are engaged in the sale of
goods, the provision of repairs and replacement services and the importation of
goods in China are generally required to pay VAT at a rate of 17.0% of the gross
sales proceeds received, less any deductible VAT already paid or borne by the
taxpayer. Further, when exporting goods, the exporter is entitled to a portion
of or all the refund of VAT that it has already paid or borne. Our imported raw
materials that are used for manufacturing export products and are deposited in
bonded warehouses are exempt from import VAT.




Foreign Currency
Exchange




Under
the PRC foreign currency exchange regulations applicable to us, the Renminbi is
convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions.
Conversion of Renminbi for capital account items, such as direct investment,
loan, security investment and repatriation of investment, however, is still
subject to the approval of the PRC State Administration of Foreign Exchange, or
SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign
currencies at those banks authorized to conduct foreign exchange business after
providing valid commercial documents and, in the case of capital account item
transactions, obtaining approval from the SAFE. Capital investments by
foreign-invested enterprises outside of China are also subject to limitations,
which include approvals by the Ministry of Commerce, the SAFE and the State
Reform and Development Commission.




Dividend
Distributions




Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China are required to set aside at least 10.0% of
their after-tax profit based on PRC accounting standards each year to its
general reserves until the accumulative amount of such reserves reach 50.0% of
its registered capital. These reserves are not distributable as cash dividends.
The board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.




EMPLOYEES




Substantially
all of our employees are located in China. At December 31, 2008, we had
approximately 642 full time employees, with 166 employees holding pharmaceutical
licenses, and 31 of such licensed pharmacists working at our retail drugstores.
There are no collective bargaining contracts covering any of our employees. We
believe our relationship with our employees is satisfactory.




Yongxin
is required to contribute a portion of its employees' total salaries to the
Chinese government's social insurance funds, including medical insurance,
unemployment insurance and job injuries insurance, and a housing assistance
fund, in accordance with relevant regulations. In the last three years, Yongxin
contributed approximately $174,567, $61,918 and $2,430 for the years ended
December 31, 2008, 2007 and 2006, respectively. We expect the amount of
Yongxin's contribution to the government's social insurance funds to increase in
the future as Yongxin expands its workforce and operations.




15




ITEM
1A: RISK FACTORS




Any
investment in our securities involves a high degree of risk. Potential investors
should carefully consider the material risks described below and all of the
information contained in this Form 10-K before deciding whether to purchase any
of our securities. Our business, financial condition or results of operations
could be materially adversely affected by these risks if any of them actually
occur. The shares of our common stock are currently quoted on the
Over-the-Counter Bulletin Board, or OTCBB under the symbol "CYXN." If and when
our securities are traded, the trading price could decline due to any of these
risks, and an investor may lose all or part of his or her investment. Some
of these factors have affected our financial condition and operating results in
the past or are currently affecting us. This report also contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks faced described
below and elsewhere in this Form 10-K.




RISKS
RELATED TO OUR BUSINESS




PURCHASES
OF MANY OF OUR PRODUCTS ARE DISCRETIONARY, MAY BE PARTICULARLY AFFECTED BY
ADVERSE TRENDS IN THE GENERAL ECONOMY, AND CHALLENGING ECONOMIC CONDITIONS WILL
MAKE IT MORE DIFFICULT TO GENERATE REVENUE.




The
current general economic recession and crisis and any continuing unfavorable
economic conditions may affect the success of our operations since many of our
products are discretionary and we depend to a significant extent upon a number
of factors relating to discretionary consumer spending in China. These factors
include economic conditions and perceptions of such conditions by consumers,
employment rates, the level of consumers' disposable income, business
conditions, interest rates, consumer debt levels, availability of credit and
levels of taxation in regional and local markets in China where we manufacture
and sell our products. There can be no assurance that consumer spending on many
of our products, including cosmetics, organic products and health and
nutritional supplements, will not be adversely affected by changes in general
economic conditions in China and globally.




THE
SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO MARKET AND ADVERTISE OUR
PRODUCTS EFFECTIVELY.




Our
ability to establish effective marketing and advertising campaigns is key to our
success. Our advertisements promote our merchandise and our proprietary brand of
ginseng-based products, and the pricing of such products. If we are unable to
increase awareness of our company and our products, we may not be able to
attract new customers. Our marketing activities may not be successful in
promoting our products or pricing strategies. We cannot assure you that our
marketing programs will be adequate to support our future growth, which may
result in a material adverse effect on our results of operations.




WE
MAY BE UNABLE TO IDENTIFY AND RESPOND EFFECTIVELY TO SHIFTING CUSTOMER
PREFERENCES, AND WE MAY FAIL TO OPTIMIZE OUR PRODUCT OFFERING AND INVENTORY
POSITION.




Consumer
preferences in the drugstore industry change rapidly and are difficult to
predict. The success of our business depends on our ability to predict
accurately and respond to future changes in consumer preferences, carry the
inventory demanded by customers, deliver the appropriate quality of products,
price products correctly and implement effective purchasing procedures. We must
optimize our product selection and inventory positions based on consumer
preferences and sales trends. If we fail to anticipate, identify or react
appropriately to changes in consumer preferences and adapt our product selection
to these changing preferences, we could experience excess inventories, higher
than normal markdowns or an inability to sell our products, which could
significantly reduce our revenue and have a material adverse effect on our
business, financial condition and results of operations.




16




IF
WE FAIL TO MAINTAIN OPTIMAL INVENTORY LEVELS, OUR INVENTORY HOLDING COSTS COULD
INCREASE OR CAUSE US TO LOSE SALES, EITHER OF WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.




While
we must maintain sufficient inventory levels to operate our business
successfully and meet our customers' demands, we must be careful to avoid
amassing excess inventory. Changing consumer demands, manufacturer backorders,
uncertainty surrounding new product launches and our increased offering of our
proprietary ginseng-based products expose us to increased inventory risks.
Demand for products can change rapidly and unexpectedly, including the time
between when the product is ordered from the supplier to the time it is offered
for sale. We carry a wide variety of products and must maintain sufficient
inventory levels of our products. We may be unable to sell certain products in
the event that consumer demand changes. Our inventory holding costs will
increase if we carry excess inventory, however, if we do not have a sufficient
inventory of a product to fulfill customer orders, we may lose orders or
customers, which may adversely affect our business, financial condition and
results of operations. We cannot assure you that we can accurately predict
consumer demand and events and avoid over-stocking or under-stocking
products.




OUR
BUSINESS AND THE SUCCESS OF OUR PRODUCTS COULD BE HARMED IF WE ARE UNABLE TO
MAINTAIN OUR BRAND IMAGE.




We
believe that establishing and strengthening our proprietary brands is critical
to achieving widespread acceptance of our products and to establishing key
strategic relationships. The importance of brand recognition will increase as
current and potential competitors enter the Chinese pharmaceutical market with
competing products. Our ability to promote and position our brands depends
largely on the success of our marketing efforts and our ability to provide high
quality products and customer service. These activities are expensive and we may
not generate a corresponding increase in sales to justify these costs. If we
fail to establish and maintain our brand, or if our brand value is damaged or
diluted, we may be unable to maintain or increase our sales or
revenue.




IF
WE ARE UNABLE TO MANAGE THE DISTRIBUTION OF OUR PRODUCTS AT OUR DISTRIBUTION
CENTERS, WE MAY BE UNABLE TO MEET CUSTOMER DEMAND.




Substantially
all of our products are distributed to our stores and our wholesale customers
through our "Logistics Center" located in our "Logistics Plaza" located in
Changchun. The efficient operation and management of this facility is essential
to our meeting customer demands ability to meet customer demand. Our business
would suffer if the operation of this facility were disrupted. Our failure to
manage this facility properly could result in higher distribution costs, excess
or sufficient inventory, or an inability to fulfill customer orders, each of
which could result in a material adverse effect on our results of
operations.




DUE
TO THE GEOGRAPHIC CONCENTRATION OF OUR SALES IN THE NORTHEAST REGION OF CHINA,
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION ARE SUBJECT TO FLUCTUATIONS IN
REGIONAL ECONOMIC CONDITIONS.




A
significant percentage of our total sales are made in the northeast region of
China, particularly in the Jilin province. For the years ended December 31,
2008, 2007 and 2006, approximately 85%, 85% and 80% of revenues, respectively,
was generated from this area. Our concentration of sales in this area heightens
our exposure to adverse developments related to competition, as well as economic
and demographic changes in this region. Our geographic concentration might
result in a material adverse effect on our business, financial condition or
results of operations in the future.




WE
HAVE HISTORICALLY DEPENDED ON A LIMITED NUMBER OF CUSTOMERS FOR A SIGNIFICANT
PORTION OF OUR REVENUES AND THIS DEPENDENCE IS LIKELY TO CONTINUE.




We
have historically depended on a limited number of customers for a significant
portion of our revenues. We anticipate that a limited number of customers will
continue to contribute to a significant portion of our revenues in the future.
Maintaining the relationships with these significant customers is vital to the
expansion and success of our business, as the loss of a major customer could
expose us to risk of substantial losses. Our sales and revenue could decline and
our results of operations could be materially adversely affected if one or more
of these significant customers stops or reduces its purchasing of our products,
or if we fail to expand our customer base for our products.




17




CERTAIN
DISRUPTIONS IN SUPPLY OF AND CHANGES IN THE COMPETITIVE ENVIRONMENT FOR OUR
PRODUCTS MAY ADVERSELY AFFECT OUR PROFITABILITY.




We
carry a broad range of merchandise in our stores, including pharmaceuticals,
traditional Chinese medicines, herbal and nutritional supplements and cosmetics.
A significant disruption in the supply of these products could decrease
inventory levels and sales, and materially adversely affect our business.
Shortages of products or interruptions in transportation systems, labor strikes,
work stoppages, war, acts of terrorism or other interruptions to or difficulties
in the employment of labor or transportation in the markets in which we purchase
products may adversely affect our ability to maintain sufficient inventories of
our products to meet consumer demand. If we were to experience a significant or
prolonged shortage of products from any of our suppliers and could not procure
the products from other sources, we would be unable to meet customer demand,
which would adversely affect our sales, margins and customer
relations.




OUR
OPERATIONS WOULD BE MATERIALLY ADVERSELY AFFECTED IF THIRD-PARTY CARRIERS WERE
UNABLE TO TRANSPORT OUR PRODUCTS ON A TIMELY BASIS.




All
of our products are shipped through third party carriers. If a strike or other
event prevented or disrupted these carriers from transporting our products,
other carriers may be unavailable or may not have the capacity to deliver our
products to our customers and to our retail stores. If adequate third party
sources to ship our products were unavailable at any time, our business would be
materially adversely affected.




THE
MARKET FOR OUR PRODUCTS AND SERVICES IS VERY COMPETITIVE AND, IF WE CANNOT
EFFECTIVELY COMPETE, OUR BUSINESS WILL BE HARMED.




The
industries in which we operate are highly fragmented and very competitive. We
compete with local drugstores and other local manufacturers of herbal products
and with large foreign multinational companies that offer products that are
similar to ours. Some of these competitors have larger local or regional
customer bases, more locations, more brand equity, and substantially greater
financial, marketing and other resources than we have. As a result, our
competitors may be in a stronger position to respond quickly to potential
acquisitions and other market opportunities, new or emerging technologies and
changes in customer tastes. We cannot assure you that we will be able to
maintain or increase our market share against the emergence of these or other
sources of competition. Failure to maintain and enhance our competitive position
could materially adversely affect our business and prospects.




WE
MAY NOT BE SUCCESSFUL IN COMPETING WITH OTHER WHOLESALERS AND DISTRIBUTORS OF
PHARMACEUTICAL PRODUCTS IN THE TENDER PROCESSES FOR THE PURCHASE OF MEDICINES BY
STATE-OWNED AND STATE-CONTROLLED HOSPITALS.





Our
wholesale business sells various pharmaceutical products to hospitals owned and
controlled by government authorities in the PRC. Government owned hospitals
purchase pharmaceutical products by using collective tender processes. During a
collective tender process, a hospital establishes a committee of recognized
pharmaceutical experts, which assesses bids submitted by pharmaceutical
manufacturers. The hospitals may only purchase pharmaceuticals that win in
collective tender processes. The collective tender process for pharmaceuticals
with the same chemical composition must be conducted at least annually, and
pharmaceuticals that have won in the collective tender processes previously must
participate and win in the collective tender processes in the following period
before hospitals may make new purchases. If we are unable to win purchase
contracts through the collective tender processes in which we decide to
participate, we will lose market share to our competitors, and our sales and
profitability will be adversely affected.




18




COUNTERFEIT
PRODUCTS IN CHINA COULD NEGATIVELY IMPACT OUR REVENUES, BRAND REPUTATION,
BUSINESS AND RESULTS OF OPERATIONS.




Our
products are also subject to competition from counterfeit pharmaceuticals, which
are pharmaceuticals manufactured without proper licenses or approvals and are
fraudulently mislabeled with respect to their content and/or manufacturer.
Counterfeit pharmaceuticals are generally sold at lower prices than the
authentic products due to their low production costs, and in some cases are very
similar in appearance to the authentic products. Counterfeit pharmaceuticals may
or may not have the same chemical content as their authentic counterparts.
Although the PRC government has recently been increasingly active in policing
counterfeit pharmaceuticals, there is not yet an effective counterfeit
pharmaceutical regulation control and enforcement system in China. The
proliferation of counterfeit pharmaceuticals has grown in recent years and may
continue to grow in the future. Despite our implementation of quality controls,
we cannot assure you that we would not be distributing or selling counterfeit
products inadvertently. Any accidental sale or distribution of counterfeit
products can subject our company to fines, administrative penalties, litigation
and negative publicity, which could negatively impact our revenues, brand
reputation, business and results of operations.




THE
RETAIL PRICES OF SOME OF OUR PRODUCTS ARE SUBJECT TO PRICE CONTROLS BY THE PRC
GOVERNMENT, WHICH MAY AFFECT BOTH OUR REVENUES AND NET INCOME.




The
laws of the PRC permit the PRC government to fix and adjust prices of certain
pharmaceutical products, including many of those listed in the Medical Insurance
Catalog. Through these price controls, the government can fix retail prices and
set retail price ceiling for certain of the pharmaceutical products we sell.
Additionally, the PRC government may periodically adjust the retail prices of
these products downward in order to make pharmaceuticals more affordable to the
general Chinese population. While our sales of pharmaceutical products are not
affected by the price controls because we currently sell such products are
prices below the price control level, we cannot guarantee that our sales of
these products will not be affected in the future, as price controls may be
increased or may affect additional products. To the extent that we are subject
to price controls, our revenue, gross profit, gross margin and net income will
be affected because the revenue we derive from our sales will be limited and we
may face no limitation on our costs. Further, if price controls affect both our
revenue and costs, our ability to be profitable and the extent of our
profitability will be effectively subject to determination by the applicable
regulatory authorities in the PRC. Any future price controls or price reductions
may reduce our revenue and profitability and have a material adverse effect on
our financial condition and results of operations.




IF
WE DO NOT COMPLY WITH THE APPLICABLE PRC LAWS AND REGULATIONS CONTROLLING THE
SALE OF MEDICINES UNDER THE PRC NATIONAL MEDICAL INSURANCE PROGRAM, WE MAY BE
SUBJECT TO FINES AND OTHER PENALTIES.




Persons
eligible to participate in the PRC National Medical Insurance Program can buy
medicines that have been included in the medical insurance catalog using a
medical insurance card in an authorized pharmacy. The applicable PRC government
social security bureau then reimburses the pharmacy. PRC law also forbids
pharmacies from selling goods other than pre-proved medicines when purchases are
made with medical insurance cards. While we have established procedures to
prevent our drugstores from selling unauthorized goods to customers who make
purchases with medical insurance cards, we cannot assure you that these
procedures will be properly followed at all times in all of our stores.
Violations of this prohibition by any of our drugstores may result in the
revocation of its status as an authorized pharmacy.  Additionally, we
could be subject to other fines or other penalties, and to negative publicity,
which could damage our company's reputation and have a material adverse effect
on our results of operations.




OUR CERTIFICATES, PERMITS, AND LICENSES
RELATED TO OUR OPERATIONS ARE SUBJECT TO GOVERNMENTAL CONTROL AND RENEWAL AND
FAILURE TO OBTAIN RENEWAL WILL CAUSE ALL OR PART OF OUR OPERATIONS TO BE
TERMINATED.




We
are subject to various PRC laws and regulations pertaining to our wholesale,
retail and manufacturing operations. We have attained certificates, permits, and
licenses required for the operation of a pharmaceutical distributor and retailer
and the manufacture of herbal and nutritional products in the PRC. We cannot
assure you that we will have all necessary permits, certificates and
authorizations for the operation of our business at all times. Additionally, our
certifications, permits and authorizations are subject to periodic renewal by
the relevant government authorities. We intend to apply for renewal of these
certificates, permits and authorizations prior to their expiration. During the
renewal process, we will be re-evaluated by the appropriate governmental
authorities and must comply with the then prevailing standards and regulations
which may change from time to time. In the event that we are not able to renew
the certificates, permits and licenses, all or part of our operations may be
terminated. Furthermore, if escalating compliance costs associated with
governmental standards and regulations restrict or prohibit any part of our
operations, it may adversely affect our operations and
profitability.




19




WE
MAY SUFFER AS A RESULT OF PRODUCT LIABILITY OR DEFECTIVE PRODUCTS.




We
may produce or sell products which inadvertently have an adverse effect on the
health of individuals despite proper testing which may expose us to potential
product liability claims. Such claims may arise despite our quality controls,
proper testing and instruction for use of our products, either due to a defect
during manufacturing or due to the individual's improper use of the product. In
addition, we may be required to participate in a recall of defective products.
Adverse side effects or manufacturing problems could also result in adverse
publicity which could harm our business.




Existing
PRC laws and regulations do not require us to maintain third party liability
insurance to cover product liability claims. However, if a product liability
claim is brought against us, it may, regardless of merit or eventual outcome,
result in damage to our reputation, breach of contract with our customers,
decreased demand for our products, costly litigation, product recalls, loss of
revenue, and the inability to commercialize some products.




WE
CANNOT GUARANTEE THE PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS AND IF
INFRINGEMENT OF OUR INTELLECTUAL PROPERTY RIGHTS OCCURS, INCLUDING
COUNTERFEITING OF OUR PRODUCTS, OUR REPUTATION AND BUSINESS MAY BE ADVERSELY
AFFECTED.




To
protect the reputation of our products, we have sought to file or register our
intellectual property, as appropriate, in the PRC where we have our primary
business presence. As of December 31, 2008, we had registered 4
trademarks.  Our products are currently sold under these trademarks in
the PRC, and we plan to expand the sale and distribution of our products to
other international markets. We plan to apply for trademark protection of these
and other marks in the United States in connection with the expansion of our
retail drugstores into California. There is no assurance that there will not be
any infringement of our brand name or other registered trademarks or
counterfeiting of our products in the future, in China, the U.S. or elsewhere.
Should any such infringement and/or counterfeiting occur, our reputation and
business may be adversely affected. We may also incur significant expenses and
substantial amounts of time and effort to enforce our trademark rights in the
future. Such diversion of our resources may adversely affect our existing
business and future expansion plans.




IF
OUR PRODUCTS ARE ALLEGED TO OR FOUND TO CONFLICT WITH PATENTS THAT HAVE BEEN OR
MAY BE GRANTED TO COMPETITORS OR OTHERS, OUR REPUTATION AND BUSINESS MAY BE
ADVERSELY AFFECTED.




The
competitive nature of the nutritional and herbal products market make the patent
position of the manufacturers of such products subject to numerous uncertainties
related to complex legal and factual issues. While we currently do not own any
patents or license patents from third parties, other parties could bring legal
actions against us claiming damages and seeking to enjoin manufacturing and
marketing of our products for allegedly conflicting with patents held by them.
Any such litigation could result in substantial cost to us and diversion of
effort by our management and technical personnel. If any such actions are
successful, in addition to any potential liability for damages, we could be
required to obtain a license in order to continue to manufacture or market the
affected products. There can be no assurance that we would prevail in any such
action or that any license required under any such patent would be made
available on acceptable terms, if at all. Failure to obtain needed patents,
licenses or proprietary information held by others may have a material adverse
effect on our business. In addition, if we were to become involved in such
litigation, it could consume a substantial portion of our time and resources.
Also, with respect to licensed technology, there can be no assurance that the
licensor of the technology will have the resources, financial or otherwise, or
desire to defend against any challenges to the rights of such licensor to its
patents.




20




WE
RELY ON TRADE SECRET PROTECTIONS THROUGH CONFIDENTIALITY AGREEMENTS WITH OUR
EMPLOYEES, CUSTOMERS AND OTHER PARTIES; THE BREACH OF SUCH AGREEMENTS COULD
ADVERSELY AFFECT OUR BUSINESS ANDS RESULTS OF OPERATIONS.




We
also rely on trade secrets, which we seek to protect, in part, through
confidentiality and non-disclosure agreements with our employees, customers and
other parties. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any such breach or that our
trade secrets will not otherwise become known to or independently developed by
competitors. To the extent that consultants, key employees or other third
parties apply technological information independently developed by them or by
others to our proposed projects, disputes may arise as to the proprietary rights
to such information that may not be resolved in our favor. We may be involved
from time to time in litigation to determine the enforceability, scope and
validity of our proprietary rights. Any such litigation could result in
substantial cost and diversion of effort by our management and technical
personnel.




THE
FAILURE TO MANAGE GROWTH EFFECTIVELY COULD HAVE AN ADVERSE EFFECT ON OUR
EMPLOYEE EFFICIENCY, PRODUCT QUALITY, WORKING CAPITAL LEVELS, AND RESULTS OF
OPERATIONS.




Any
significant growth in the market for our products or our entry into new markets
may require and expansion of our employee base for managerial, operational,
financial, and other purposes. As of December 31, 2008, we had approximately 642
full time employees. During any growth, we may face problems related to our
operational and financial systems and controls, including quality control and
delivery and service capacities. We would also need to continue to expand, train
and manage our employee base. Continued future growth will impose significant
added responsibilities upon the members of management to identify, recruit,
maintain, integrate, and motivate new employees.




Aside
from increased difficulties in the management of human resources, we may also
encounter working capital issues, as we will need increased liquidity to finance
the purchase of raw materials and supplies, development of new products, and the
hiring of additional employees. For effective growth management, we will be
required to continue improving our operations, management, and financial systems
and control. Our failure to manage growth effectively may lead to operational
and financial inefficiencies that will have a negative effect on our
profitability. We cannot assure investors that we will be able to timely and
effectively meet that demand and maintain the quality standards required by our
existing and potential customers.




WE
ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND LOSS OF THESE KEY PERSONNEL COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.




Our
success is, to a certain extent, attributable to the management, sales and
marketing, and operational and technical expertise of certain key personnel.
Each of the named executive officers performs key functions in the operation of
our business. The loss of a significant number of these employees could have a
material adverse effect upon our business, financial condition, and results of
operations.





WE
ARE DEPENDENT ON A TRAINED WORKFORCE AND AN INABILITY TO RETAIN OR EFFECTIVELY
RECRUIT SUCH EMPLOYEES, INCLUDING IN-STORE PHARMACISTS FOR OUR STORES, COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.





We
must attract, recruit and retain a sizeable workforce of qualified and trained
staff, including in-store pharmacists, in order to operate our retail
drugstores. Applicable PRC regulations require at least one qualified pharmacist
to be stationed in each drugstore to instruct or advise customers on
prescription medications. A shortage of pharmacists in the past few years has
occurred in the past few years due to increasing demand within the drugstore
industry as well as demand from other businesses in the healthcare industry. We
face competition for personnel from other drugstore chains, supermarkets, retail
chains, and pharmaceutical companies. We cannot assure you that we will be able
to attract, hire and retain sufficient numbers of in-store pharmacists necessary
to continue to develop and grow our business.




21




Additionally,
we must recruit and retain technically competent employees to develop and
manufacture our pharmaceutical products. Our ability to implement effectively
our business strategy and expand our operations will depend upon, among other
factors, the successful recruitment and retention of additional highly skilled
and experienced pharmacists and other technical and marketing personnel. There
is significant competition for technologically qualified personnel in our
business and we may not be successful in recruiting or retaining sufficient
qualified personnel consistent with our operational needs.




OUR
QUARTERLY RESULTS MAY FLUCTUATE BECAUSE OF MANY FACTORS AND, AS A RESULT,
INVESTORS SHOULD NOT RELY ON QUARTERLY OPERATING RESULTS AS INDICATIVE OF FUTURE
RESULTS.




Fluctuations
in operating results or the failure of operating results to meet the
expectations of public market analysts and investors may negatively impact the
value of our securities. Quarterly operating results may fluctuate in the future
due to a variety of factors that could affect revenues or expenses in any
particular quarter. Fluctuations in quarterly operating results could cause the
value of our securities to decline. Investors should not rely on
quarter-to-quarter comparisons of results of operations as an indication of
future performance. As a result of the factors listed below, it is possible that
in future periods results of operations may be below the expectations of public
market analysts and investors. This could cause the market price of our
securities to decline. Factors that may affect our quarterly results
include:




·
            vulnerability of our business to
      a general economic downturn in
China;


·
            fluctuation and unpredictability
      of costs related to the raw materials used to manufacture our
      products;


·
            seasonality of our
      business;


·
            changes in the laws of the PRC
      that affect our operations;


·
            competition from our competitors;
      and


·
            Our ability to obtain necessary
      government certifications and/or licenses to conduct our
      business.




OUR
STRATEGY TO ACQUIRE COMPANIES MAY RESULT IN UNSUITABLE ACQUISITIONS OR FAILURE
TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES, WHICH COULD LEAD TO REDUCED
PROFITABILITY.




We
may embark on a growth strategy through acquisitions of companies or operations
that complement existing product lines, customers or other capabilities. We may
be unsuccessful in identifying suitable acquisition candidates, or may be unable
to consummate a desired acquisition. To the extent any future acquisitions are
completed, we may be unsuccessful in integrating acquired companies or their
operations, or if integration is more difficult than anticipated, we may
experience disruptions that could have a material adverse impact on future
profitability. Some of the risks that may affect our ability to integrate, or
realize any anticipated benefits from, acquisitions include:




·
            unexpected losses of key
      employees or customer of the acquired
  company;


·
            difficulties integrating the
      acquired company's standards, processes, procedures and
      controls;


·
            difficulties coordinating new
      product and process
development;


·
            difficulties hiring additional
      management and other critical
personnel;


·
            difficulties increasing the
      scope, geographic diversity and complexity of our
      operations;


·
            difficulties consolidating
      facilities, transferring processes and
  know-how;


·
            difficulties reducing costs of
      the acquired company's
business;


·
            diversion of management's
      attention from our management;
and


·
            adverse impacts on existing
      business relationships with
customers.




22




RISKS
RELATED TO US DOING BUSINESS IN CHINA




SUBSTANTIALLY
ALL OF OUR ASSETS ARE LOCATED IN THE PRC AND SUBSTANTIALLY ALL OF OUR REVENUES
ARE DERIVED FROM OUR OPERATIONS IN CHINA, AND CHANGES IN THE POLITICAL AND
ECONOMIC POLICIES OF THE PRC GOVERNMENT COULD HAVE A SIGNIFICANT IMPACT UPON THE
BUSINESS WE MAY BE ABLE TO CONDUCT IN THE PRC AND ACCORDINGLY ON THE RESULTS OF
OUR OPERATIONS AND FINANCIAL CONDITION.




Our
business operations may be adversely affected by the current and future
political environment in the PRC. The Chinese government exerts substantial
influence and control over the manner in which we must conduct our business
activities. Our ability to operate in China may be adversely affected by changes
in Chinese laws and regulations, including those relating to taxation, import
and export tariffs, raw materials, environmental regulations, land use rights,
property and other matters. Under the current government leadership, the
government of the PRC has been pursuing economic reform policies that encourage
private economic activity and greater economic decentralization. There is no
assurance, however, that the government of the PRC will continue to pursue these
policies, or that it will not significantly alter these policies from time to
time without notice.




OUR
OPERATIONS ARE SUBJECT TO PRC LAWS AND REGULATIONS THAT ARE SOMETIMES VAGUE AND
UNCERTAIN. ANY CHANGES IN SUCH PRC LAWS AND REGULATIONS, OR THE INTERPRETATIONS
THEREOF, MAY HAVE A MATERIAL AND ADVERSE EFFECT ON OUR BUSINESS.




The
PRC's legal system is a civil law system based on written statutes. Unlike the
common law system prevalent in the United States, decided legal cases have
little value as precedent in China. There are substantial uncertainties
regarding the interpretation and application of PRC laws and regulations,
including but not limited to, the laws and regulations governing our business,
or the enforcement and performance of our arrangements with customers in the
event of the imposition of statutory liens, death, bankruptcy or criminal
proceedings. The Chinese government has been developing a comprehensive system
of commercial laws, and considerable progress has been made in introducing laws
and regulations dealing with economic matters such as foreign investment,
corporate organization and governance, commerce, taxation and trade. However,
because these laws and regulations are relatively new, and because of the
limited volume of published cases and judicial interpretation and their lack of
force as precedents, interpretation and enforcement of these laws and
regulations involve significant uncertainties. New laws and regulations that
affect existing and proposed future businesses may also be applied
retroactively.




Our
principal operating subsidiary, Yongxin, is considered a foreign invested
enterprise under PRC laws, and as a result is required to comply with PRC laws
and regulations, including laws and regulations specifically governing the
activities and conduct of foreign invested enterprises. We cannot predict what
effect the interpretation of existing or new PRC laws or regulations may have on
our businesses. If the relevant authorities find us in violation of PRC laws or
regulations, they would have broad discretion in dealing with such a violation,
including, without limitation:




·
            levying
    fines;


·
            revoking our business license,
      other licenses or
authorities;


·
            requiring that we restructure our
      ownership or operations;
and


·
            requiring that we discontinue any
      portion or all of our
business.




THE
SCOPE OF OUR BUSINESS LICENSE IN CHINA IS LIMITED, AND WE MAY NOT EXPAND OR
CONTINUE OUR BUSINESS WITHOUT GOVERNMENT APPROVAL AND RENEWAL,
RESPECTIVELY.




Our
principal operating subsidiary, Yongxin, is a wholly foreign-owned enterprise,
commonly known as a WFOE. A WFOE can only conduct business within its approved
business scope, which ultimately appears on its business license. Our license
permits us to design, manufacture, sell and market pharmaceutical products
throughout the PRC. Any amendment to the scope of our business requires further
application and government approval. In order for us to expand our business
beyond the scope of our license, it will be required to enter into a negotiation
with the authorities for the approval to expand the scope of our business. We
cannot assure investors that Yongxin will be able to obtain the necessary
government approval for any change or expansion of its business.




23




OUR
BUSINESS IS SUBJECT TO A VARIETY OF ENVIRONMENTAL LAWS AND REGULATIONS. OUR
FAILURE TO COMPLY WITH ENVIRONMENTAL LAWS AND REGULATIONS MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.




We
are subject to various environmental laws and regulations that require us to
obtain environmental permits and are subject to registration and inspection by
the SFDA. We have a provincial license issued by the Business Administration
Bureau, Jilin Province. Although we are currently compliant with all provisions
of our registrations and licenses, we cannot assure you that at all times we
will be in compliance with environmental laws and regulations or our
environmental permits or that we will not be required to expend significant
funds to comply with, or discharge liabilities arising under, environmental
laws, regulations and permits. Additionally, we cannot guarantee you that our
licenses and registrations will be renewed. Any non-renewal of any of our
required permits and licenses could result in the termination of our business
operations.




RECENT
PRC REGULATIONS RELATING TO ACQUISITIONS OF PRC COMPANIES BY FOREIGN ENTITIES
MAY CREATE REGULATORY UNCERTAINTIES THAT COULD RESTRICT OR LIMIT OUR ABILITY TO
OPERATE, INCLUDING OUR ABILITY TO PAY DIVIDENDS.




The
PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company controlled by PRC
residents intends to acquire a PRC company, such acquisition will be subject to
strict examination by the relevant foreign exchange authorities. The public
notice also states that the approval of the relevant foreign exchange
authorities is required for any sale or transfer by the PRC residents of a PRC
company's assets or equity interests to foreign entities for equity interests or
assets of the foreign entities.




In
April 2005, SAFE issued another public notice further explaining the January
notice. In accordance with the April notice, if an acquisition of a PRC company
by an offshore company controlled by PRC residents has been confirmed by a
Foreign Investment Enterprise Certificate prior to the promulgation of the
January notice, the PRC residents must each submit a registration form to the
local SAFE branch with respect to their respective ownership interests in the
offshore company, and must also file an amendment to such registration if the
offshore company experiences material events, such as changes in the share
capital, share transfer, mergers and acquisitions, spin-off transaction or use
of assets in China to guarantee offshore obligations. The April notice also
provides that failure to comply with the registration procedures set forth
therein may result in restrictions on our PRC resident shareholders and
subsidiaries. Pending the promulgation of detailed implementation rules, the
relevant government authorities are reluctant to commence processing any
registration or application for approval required under the SAFE
notices.


On August
8, 2006, the PRC Ministry of Commerce ("MOFCOM"), joined by the State-owned
Assets Supervision and Administration Commission of the State Council, the State
Administration of Taxation, the State Administration for Industry and Commerce,
the China Securities Regulatory Commission and SAFE, released a substantially
amended version of the Provisions for Foreign Investors to Merge with or Acquire
Domestic Enterprises (the "Revised M&A Regulations"), which took effect
September 8, 2006. These new rules significantly revised China's regulatory
framework governing onshore-to-offshore restructurings and foreign acquisitions
of domestic enterprises. These new rules signify greater PRC government
attention to cross-border merger, acquisition and other investment activities,
by confirming MOFCOM as a key regulator for issues related to mergers and
acquisitions in China and requiring MOFCOM approval of a broad range of merger,
acquisition and investment transactions. Further, the new rules establish
reporting requirements for acquisition of control by foreigners of companies in
key industries, and reinforce the ability of the Chinese government to monitor
and prohibit foreign control transactions in key industries.




These
new rules may significantly affect the means by which offshore-onshore
restructurings are undertaken in China in connection with offshore private
equity and venture capital financings, mergers and acquisitions. It is expected
that such transactional activity in China in the near future will require
significant case-by-case guidance from MOFCOM and other government authorities
as appropriate. It is anticipated that application of the new rules will be
subject to significant administrative interpretation, and we will need to
closely monitor how MOFCOM and other ministries apply the rules to ensure its
domestic and offshore activities continue to comply with PRC law. Given the
uncertainties regarding interpretation and application of the new rules, we may
need to expend significant time and resources to maintain
compliance.




24




It is uncertain how our business
operations or future strategy will be affected by the interpretations and
implementation of the SAFE notices and new rules. Our business operations or
future strategy could be adversely affected by the SAFE notices and the new
rules. For example, we may be subject to more stringent review and approval
process with respect to our foreign exchange activities.




THE
FOREIGN CURRENCY EXCHANGE RATE BETWEEN U.S. DOLLARS AND RENMINBI COULD ADVERSELY
AFFECT OUR FINANCIAL CONDITION.




To
the extent that we need to convert U.S. Dollars into Renminbi for our
operational needs, our financial position and the price of our common stock may
be adversely affected should the Renminbi appreciate against the U.S. Dollar at
that time. Conversely, if we decide to convert our Renminbi into U.S. Dollars
for the operational needs or paying dividends on our common stock, the dollar
equivalent of our earnings from our subsidiaries in China would be reduced
should the U.S. Dollar appreciate against the Renminbi.




Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including dollars, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative to
the U.S. Dollar has remained stable and has appreciated slightly against the
U.S. Dollar. Countries, including the United States, have argued that the
Renminbi is artificially undervalued due to China's current monetary policies
and have pressured China to allow the Renminbi to float freely in world markets.
In July 2005, the PRC government changed its policy of pegging the value of the
Renminbi to the U.S. Dollar. Under the new policy, the Renminbi is permitted to
fluctuate within a narrow and managed band against a basket of designated
foreign currencies. While the international reaction to the Renminbi revaluation
has generally been positive, there remains significant international pressure on
the PRC government to adopt an even more flexible currency policy, which could
result in further and more significant appreciation of the Renminbi against the
dollar.




FAILURE
TO COMPLY WITH THE UNITED STATES FOREIGN CORRUPT PRACTICES ACT COULD SUBJECT US
TO PENALTIES AND OTHER ADVERSE CONSEQUENCES.




As
our ultimate holding company is a Delaware corporation, we are subject to the
United States Foreign Corrupt Practices Act, which generally prohibits United
States companies from engaging in bribery or other prohibited payments to
foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some that may compete with us, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices may occur from time-to-time in the PRC. We can make no
assurance, however, that our employees or other agents will not engage in such
conduct for which we might be held responsible. If our employees or other agents
are found to have engaged in such practices, we could suffer severe penalties
and other consequences that may have a material adverse effect on our business,
financial condition and results of operations.




IF
WE MAKE EQUITY COMPENSATION GRANTS TO PERSONS WHO ARE PRC CITIZENS, THEY MAY BE
REQUIRED TO REGISTER WITH THE STATE ADMINISTRATION OF FOREIGN EXCHANGE OF THE
PRC, OR SAFE. WE MAY ALSO FACE REGULATORY UNCERTAINTIES THAT COULD RESTRICT OUR
ABILITY TO ADOPT AN EQUITY COMPENSATION PLAN FOR OUR DIRECTORS AND EMPLOYEES AND
OTHER PARTIES UNDER PRC LAW.




On
April 6, 2007, SAFE issued the "Operating Procedures for Administration of
Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock
Option Plan of An Overseas Listed Company, also know as "Circular 78." It is not
clear whether Circular 78 covers all forms of equity compensation plans or only
those which provide for the granting of stock options. For any plans which are
so covered and are adopted by a non-PRC listed company after April 6, 2007,
Circular 78 requires all participants who are PRC citizens to register with and
obtain approvals from SAFE prior to their participation in the plan. In
addition, Circular 78 also requires PRC citizens to register with SAFE and make
the necessary applications and filings if they participated in an overseas
listed company's covered equity compensation plan prior to April 6, 2007. We
intend to adopt an equity compensation plan in the future and make option grants
to our officers and directors, most of who are PRC citizens. Circular 78 may
require our officers and directors who receive option grants and are PRC
citizens to register with SAFE. We believe that the registration and approval
requirements contemplated in Circular 78 will be burdensome and time consuming.
If it is determined that any of our equity compensation plans are subject to
Circular 78, failure to comply with such provisions may subject us and
participants of our equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent us from being able to grant equity compensation to
our PRC employees. In that case, our ability to compensate our employees and
directors through equity compensation would be hindered and our business
operations may be adversely affected.




25




ANY
RECURRENCE OF SEVERE ACUTE RESPIRATORY SYNDROME (SARS), AVIAN FLU, OR ANOTHER
WIDESPREAD PUBLIC HEALTH PROBLEM, IN THE PRC COULD ADVERSELY AFFECT OUR
OPERATIONS.




A
renewed outbreak of SARS, Avian Flu or another widespread public health problem
in China, where all of our manufacturing facilities are located and where the
substantial portion of our sales occur, could have a negative effect on our
operations. Our business is dependent upon its ability to continue to
manufacture products. Such an outbreak could have an impact on our operations as
a result of:




·
            quarantines or closures of some
      of our manufacturing facilities, which would severely disrupt our
      operations,


·
            the sickness or death of our key
      officers and employees, and


·
            a general slowdown in the Chinese
      economy.




Any
of the foregoing events or other unforeseen consequences of public health
problems could adversely affect our operations.




A
DOWNTURN IN THE ECONOMY OF THE PRC MAY SLOW OUR GROWTH AND
PROFITABILITY.





The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors.  There can be no assurance that growth of the
Chinese economy will be steady or that any further downturn will not have a
negative effect on our business, especially if it results in either a decreased
use of our products or in pressure on us to lower our prices.





BECAUSE
OUR BUSINESS IS LOCATED IN THE PRC, WE MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE
MANAGEMENT, LEGAL AND FINANCIAL CONTROLS, WHICH IT IS REQUIRED TO DO IN ORDER TO
COMPLY WITH U.S. SECURITIES LAWS.




PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. Most of our middle and top management staff are not educated and
trained in the Western system, and we may difficulty hiring new employees in the
PRC with such training. In addition, we may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the PRC. As a
result of these factors, we may experience difficulty in establishing
management, legal and financial controls, collecting financial data and
preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards. Therefore, we may,
in turn, experience difficulties in implementing and maintaining adequate
internal controls as required under Section 404 of the Sarbanes-Oxley Act of
2002. This may result in significant deficiencies or material weaknesses in our
internal controls which could impact the reliability of its financial statements
and prevent us from complying with SEC rules and regulations and the
requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies,
weaknesses or lack of compliance could have a materially adverse effect on our
business.




26




INVESTORS
MAY EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS, ENFORCING
FOREIGN JUDGMENTS OR BRINGING ORIGINAL ACTIONS IN CHINA BASED UPON U.S. LAWS,
INCLUDING THE FEDERAL SECURITIES LAWS OR OTHER FOREIGN LAWS AGAINST US OR OUR
MANAGEMENT.




Most
of our current operations, including the manufacturing and distribution of our
products, are conducted in China. Moreover, all but one of our directors and
officers are nationals and residents of China or Hong Kong. All or substantially
all of the assets of these persons are located outside the United States and in
the PRC. As a result, it may not be possible to effect service of process within
the United States or elsewhere outside China upon these persons. In addition,
uncertainty exists as to whether the courts of China would recognize or enforce
judgments of U.S. courts obtained against us or such officers and/or directors
predicated upon the civil liability provisions of the securities laws of the
United States or any state thereof, or be competent to hear original actions
brought in China against us or such persons predicated upon the securities laws
of the United States or any state thereof.




RISKS
RELATED TO OUR CAPITAL STRUCTURE




IF
WE ARE FOUND TO BE IN VIOLATION OF CURRENT OR FUTURE PRC LAWS, RULES OR
REGULATIONS REGARDING THE LEGALITY OF FOREIGN INVESTMENT IN THE PRC WITH RESPECT
TO OUR OWNERSHIP STRUCTURE, WE COULD BE SUBJECT TO SEVERE
PENALTIES.




We
conduct business operations solely in the PRC through our wholly owned
subsidiary, Yongxin, and our 90% owned subsidiary, Dingjian. We are a Delaware
corporation, most of our direct and indirect subsidiaries are companies
organized under the laws of the PRC. We are considered a foreign person or
foreign invested enterprise under PRC law. As a result, we are subject to PRC
law limitations on foreign ownership of Chinese companies. There are substantial
uncertainties regarding the interpretation and application of PRC laws and
regulations, including, but not limited to, the laws and regulations governing
our pharmaceutical distribution and retail drugstore businesses.




Accordingly,
it is possible that the relevant PRC authorities could, at any time, assert that
any portion of our existing or future ownership structure and businesses violate
existing or future PRC laws, regulations or policies. It is also possible that
the new laws or regulations governing our business operations in the PRC that
have been adopted or may be adopted in the future will prohibit or restrict
foreign investment in, or other aspects of, any of our PRC subsidiaries' and our
current or proposed businesses and operations. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental
reliance by foreign investors. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively.




The PRC
government has broad discretion in dealing with violations of laws and
regulations, including:




·
            levying
    fines;


·
            confiscating our
      income;


·
            revoking business and other
      licenses;


·
            requiring us to discontinue any
      portion or all of our
business;


·
            requiring us to restructure our
      ownership structure or operations;
and


·
            requiring actions necessary for
      compliance.




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




27




WE
MAY BE ADVERSELY AFFECTED BY COMPLEXITY, UNCERTAINTIES AND CHANGES IN PRC
REGULATION OF PHARMACEUTICAL BUSINESSES AND DRUGSTORE COMPANIES, INCLUDING
LIMITATIONS ON OUR ABILITY TO OWN KEY ASSETS.




The
PRC government regulates the pharmaceutical and drugstore industries including
foreign ownership of, and the licensing and permit requirements pertaining to,
companies operating in these industries. These laws and regulations are
relatively new and evolving, and their interpretation and enforcement involve
significant uncertainty. As a result, in certain circumstances it may be
difficult to determine what actions or omissions may be deemed to be a violation
of applicable laws and regulations. Issues, risks and uncertainties relating to
PRC government regulation of the pharmaceutical industry include those relating
evolving licensing practices. Permits, licenses or operations at our company may
be subject to challenge, which may disrupt our business, or subject us to
sanctions, requirements to increase capital or other conditions or enforcement,
or compromise enforceability of related contractual arrangements, or have other
harmful effects on us. Although we believe we comply with current PRC
regulations, we cannot assure you that our ownership and operating structure
comply with PRC licensing, registration or other regulatory requirements, with
existing policies or with requirements or policies that may be adopted in the
future. If the PRC government determines that we do not comply with applicable
law, it could take other regulatory or enforcement actions against us that could
be harmful to our business.




THERE
IS CURRENTLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK, AND THERE IS NO
ASSURANCE OF A MORE ESTABLISHED PUBLIC TRADING MARKET, WHICH WOULD ADVERSELY
AFFECT THE ABILITY OF OUR INVESTORS TO SELL THEIR SECURITIES IN THE PUBLIC
MARKET.




While,
our common stock is currently listed on the Over-the-Counter Bulletin Board
("OTCBB"), there is currently a very limited trading market for our common
stock. The Financial Industry Regulatory Authority has enacted changes that
limit quotations on the OTCBB to securities of issuers that are current in their
reports filed with the Securities and Exchange Commission. The effect on the
OTCBB of these rule changes and other proposed changes cannot be determined at
this time. The OTCBB is an inter-dealer, over-the-counter market that provides
significantly less liquidity than the NASDAQ Global Market (the "NASDAQ Global
Market"). Quotes for stocks included on the OTCBB are not listed in the
financial sections of newspapers as are those for the NASDAQ Global Market.
Therefore, prices for securities traded solely on the OTCBB may be difficult to
obtain and holders of common stock may be unable to resell their securities at
or near their original offering price or at any price.




Market
prices for our common stock after the Share Exchange will be influenced by a
number of factors, including:




·
            Our ability to obtain additional
      financing and, if available, the terms and conditions of the
      financing;


·
            Our financial position and
      results of operations;


·
            Concern as to, or other evidence
      of, the reliability and safety of our products and services or our
      competitors' products and
services;




·
            Announcements of innovations or
      new products or services by us or our
  competitors;


·
            U.S. federal and state
      governmental regulatory actions and the impact of such requirements on our
      business;




·
            Chinese governmental regulatory
      actions and the impact of such requirements on our
      business;


·
            The development of litigation
      against us;


·
            Period-to-period fluctuations in
      our operating results;


·
            Changes in estimates of our
      performance by any securities
analysts;


·
            The issuance of new equity
      securities pursuant to a future offering or
      acquisition;


·
            Changes in interest rates and/or
      foreign currency exchange
rates;




28




·
            Competitive developments,
      including announcements by competitors of new products or services or
      significant contracts, acquisitions, strategic partnerships, joint
      ventures or capital
commitments;




·
            Investor perceptions of us;
      and


·
            General economic and other
      national and international
conditions.




SHARES
ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
STOCK, AS THE FUTURE SALE OF A SUBSTANTIAL AMOUNT OF OUTSTANDING STOCK IN THE
PUBLIC MARKETPLACE COULD REDUCE THE PRICE OF OUR COMMON STOCK.




We
may file a registration statement to register the shares issued to the Yongxin
shareholders pursuant to the Share Exchange. All of the shares included in an
effective registration statement as described above may be freely sold and
transferred except if subject to a lock up agreement.




The
shareholders who received shares of our common stock in the Share Exchange
and/or their designees may be eligible to sell all or some of our shares of
common stock by means of ordinary brokerage transactions in the open market
pursuant to Rule 144, promulgated under the Securities Act ("Rule 144"), subject
to certain limitations. In general, pursuant to Rule 144, a non-affiliate
stockholder (or stockholders whose shares are aggregated) who has satisfied a
six-month holding period, and provided that there is current public information
available, may sell all of its securities. Rule 144 also permits the sale of
securities, without any limitations, by a non-affiliate that has satisfied a
one-year holding period. Any substantial sale of common stock pursuant to any
resale prospectus or Rule 144 may have an adverse effect on the market price of
our common stock by creating an excessive supply.




FOLLOWING
THE SHARE EXCHANGE, THE FORMER PRINCIPAL SHAREHOLDERS OF YONGXIN HAVE
SIGNIFICANT INFLUENCE OVER US.




The
former shareholders of Yongxin and their designees beneficially own or control a
majority of our outstanding shares as of December 31, 2008. If these
stockholders were to act as a group, they would have a controlling influence in
determining the outcome of any corporate transaction or other matters submitted
to our stockholders for approval, including mergers, consolidations and the sale
of all or substantially all of our assets, election of directors, and other
significant corporate actions. Such shareholders may also have the power to
prevent or cause a change in control. In addition, without the consent of the
former Yongxin shareholders, we could be prevented from entering into
transactions that could be beneficial to us. The interests of the former Yongxin
shareholders may differ from the interests of our other
stockholders.




IF
WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING, THE
PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED.




We
are required to establish and maintain appropriate internal controls over
financial reporting. Failure to establish those controls, or any failure of
those controls once established, could adversely impact our public disclosures
regarding our business, financial condition or results of operations. Any
failure of these controls could also prevent us from maintaining accurate
accounting records and discovering accounting errors and financial frauds. Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of this assessment by our independent registered public accountants.
The SEC extended the compliance dates for non-accelerated filers, as defined by
the SEC. Accordingly, we believe that the annual assessment of our internal
controls requirement has first applied to our annual report for the 2007 fiscal
year and the attestation requirement of management's assessment by our
independent registered public accountants has first applied to our annual report
for the 2008 fiscal year. The standards that must be met for management to
assess the internal control over financial reporting as effective are new and
complex, and require significant documentation, testing and possible remediation
to meet the detailed standards. We may encounter problems or delays in
completing activities necessary to make an assessment of our internal control
over financial reporting. In addition, the attestation process by our
independent registered public accountants is new and we may encounter problems
or delays in completing the implementation of any requested improvements and
receiving an attestation of our assessment by our independent registered public
accountants. If we cannot assess our internal control over financial reporting
as effective, or our independent registered public accountants are unable to
provide an unqualified attestation report on such assessment, investor
confidence and share value may be negatively impacted.




29




In
addition, management's assessment of internal controls over financial reporting
may identify weaknesses and conditions that need to be addressed in our internal
controls over financial reporting or other matters that may raise concerns for
investors. Any actual or perceived weaknesses and conditions that need to be
addressed in our internal control over financial reporting, disclosure of
management's assessment of our internal controls over financial reporting, or
disclosure of our public accounting firm's attestation to or report on
management's assessment of our internal controls over financial reporting may
have an adverse impact on the price of our common stock.




THE
FOREIGN CURRENCY EXCHANGE RATE BETWEEN U.S. DOLLARS AND RENMINBI COULD ADVERSELY
AFFECT OUR FINANCIAL CONDITION.




To
the extent that we need to convert U.S. Dollars into Renminbi for our
operational needs, our financial position and the price of our common stock may
be adversely affected should the Renminbi appreciate against the U.S. Dollar at
that time. Conversely, if we decide to convert our Renminbi into U.S. Dollars
for our operational needs or paying dividends on our common stock, the U.S.
Dollar equivalent of our earnings from our subsidiaries in China would be
reduced should the U.S. Dollar appreciate against the Renminbi.




Until
1994, the Renminbi experienced a gradual but significant devaluation against
most major currencies, including dollars, and there was a significant
devaluation of the Renminbi on January 1, 1994 in connection with the
replacement of the dual exchange rate system with a unified managed floating
rate foreign exchange system. Since 1994, the value of the Renminbi relative to
the U.S. Dollar has remained stable and has appreciated slightly against the
U.S. Dollar. Countries, including the United States, have argued that the
Renminbi is artificially undervalued due to China's current monetary policies
and have pressured China to allow the Renminbi to float freely in world markets.
In July 2005, the PRC government changed its policy of pegging the value of the
Renminbi to the dollar. Under the new policy the Renminbi is permitted to
fluctuate within a narrow and managed band against a basket of designated
foreign currencies. While the international reaction to the Renminbi revaluation
has generally been positive, there remains significant international pressure on
the PRC government to adopt an even more flexible currency policy, which could
result in further and more significant appreciation of the Renminbi against the
dollar.




WE
MAY NOT BE ABLE TO ACHIEVE THE FULL EXTENT OF THE BENEFITS WE EXPECT FROM THE
SHARE EXCHANGE.




On
April 12, 2008, we entered into the Second Amendment to the Share Exchange
Agreement with Yongxin, effective November 16, 2007, and all of the shareholders
of Yongxin, pursuant to which we agreed to acquire 80% of the issued and
outstanding equity interest of Yongxin in exchange for shares of our common
stock. On November 16, 2007, the Share Exchange closed, Yongxin became our
80%-owned subsidiary and we assumed the business operations Yongxin. We also
have a new Board of Directors and management consisting of persons from Yongxin
and changed our corporate name from "Digital Learning Management Corporation" to
"Nutradyne Group, Inc."




We
may not realize the full extent of the benefits that we hoped to receive as a
result of the Share Exchange, which include:




·
            access to the capital markets of
      the United States;


·
            the increased market liquidity
      expected to result from exchanging stock in a private company for
      securities of a public
company;




·
            the ability to use registered
      securities to make acquisitions of assets or
      businesses;


·
            increased visibility in the
      financial community;


·
            enhanced access to the capital
      markets;


·
            improved transparency of
      operations; and


·
            perceived credibility and
      enhanced corporate image of being a publicly traded
      company.




30




There
can be no assurance that any of the anticipated benefits of the Share Exchange
will be realized in respect to our new business operations. In addition, the
attention and effort devoted to achieving the benefits of the Share Exchange and
attending to the obligations of being a public company, such as reporting
requirements and securities regulations, could significantly divert management's
attention from other important issues, which could materially and adversely
affect our operating results or stock price in the future.




COMPLIANCE
WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE WILL
RESULT IN ADDITIONAL EXPENSES.




Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets and
public reporting. Our management team will need to invest significant management
time and financial resources to comply with both existing and evolving standards
for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue
generating activities to compliance activities.




OUR
COMMON STOCK IS CONSIDERED A "PENNY STOCK," AND THEREBY IS SUBJECT TO ADDITIONAL
SALE AND TRADING REGULATIONS THAT MAY MAKE IT MORE DIFFICULT TO
SELL.




Our
common stock is currently considered to be a "penny stock" because it does not
qualify for one of the exemptions from the definition of "penny stock" under
Section 3a51-1 of the Securities Exchange Act for 1934, as amended (the
"Exchange Act"). Our common stock is considered a "penny stock" because it meets
one or more of the following conditions (i) the stock trades at a price less
than $5.00 per share; (ii) it is NOT traded on a "recognized" national exchange;
(iii) it is NOT quoted on the NASDAQ Capital Market, or even if so, has a price
less than $5.00 per share; or (iv) is issued by a company that has been in
business less than three years with net tangible assets less than $5
million.




The
principal result or effect of being designated a "penny stock" is that
securities broker-dealers participating in sales of our common stock will be
subject to the "penny stock" regulations set forth in Rules 15-2 through 15g-9
promulgated under the Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document at least two business days before
effecting any transaction in a penny stock for the investor's account. Moreover,
Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any
investor for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.




WE
DO NOT FORESEE PAYING CASH DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS A RESULT,
OUR INVESTORS' SOLE SOURCE OF GAIN, IF ANY, WILL DEPEND ON CAPITAL APPRECIATION,
IF ANY.




We
do not plan to declare or pay any cash dividends on our shares of common stock
in the foreseeable future and currently intend to retain any future earnings for
funding growth. As a result, investors should not rely on an investment in our
securities if they require the investment to produce dividend income. Capital
appreciation, if any, of our shares may be investors' sole source of gain for
the foreseeable future. Moreover, investors may not be able to resell their
shares of our common stock at or above the price they paid for
them.




31




ITEM
1B. UNRESOLVED STAFF COMMENTS




Not
applicable.




ITEM
2. PROPERTIES




Our corporate headquarters are located
in the City of Industry, California in the United States at 927 Canada Court,
City of Industry, CA 91748. We also lease office space in the in the Jilin
Province under a lease that expires on June 30, 2020.




We
currently operate one national distribution center located in Changchun that
provides us with 43,000 square meters of storage space. We lease our
distribution center under a long-term lease agreement that expires in 2020 and
do not anticipate any material difficulties in renewing our lease upon its
expiration.




Currently,
all of our retail drugstores are located in the PRC. We lease substantially all
of our store locations from various third-parties under a total of 84 leases
with terms ranging from month-to-month to 5 years, which are renewed upon
expiration. The total combined space for our retail stores consisted of 11,868
square meters.  We must negotiate with the landlords to extend our
leases or enter into new leases upon their expiration, at which time the
landlords may request a rent increase. Under applicable PRC law, we have
priority over other potential lessees with respect to the leased store space on
the same terms. Our retail stores are relatively small in size and are generally
easily movable to new locations. We do not expect our drugstore operations to be
adversely affected by any failure to renew or enter into new
leases.




ITEM
3. LEGAL PROCEEDINGS





On
or about October 17, 2008, in a case called Craig
Nagasugi v. Digital Learning Management Corporation, et al.,a former officer initiated
an action in the Superior Court for the State of California, County of Los
Angeles, Central District, against the Company alleging claims for damages
related to an alleged employment agreement.  On December 29, 2008, the
Company filed an Answer to the Complaint.  The Company strongly
disputes the claims and is diligently defending against them. The matter is
presently in the discovery stage and has been set for trial to commence on
October 6, 2009.





Under
Allaudin
Jinnah v. China Yongxin Pharmaceuticals, Inc., filed in Los Angeles
Superior Court, Central Judicial District, on or about June 27, 2008, the
Company is defending itself against claims for open account and intentional
misrepresentation.  The Plaintiff is seeking past due attorneys’ fees
for services rendered in the amount of $193,100.  The Plaintiff is
also seeking 67,000 shares of the Company’s common stock. The Company’s
management has indicated willingness to settle this matter
out-of-court.





The
Company is also involved in an ongoing legal proceeding called Wells
Fargo Bank. N.A.. v. Software Education for America Inc. filed in Orange
County Superior Court on or about November 9, 2004.  In this action,
the Cross-Complainant, Terry Koosed, is seeking to amend a $219,000 judgment he
obtained to include a subsidiary of the predecessor-in-interest of the Company,
which was not named or a participant in such lawsuit.  The Company
strongly disputes the alleged claims and is aggressively defending
such action.





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





None.




32




PART
II




ITEM 5.  MARKET FOR
REGISTRANT’S COMMON STOCK,RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES





Market
Price for Common Equity





Our
common stock is currently quoted on the OTC Bulletin Board under the symbol
“CYXN.” As of December 31, 2008, we had 38 stockholders of record of our
common stock and 2 stockholders of record of our Series A Preferred Stock. The
number of registered shareholders excludes any estimate by us of the number of
beneficial owners of common shares held in street name. The following table sets
forth the high and low bid information for the common stock for each quarter
within the last two fiscal years, as reported by the OTC Bulletin Board. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.




Low
                            
                            
                            High2008Quarter
      ended December 31, 2008
                            
                            $
                            0.05
                            
                            
                            $
                            0.59Quarter
      ended September 30, 2008
                            
                            $
                            0.41
                            
                            
                            $
                            1.40Quarter
      ended June 30, 2008
                            
                            $
                            0.40
                            
                            
                            $
                            1.53Quarter
      ended March 31, 2008
                            
                            $
                            0.93
                            
                            
                            $
                            1.722007Quarter
      ended December 31, 2007
                            
                            $
                            1.55
                            
                            
                            $
                            1.55Quarter
      ended September 30, 2007
                            
                            $
                            0.04
                            
                            
                            $
                            0.09Quarter
      ended June 30, 2007
                            
                            $
                            0.02
                            
                            
                            $
                            0.07Quarter
      ended March 31, 2007
                            
                            $
                            0.06
                            
                            
                            $
                            0.07




On
March 31, 2009, the closing sale price of our common stock on the OTC Bulletin
Board was $0.22 per share. The price of our common stock will likely fluctuate
in the future. The stock market in general has experienced extreme stock price
fluctuations in the past few years. In some cases, these fluctuations have been
unrelated to the operating performance of the affected companies. Many companies
have experienced dramatic volatility in the market prices of their common stock.
We believe that a number of factors, both within and outside our control, could
cause the price of our common stock to fluctuate, perhaps substantially. Factors
such as the following could have a significant adverse impact on the market
price of our common stock:





·
            Our ability to obtain additional
      financing and, if available, the terms and conditions of the
      financing;


·
            Our financial position and
      results of operations;


·
            Concern as to, or other evidence
      of, the reliability and safety of our products and services or our
      competitors’ products and
services;


·
            Announcements of innovations or
      new products or services by us or our
  competitors;


·
            U.S. federal and state
      governmental regulatory actions and the impact of such requirements on our
      business;


·
            Chinese governmental regulatory
      actions and the impact of such requirements on our
      business;


·
            The outcome of legal claims
      against us;


·
            Period-to-period fluctuations in
      our operating results;


·
            Changes in estimates of our
      performance by any securities
analysts;


·
            The issuance of new equity
      securities pursuant to a future offering or
      acquisition;


·
            Changes in applicable interest
      rates;


·
            Competitive developments,
      including announcements by competitors of new products or services or
      significant contracts, acquisitions, strategic partnerships, joint
      ventures or capital
commitments;


·
            Investor perceptions of us;
      and


·
            General economic and other
      national conditions.




33




DIVIDEND POLICY





We
do not expect to declare or pay any cash dividends on our common stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in its
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant.  We did not pay any cash dividends during the years ended
December 31, 2008 or 2007.




Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China are required to set aside at least 10.0% of
their after-tax profit based on PRC accounting standards each year to its
general reserves until the accumulative amount of such reserves reach 50.0% of
its registered capital. These reserves are not distributable as cash dividends.
The board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.




ITEM
6. SELECTED CONSOLIDATED FINANCIAL DATA




Not
applicable.




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




The
following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this
report.  This report contains forward-looking
statements.  The words “anticipated,” “believe,” “expect,” “plan,”
“intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions
are intended to identify forward-looking statements.  These statements
include, among others, information regarding future operations, future capital
expenditures, and future net cash flow.  Such statements reflect our
management’s current views with respect to future events and financial
performance and involve risks and uncertainties, including, without limitation,
general economic and business conditions, changes in foreign, political, social,
and economic conditions, regulatory initiatives and compliance with government
regulations, the ability to achieve further market penetration and additional
customer, and various other matters, any of which are beyond our
control.  Should one or more of these risks and uncertainties occur,
or should underlying assumptions prove to be incorrect, actual results may vary
materially and adversely from those anticipated, believed, estimated or
otherwise indicated.  Consequently, all of the forward-looking
statements made in this report are qualified by these cautionary statements and
there can be no assurance of the actual results or developments.  CRITICAL ACCOUNTING POLICIES AND
ESTIMATES




The
SEC defines critical accounting policies as those that are, in management's
view, most important to the portrayal of our financial condition and results of
operations and those that require significant judgments and
estimates.




The
preparation of these consolidated financial statements requires our management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as the disclosure of contingent
assets and liabilities at the date of our financial statements. We base our
estimates on historical experience, actuarial valuations and various other
factors that we believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Some of those
judgments can be subjective and complex and, consequently, actual results may
differ from these estimates under different assumptions or conditions. While for
any given estimate or assumption made by our management there may be other
estimates or assumptions that are reasonable, we believe that, given the current
facts and circumstances, it is unlikely that applying any such other reasonable
estimate or assumption would materially impact the financial statements. The
accounting principles we utilized in preparing our consolidated financial
statements conform in all material respects to generally accepted accounting
principles in the United States of America.




USE OF
ESTIMATES. The preparation of financial statements in conformity with generally
accepted accounting principles in the United States (“GAAP”) requires management
to make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ
from those estimates.  Significant estimates include collectability of
accounts receivable, accounts payable, sales returns and recoverability of
long-term assets.




34




ACCOUNTS
RECEIVABLE. The Company maintains reserves for potential credit losses on
accounts receivable. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. Reserves are recorded primarily on a
specific identification basis. As of December 31, 2008 and 2007, allowance for
doubtful debts amounted to $112,452 and $331,475, respectively.




INVENTORIES.
Inventories are valued at the lower of weighted average cost or market
basis.   Inventory includes product cost, inbound freight,
warehousing costs and vendor allowances not included as a reduction of
advertising expense. The Management compares the cost of inventories with the
market value and allowance is made for writing down their inventories to market
value, if lower. Work in process inventories include the cost of raw materials
and outsource processing fees.




IMPAIRMENT
OF LONG LIVED ASSETS. Effective January 1, 2002, the Company adopted Statement
of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of,” and the accounting and reporting
provisions of APB Opinion No. 30, “Reporting the Results of Operations for a
Disposal of a Segment of a Business.” The Company periodically evaluates the
carrying value of long-lived assets to be held and used in accordance with SFAS
144. SFAS 144 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets’ carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined in
a similar manner, except that fair market values are reduced for the cost of
disposal.




REVENUE
RECOGNITION. The Company’s revenue recognition policies are in compliance with
Staff accounting bulletin (SAB) 104. Sales revenue is recognized at the date of
shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. The Company recognizes
revenue net of an allowance for estimated returns, at the time the merchandise
is sold or services performed. The allowance for sales returns is estimated
based on the Company’s historical experience. Sales taxes are presented on a net
basis (excluded from revenues and costs). Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.





INCOME
TAXES. The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax basis of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.




The
Company accounts for income taxes using an asset and liability approach which
allows for the recognition and measurement of deferred tax assets based upon the
likelihood of realization of tax benefits in future years. Under the asset and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future deductibility is uncertain.




The
Company records a valuation allowance for deferred tax assets, if any, based on
its estimates of its future taxable income as well as its tax planning
strategies when it is more likely than not that a portion or all of its deferred
tax assets will not be realized. If the Company is able to utilize more of its
deferred tax assets than the net amount previously recorded when unanticipated
events occur, an adjustment to deferred tax assets would increase the Company
net income when those events occur. The Company does not have any significant
deferred tax asset or liabilities in the PRC tax jurisdiction.




35




FOREIGN
CURRENCY TRANSLATION. The Company uses the United States dollar ("U.S. dollars")
for financial reporting purposes. The Company maintains books and records in
their functional currency, being the primary currency of the economic
environment in which the operations are conducted. In general, the Company
translates the assets and liabilities into U.S. dollars using the applicable
exchange rates prevailing at the balance sheet date, and the statement of income
is translated at average exchange rates during the reporting period. Gain or
loss on foreign currency transactions are reflected on the income statement.
Gain or loss on financial statement translation from foreign currency are
recorded as a separate component in the equity section of the balance sheet, as
component of comprehensive income in accordance with SFAS No. 130, "Reporting
Comprehensive Income" as a component of shareholders' equity. During the years
ended December 31, 2008 and 2007 other comprehensive income includes translation
gain of $824,961 and $590,885, respectively.




FAIR
VALUE OF FINANCIAL INSTRUMENTS. Statement of financial accounting standard No.
107, Disclosures about fair value of financial instruments, requires that the
Company disclose estimated fair values of financial instruments. The carrying
amounts reported in the statements of financial position for current assets and
current liabilities qualifying as financial instruments are a reasonable
estimate of fair value.




STOCK
BASED COMPENSATION. In December 2004, the FASB issued SFAS No. 123
(revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), which requires the
measurement of all employee share-based payments to employees, including grants
of employee stock options, using a fair-value-based method and the recording of
such expense in the consolidated statements of operations. In March 2005, the
SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the
SEC’s interpretation of SFAS 123R and the valuation of share-based payments for
public companies. The Company has adopted SFAS 123R and related FASB Staff
Positions (“FSPs”) as of January 01, 2006 and will recognize stock-based
compensation expense using the modified prospective method.




NEW
ACCOUNTING PRONOUNCEMENTS.  In December 2007, the FASB issued SFAS No.
160, “Noncontrolling Interests in Consolidated Financial Statements”, which is
an amendment of Accounting Research Bulletin (“ARB”) No. 51.  This
statement clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements.  This statement changes the
way the consolidated income statement is presented, thus requiring consolidated
net income to be reported at amounts that include the amounts attributable to
both parent and the noncontrolling interest.  This statement is
effective for the fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008.  Based on current conditions,
the Company does not expect the adoption of SFAS 160 to have a significant
impact on its results of operations or financial position.




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.”  This statement replaces FASB Statement No. 141,
“Business Combinations.” This statement retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. This statement defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. This statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS 160 to have
a significant impact on its results of operations or financial
position.




In March,
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows.




36




FASB
Statement No. 161 achieves these improvements by requiring disclosure of the
fair values of derivative instruments and their gains and losses in a tabular
format. It also provides more information about an entity’s liquidity by
requiring disclosure of derivative features that are credit risk–related.
Finally, it requires cross-referencing within footnotes to enable financial
statement users to locate important information. Based on current conditions,
the Company does not expect the adoption of SFAS 161 to have a significant
impact on its results of operations or financial position.




In May of
2008, FASB issued SFASB No.162, The Hierarchy of Generally Accepted Accounting
Principles.  The pronouncement mandates the GAAP hierarchy reside in
the accounting literature as opposed to the audit literature.  This
has the practical impact of elevating FASB Statements of Financial Accounting
Concepts in the GAAP hierarchy.  This pronouncement will become
effective 60 days following SEC approval.  The Company does not
believe this pronouncement will impact its financial statements.




In May of
2008, FASB issued SFASB No. 163, Accounting for Financial Guarantee Insurance
Contracts-an interpretation of FASB Statement No. 60.  The scope of
the statement is limited to financial guarantee insurance (and reinsurance)
contracts.  The pronouncement is effective for fiscal years beginning
after December 31, 2008.  The company does not believe this
pronouncement will impact its financial statements.




RESULTS
OF OPERATIONS




Comparison of Years Ended December
31, 2008 and December 31, 2007.




The
following table sets forth the results of our operations for the periods
indicated:




Year Ended
              
              
              Year EndedDecember 31,
              
              
              December 31,2008
              
              
              2007Net
      Revenue
              
              $
              59,123,256
              
              
              $
              47,892,833Cost
      of Revenue
              
              
              47,227,334
              
              
              
              39,898,004Gross
      Profit
              
              
              11,895,922
              
              
              
              7,994,829Selling
      Expenses
              
              
              3,553,923
              
              
              
              2,561,721General
      & Administrative Expenses
              
              
              2,556,133
              
              
              
              1,314,229Total
      Operating Expenses
              
              
              6,110,056
              
              
              
              3,875,950Income
       from Operations
              
              
              5,785,866
              
              
              
              4,118,879Other
      Income
              
              
              529,397
              
              
              
              386,820Operating
      Income Before Tax and Minority Interest
              
              
              6,315,263
              
              
              
              4,505,699Provision
      for Income Tax
              
              
              (1,009,643
              )
              
              
              (17,888
              )Net
      Income Before Minority Interest
              
              $
              5,305,620
              
              
              $
              4,487,811Minority
      Interest
              
              
              (1,239,481)
              
              
              
              (910,433)Net
      Income
              
              
              4,066,139
              
              
              
              3,577,378Basic
      Earnings Per Share
              
              
              0.13
              
              
              
              0.16Diluted
      Earnings Per Share
              
              
              0.13
              
              
              
              0.16Basic
      Weighted Average Shares Outstanding
              
              
              31,186,366
              
              
              
              22,238,036Diluted
      Weighted Average Shares Outstanding
              
              
              31,186,366
              
              
              
              22,372,676


37




NET
REVENUES. For the year ended December 31, 2008, our net revenues increased
approximately 23.4% from $47,892,833 in 2007 to $59,123,256 in 2008. The
increase in revenues is mainly attributable to the higher performance of the
wholesale and retail sectors of our business in 2008.  The revenues
for our wholesale segment increased from $38,348,802 in 2007 to $48,251,434 in
2008, or approximately 25.8%.  The revenues for our retail operations
increased from $9,441,967 in 2007 to $10,865,100 in 2008, or approximately
15%.  We expanded our retail operations by adding 3 new subsidiaries
in mid-2007, namely Yongxin Drugstore, Jingyongxin Drugstore and Caoantang
Drugstore.  We added 14 new drugstores under these subsidiaries for
the fiscal year ended 2008.  The retail drugstores under our new
subsidiaries developed and grew rapidly in 2008 which brought in additional
revenues for our retail operations for the period ended December 31,
2008.  The revenues for our ginseng and health products sector is the
only segment that shrank but the revenues from this particular segment were
insignificant and consisted of  less than 1% of our business
operations.




COST OF
SALES. Cost of sales to net sales percentage decreased from $39,898,004, or
approximately 83.3% of net revenues for the year ended December 31, 2007, to
$47,227,334, or approximately 79.9% of net sales for the year ended December 31,
2008. The approximate 3.4% decrease in percentage was primarily due to our
ability to secure favorable prices for the goods we sell, from our suppliers,
due to volume purchasing as a result of increased revenue.  The prices
of our products increased in 2008 compared to the prior year but we were able to
recoup most of these cost increases through increased consumer prices for our
products.  Our other operating costs, such a rent, utilities, labor
and transportation remained stable and only increased in proportion to
the increase of our sales.  Management also believes that productivity
remained steady, with no significant changes from 2007 to 2008.




GROSS
PROFIT. Gross profit increased approximately 48.8% from $7,994,830 for the year
ended December 31, 2007 to $11,895,922 for the year ended December 31, 2008.
This increase in gross profit was primarily due to the increase in
sales.  For fiscal year ended 2008, we added products with higher
profit margins to our operations to increase our gross profit, such products
including cosmetics and certain health and organic
products.  Management believes that the addition of such products will
increase our overall gross profit for the next few years.


SELLING
EXPENSES. Selling expenses increased approximately 38.7% from $2,561,721 for the
year ended December 31, 2007 to $3,553,923 for the same period in
2008.  We opened an additional 14 new stores in 2008 compared to 2007,
which resulted in an increase in rent, salaries and office expenses. The
increase in selling expenses is mainly attributable to the increase of our sales
and the increase in resources allocated, corresponding with the increased
sales.




GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $2,556,133
for the year ended December 31, 2008, as compared to $1,314,229 for the year
ended December 31, 2007, an increase of 94.5%. This increase is the result of
increase in management salaries and travel and public relations
expenses.




OTHER
INCOME.  Other income increased 36.9% from $386,820 in 2007 to
$529,397 in 2008.  The increase was attributable to the rental income
we received for subletting a portion of our retail stores to other vendors to
bring in extra income, and advertising and sponsorship fees we received from
various suppliers.




38




NET
INCOME BEFORE MINORITY INTEREST. Net income before minority interest increased
approximately 18.2% from a net income of $4,487,811 for the year ended December
31, 2007 to a net income of $5,305,620 for the year ended December 31,
2008.  The reason attributable to such increase is mainly due to the
addition of 3 new subsidiaries in 2007 which developed and grew rapidly in 2008
which significantly increased our net income for the period ended December 31,
2008.




Comparison of Years Ended December
31, 2007 and December 31, 2006.
  The
following table sets forth the results of our operations for the periods
indicated:




Year Ended
              
              
              Year EndedDecember 31,
              
              
              December 31,2007
              
              
              2006Net
      Revenue
              
              $
              47,892,833
              
              
              $
              38,995,103Cost
      of Revenue
              
              
              39,898,004
              
              
              
              35,752,308Gross
      Profit
              
              
              7,994,829
              
              
              
              3,242,795Selling
      Expenses
              
              
              2,561,721
              
              
              
              1,301,260General
      & Administrative Expenses
              
              
              1,314,229
              
              
              
              1,658,528Total
      Operating Expenses
              
              
              3,875,950
              
              
              
              2,959,788Income
      From Operations
              
              
              4,118,879
              
              
              
              283,008Other
      Income
              
              
              386,820
              
              
              
              1,489,713Operating
      Income Before Tax and Minority Interest
              
              
              4,505,700
              
              
              
              1,772,721Provision
      for Income Tax
              
              
              (17,888
              )
              
              
              --Net
      Income  Before Minority Interest
              
              $
              4,487,812
              
              
              $
              1,772,721Minority
      Interest
              
              
              (910,433)
              
              
              
              --Net
      Income
              
              
              3,577,378
              
              
              
              1,772,721Basic
      Earnings Per Share
              
              
              0.16
              
              
              
              0.08Diluted
      Earnings Per Share
              
              
              0.16
              
              
              
              0.08Basic
      Weighted Average Shares Outstanding
              
              
              22,238,036
              
              
              
              21,000,000Diluted
      Weighted Average Shares Outstanding
              
              
              22,372,676
              
              
              
              21,000,000




COMPARISON
OF YEAR ENDED DECEMBER 31, 2007 WITH THE YEAR ENDED DECEMBER 31,
2006.




NET
REVENUES. For the year ended December 31, 2007, our net revenues increased
approximately 22.82% from $38,995,103 to $47,892,833 relative to the same period
ended December 31, 2006. The increase in revenues resulted mainly from the
remodeling of the stores, developing new chain stores and due to stronger
market.




39




COST OF
SALES. Cost of sales to net sales percentage decreased from $35,752,308, or
approximately 92% of net revenues for the year ended December 31, 2006, to
$39,898,004, or approximately 83% of net sales for the year ended December 31,
2007. The approximately 9% decrease in percentage was primarily due to the
economies of scale due to higher purchases with the increase in
revenue.




GROSS
PROFIT. Gross profit increased approximately 147% from $3,242,795 for the year
ended December 31, 2006 to $7,994,830 for the year ended December 31, 2007. This
increase in gross profit was primarily due to the increase in the revenues and
the reduction in the cost of sales during the period.




OPERATING
EXPENSES. For the year ended December 31, 2007, overall operating expenses
increased approximately 31% from $2,959,788 to $3,875,950 relative to the year
ended December 31, 2006. This increase was mainly due to the
following:




SELLING
EXPENSES. Selling expenses increased approximately 97% from $1,301,260 for the
year ended December 31, 2006 to $2,561,721 for the same period in 2007. This
increase was related to an increase in revenues for the period.




GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $1,658,528
for the year ended December 31, 2006, as compared to $1,314,229 for the year
ended December 31, 2007, a decrease of 21%. This decrease is the result of
better cost management and also due to reduction in the advisory fee paid during
the year 2006 as the Company was looking for acquisition
candidates.




NET
INCOME BEFORE MINORITY INTEREST. Net income before minority interest increased
approximately 153% from a net income of 1,772,721 for the year ended December
31, 2006 to a net income of $4,505,700 for the year ended December 31,
2007.




LIQUIDITY




Cash
Flows




Net cash
flow provided by operating activities was $5.9 million for the year ended
December 31, 2008 and $1.8 million used in operating activities for the year
ended December 31, 2007.  For the year ended December 31, 2008,
increase in cash flows provided by operating activities was attributable to a
decrease in accounts receivable of $999,096, an increase in advances to
suppliers of $53,949, an increase in notes receivable by $1.3 million, an
increase in inventory by $1.1 million, a decrease in accounts payable by $2.2
million, an increase in advance from customers by $1.8 million, and an increase
in taxes by $0.9 million.  For the year ended December 31, 2007,
decrease in cash flows provided by operating activities was attributable to an
increase in accounts receivable of $3.6 million, an increase in advances to
suppliers of $3.4 million, an increase in inventory of $2.5 million and an
increase in accounts payable of $1.4 million offset by our net income of $3.6
million.
  The
Company incurred cash outflows of $6.7 million from investing activities during
the year ended December 31, 2008, as compared to cash outflows of $1.0 million
for the same period in 2007.  The significant increase in cash
outflows was mainly attributable to remodeling and construction
expenses.  In conjunction with the 2008 Olympics, certain governmental
policies were enacted in an effort to make the commercial areas of Beijing more
environmentally friendly and improve the appearance and function of retail
stores.  We renovated our offices and retail drugstores to comply with
these governmental policies in 2008.  We also remodeled some of our
stores to sublet to other tenants to bring in extra income.  We also
invested in the development of ERP software to link sales to our accounting and
finance department in 2008. The cash outflows of $1.0 million in investing
activities during the year ended December 31, 2007 was mainly for the purchase
of property and equipment.
  Net
cash flows provided by financing activities decreased significantly from $2.7
million for the year ended December 31, 2007 to $201,153 for the year ended
December 31, 2008.  We borrowed $1.8 million from non-related parties
in 2008 compared to the $1.2 million of loans we borrowed from non-related
parties and $1.5 million borrowed from banks in 2007.


40




CAPITAL
RESOURCES




The Company believes that the existing
cash and cash equivalents, and cash generated from operating activities will be
sufficient to meet the needs of its current operations, including anticipated
capital expenditures and scheduled debt repayments, for the next twelve months.
The Company may also seek additional financing to meet the needs of its
long-term strategic plan.




We
currently have certain material commitments for capital expenditures due to the
remodeling and construction of our offices and retail drugstores and the
development of our ERP software.  The total capital expenditure budget
for 2008 is $8.1 million, of which $6.1 million has been expended and $2.0
million is still unpaid as of December 31, 2008.  Other than working
capital and loans, we presently have no other alternative source of working
capital. We may need to raise additional working capital to complete the
projects. We may seek to raise additional capital through the sale of equity
securities. No assurances can be given that we will be successful in obtaining
additional capital, or that such capital will be available in terms acceptable
to our company. At this time, we have no commitments or plans to obtain
additional capital.




CONTRACTUAL
OBLIGATIONS




This
table summarizes our known contractual obligations and commercial commitments at
December 31, 2008.




Payments Due by PeriodTotal
                          
                          
                          Less than 1
                            year
                          
                          
                          1-3 Years
                          
                          
                          3-5 Years
                          
                          
                          5 Years +Contractual Obligations :Bank
      Indebtedness
                          
                          $
                          1,320,390
                          
                          
                          $
                          -
                          
                          
                          $
                          1,320,390
                          
                          
                          $
                          -
                          
                          
                          $
                          -Other
      Indebtedness
                          
                          $
                          1,042,785
                          
                          
                          $
                          1,042,785
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Capital
      Lease Obligations
                          
                          $
                          2,198,936
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          2,198,936Operating
      Leases
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Purchase
      Obligations
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Total
      Contractual Obligations:
                          
                          $
                          4,562,111
                          
                          
                          $
                          1,042,785
                          
                          
                          $
                          1,320,390
                          
                          
                          $
                          -
                          
                          
                          $
                          2,198,936




OFF-BALANCE
SHEET ARRANGEMENTS




We
have not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholder's equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing or hedging services with
us.




ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We do not
use derivative financial instruments in our investment portfolio and have no
foreign exchange contracts. Our financial instruments consist of cash and cash
equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly-liquid instruments purchased with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents.


Interest Rates. Our exposure
to market risk for changes in interest rates relates primarily to our short-term
obligations; thus, fluctuations in interest rates would not have a material
impact on the fair value of these securities. At December 31, 2008, we had
approximately $609,422 in cash and cash equivalents. A hypothetical 10% increase
or decrease in interest rates would not have a material impact on our earnings
or loss, or the fair market value or cash flows of these
instruments.
  Foreign Exchange Rate. We use
the United States Dollar (“U.S. Dollars”) for financial reporting purposes but
all of our sales and inputs are transacted in Renminbi (“RMB”). As a result,
changes in the relative values of U.S. Dollars and RMB affect our reported
levels of revenues and profitability as the results are translated into U.S.
Dollars for reporting purposes. However, since we conduct our sales and purchase
inputs in RMB, fluctuations in exchange rates are not expected to significantly
affect our financial stability, or gross and net profit margins. We do not
currently expect to incur significant foreign exchange gains or losses, or gains
or losses associated with any foreign operations.  During the years
ended December 31, 2008 and 2007, we recorded net foreign currency gains of
$824,961 and $590,885, respectively.


41




ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




The
information required by this Item 8 is incorporated by reference to information
begins on Page F-1 of this Form 10-K.




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




None.




ITEM
9A. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures




Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms and that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
principal executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure.




As
of the end of the period covered by this Annual Report, we conducted an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
Act). Based upon this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective.




Management’s
Annual Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the
supervision of, our principal executive and principal financial officers and
effected by our Board of Directors, management and other personnel, 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 and includes those policies and
procedures that:




·
            Pertain to the maintenance of
      records that in reasonable detail accurately and fairly reflect the
      transactions and dispositions of our
  assets;


·
            Provide reasonable assurance that
      transactions are recorded as necessary to permit preparation of financial
      statements in accordance with generally accepted accounting principles,
      and that our receipts and expenditures are being made only in accordance
      with authorizations of our management and directors;
      and




·
            Provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use
      of disposition of our assets that could have a material effect on the
      financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.




42




Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008.  In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on this assessment, management believes that as of December 31,
2008, our internal control over financial reporting is effective based on those
criteria.




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




Changes
in Internal Control




There
were no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our international
control over financial reporting.




ITEM
9B. OTHER INFORMATION




None.




PART
III





ITEM
10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Current Management





The
following table identifies our current executive officers and directors, their
respective offices and positions, and their respective dates of election or
appointment:





Name
              
              Age
              
              Position
              
              Effective
      Date of AppointmentYongxin
      Liu
              
              41
              
              Chairman
      of the Board and Chief Executive Officer
              
              November
      16, 2007Ning
      Liu
              
              46
              
              President,
      Chief Operating Officer and Director
              
              November
      16, 2007Yongkui
      Liu
              
              39
              
              Vice
      President, Chief Financial Officer and Director
              
              November
      16, 2007Yongmei
      Wang
              
              35
              
              Vice
      President, Treasurer and Director
              
              November
      16, 2007Umesh
      Patel
              
              51
              
              Vice
      President and Director
              
              November
      16, 2007





Yongxin
Liu has been the Chairman of Changchun Yongxin Dirui Medical Co., Ltd.
(“Yongxin”) since 2003 and Jilin Province Yongxin Chain Drugstore Co., Ltd.
(“Yongxin Drugstore”) since 2001.  From August 1998 to 2003, Mr. Liu
served as the General Manager of Yongxin Drugstore.  From 1984 to June
2006, Mr. Liu was employed by Changchun Medical Materials Marketing Co., Ltd.
(“Changchun Medical”), serving as the Assistant Manager of Business and
Vice-manager.  From July 1991 to July 1994, Mr. Liu studied at
Northeast Normal University, majoring in Management.  In August 2004,
he received an MBA from Beijing University.





Ning Liu
has been the president of Succeed Group Inc., a media company, since
2003.  Prior to his service at Succeed Group, Inc., Mr. Liu was the
president of Super Nu-Life Products Inc., a nutraceuticals manufacturer from
1994 to 2003.  From 1992 to 1994, Mr. Liu was the president of
Goldenrise Development Inc.  Additionally, from 1986 TO 2002, Mr. Liu
served as president of Accords System Inc.  Mr. Liu is active in
founding, organizing and managing a number of foreign investment projects
to China, and he counsels China companies in doing business in the United
States, and in mergers with public companies in the United
States.  Mr. Liu graduated from Beijing University with a Masters of
Arts degree in 1985.




43




Yongkui
Liu has served as Vice Manager of Yongxin Drugstore since
2001.  Previously, he was employed as a salesman by Changchun Medical
from July 1993 to June 2005.  From August 1998 to 2001, Mr. Liu served
as the Business Manager of Yongxin Drugstore.  From 1986 to 1989, Mr.
Liu studied at the Jilin Province Medicine Staff Trade School, Education
Section, majoring in Pharmacy.  From July 2004 to November 2005, he
studied at the Chinese University of Hong Kong, majoring in Enterprise
Management.





Yongmei
Wang has served as the Vice-Manager of Yongxin Drugstore since
2001.  From July 1993 to June 2005, Ms. Wang also served as an
accountant of Changchun Medical.  From August 1990 to July 1993, Ms.
Wang studied at the Changchun City No.4 Professional Middle School, majoring in
Accounting & Statistics.





Umesh
Patel has served as Vice President of our company since November 2007
after the completion of the Share Exchange.  Prior to the consummation
of the Share Exchange, he served as the Vice President of Digital Learning
Management Corporation from 2004 to 2006 and as the President from 2006 until
November 2007.  From 1990 to 2001, Mr. Patel served as the President
of Tech Med Billing Services.  In 2001, Mr. Patel co-founded the
School of I.T, serving as its Vice President from until February
2004.





Family
Relationships





Yongxin
Liu and Yongkui Liu are brothers.  Additionally, Yongkui Liu, our
Chief Financial Officer, is the spouse of Yongmei Wang, one of our Vice
Presidents.





Involvement
in Certain Legal Proceedings




Our
directors, executive officers and control persons have not been involved in any
of the following events during the past five years:




1.    
any bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the bankruptcy
or within two years prior to that time;




2.    
any conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);




3.    
being subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; or




4.    
being found by a court of competent jurisdiction (in a civil action), the SEC or
the Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.




Compliance
with Section 16(a) of the Securities Exchange Act of 1934





Section
16(a) of the Securities Exchange Act of 1934 requires the Company's directors
and executive officers, and persons who own more than 10% of the Company's
Common Stock, to file with the Securities and Exchange Commission initial
reports of beneficial ownership and reports of changes in beneficial ownership
of Common Stock of the Company. Officers, directors and greater than 10%
shareholders are required by the Securities and Exchange Commission to furnish
the Company with copies of all section 16(a) reports they file. Yongxin Liu,
Yongkui Liu, Ning Liu and Yongmei Wang have not yet filed a Form 3, as was
required upon their becoming officers and directors of the Company upon the
completion of the Share Exchange. Yongxin Liu, Yongkui Liu, Yongmei Wang, Umesh
Patel, Accord Success Ltd., Boom Day Investments, Mater Power Holdings Coup Ltd.
have not filed a Form 4, as was required upon their becoming 10% owners of the
Company upon the completion of the Share Exchange.




44




Code
of Conduct





We
adopted a Code of Ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller or
persons performing similar functions.  Anyone who would like a copy of
our Code of Conduct may do so by writing to the Company at its principal place
of business at 927 Canada Court, City of Industry, California
91748.




The
Board of Directors and Committees





Our
Board of Directors does not maintain a separate audit, nominating or
compensation committee.  Functions customarily performed by such
committees are performed by its Board of Directors as a whole.  We are
not required to maintain such committees under the applicable rules of the
Over-the-Counter Bulletin Board.  We do not currently have an “audit
committee financial expert” since we currently do not have an audit committee in
place.  We intend to create board committees, including an independent
audit committee, in the near future.





We
do not currently have a process for security holders to send communications to
the Board.




Director
Independence





Our
common stock is quoted on the Over-the-Counter Bulletin Board and, therefore, we
are not required to maintain a board consisting of majority independent
directors and we are not currently otherwise subject to any law, rule or
regulation requiring that all or any portion of our Board of Directors include
"independent" directors.  Our board of directors reviewed the independence
of the directors using the criteria established by the American Stock Exchange.
 As of December 31, 2008, the board of directors determined that none of
the directors were independent based on such criteria.





ITEM
11.   EXECUTIVE COMPENSATION





Summary
Compensation Tables





The
following table sets forth information concerning the compensation for the
fiscal years ended December 31, 2008 and 2007 of the principal executive
officer, principal financial officer, in addition to our three most highly
compensated officers whose annual compensation exceeded $100,000, and up to two
additional individuals for whom disclosure would have been required but for the
fact that the individual was not serving as an executive officer of the
registrant at the end of the last fiscal year.





Name and Position
                                
                                Year
                                
                                Salary
                                
                                
                                Bonus
                                
                                
                                TotalYongxin
      Liu
                                
                                2008
                                
                                $
                                82,392
                                
                                
                                $
                                5,633
                                
                                
                                $
                                88,025Chief
      Executive Officer and
                                
                                2007
                                
                                $
                                11,918
                                
                                
                                $
                                1,769
                                
                                
                                $
                                13,687Chairman
      of the BoardYongkui
      Liu
                                
                                2008
                                
                                $
                                64,787
                                
                                
                                $
                                5,633
                                
                                
                                $
                                70,420Chief
      Financial Officer and Vice President
                                
                                2007
                                
                                $
                                11,918
                                
                                
                                $
                                1,275
                                
                                
                                $
                                13,193





Grants
of Plan-Based Awards in 2008





There
were no option grants as of December 31, 2008.





Outstanding
Equity Awards at 2008 Fiscal Year End





There
were no outstanding equity awards as of December 31, 2008.




45




Option
Exercises and Stock Vested in Fiscal 2008





There
were no option exercises or stock vested as of December 31, 2008.





Pension
Benefits





There
were no pension benefit plans in effect as of December 31, 2008.




Nonqualified
defined contribution and other nonqualified deferred compensation
plans





There
was no nonqualified defined contribution or other nonqualified deferred
compensation plans in effect as of December 31, 2008.





Employment
Agreements





We
have no employment agreements with any of our executive officers as of December
31, 2008.




Director
Compensation




For
the year ended December 31, 2008, none of the members of our Board of Directors
received compensation for his or her service as a director. We do not currently
have an established policy to provide compensation to members of our Board of
Directors for their services in that capacity. We intend to develop such a
policy in the near future.





Indemnifications
of Directors And Executive Officers And Limitations of Liability





Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our certificate of incorporation provides that, pursuant
to Delaware law, our directors shall not be liable for monetary damages for
breach of the directors’ fiduciary duty of care to us and our stockholders. This
provision in the certificate of incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of nonmonetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director’s duty of loyalty to us or our stockholders, for acts or omissions
not in good faith or involving intentional misconduct or knowing violations of
the law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision also does not affect a director’s
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.




46




Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our Board of Directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under the bylaws or otherwise. We are not, however, required to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our Board of Directors by a majority vote of a
quorum of disinterested Board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.





We
have been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In the
event a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.





We
may enter into indemnification agreements with each of our directors and
officers that are, in some cases, broader than the specific indemnification
provisions permitted by Delaware law, and that may provide additional procedural
protection. As of the Effective Time of the Share Exchange, we had not entered
into any indemnification agreements with our directors or officers, but may
choose to do so in the future. Such indemnification agreements may require us,
among other things, to:





·
            indemnify officers and directors
      against certain liabilities that may arise because of their status as
      officers or directors;





·
            advance expenses, as incurred, to
      officers and directors in connection with a legal proceeding, subject to
      limited exceptions; or





·
            obtain directors’ and officers’
      insurance.





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





The
following table sets forth information regarding the beneficial ownership of our
common stock as of March 31, 2009 for each of our directors and officers; all
directors and officers as a group; and each person known by us to beneficially
own five percent or more of our common stock.





Beneficial
ownership is determined in accordance with SEC rules.  Unless
otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth
opposite the shareholder’s name.   Unless otherwise indicated, the
address of each stockholder listed in the table is c/o China Yongxin
Pharmaceuticals Inc., 927 Canada Court, City of Industry, CA 91748.




47




Name
      and Address
                                    of
      Beneficial Owner
                                  
                                  Title
                                  
                                  Beneficially
                                    Owned
                                  
                                  
                                  Percent
      of
                                    ClassDirectors
      and Executive OfficersYongxin
      Liu
                                  
                                  Chief
      Executive Officer andChairman
      of the Board
                                  
                                  
                                  10,599,996
                                  (1)
                                  
                                  
                                  25.8
                                  %Ning
      Liu (2)
                                  
                                  President,  Chief
      Operating Officer and Director
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Yongkui
      Liu
                                  
                                  Vice
      President, Chief Financial Officer and Director
                                  
                                  
                                  16,599,996
                                  (3)
                                  
                                  
                                  40.4
                                  %Yongmei
      Wang
                                  
                                  Vice
      President, Treasurer and  Director
                                  
                                  
                                  16,599,996
                                  (4)
                                  
                                  
                                  40.4
                                  %Umesh
      Patel
                                  
                                  Vice
      President and Director
                                  
                                  
                                  3,818,099
                                  (5)
                                  
                                  
                                  11.8
                                  %Officers
      and Directors as a Group (total of 5 persons)
                                  
                                  
                                  
                                  
                                  21,018,095
                                  (6)
                                  
                                  
                                  49.7
                                  %5%
      HoldersAccord
      Success Ltd., BVI
                                  
                                  
                                  
                                  
                                  5,400,000
                                  (7)
                                  
                                  
                                  17.4
                                  %Boom
      Day Investments, Ltd., BVI
                                  
                                  
                                  
                                  
                                  15,399,996
                                  (8)
                                  
                                  
                                  37.5
                                  %Master
      Power Holdings Coup Ltd., BVI
                                  
                                  
                                  
                                  
                                  4,200,000
                                  (9)
                                  
                                  
                                  13.5
                                  %Cede
      & Co. (10)
                                  
                                  
                                  
                                  
                                  2,640,388
                                  (10)
                                  
                                  
                                  8.5
                                  %Grand
      Opus Co. Ltd., BVI
                                  
                                  
                                  
                                  
                                  2,400,000
                                  (11)
                                  
                                  
                                  7.7
                                  %Full
      Spring Group Ltd., BVI
                                  
                                  
                                  
                                  
                                  1,800,000
                                  (12)
                                  
                                  
                                  5.8
                                  %




(1)
            Represents
      shares of common stock in our company held by Misala Holdings, Inc., a
      British Virgin Islands corporation, over which Mr. Liu may be deemed to
      have voting and investment control. Includes 9,999,996 shares of
      common stock issuable upon the conversion of 1,666,666 shares of Series A
      Convertible Preferred Stock, which are each convertible into 6 shares of
      common stock, upon the Company meeting certain required net income amounts
      for conversion for the fiscal years ending 2007, 2008 and 2009, held by
      Masala Holdings, Inc.





(2)
            Mr.
      Liu’s address is 22128 Stepplechase Lane, Diamond Bar, CA
      91765.




(3)
            Includes
      5,400,000 shares of common stock held by Boom Day Investments, Ltd.,
      British Virgin Islands corporation over which Mr. Liu may be deemed to
      have voting and investment control.  Also includes 1,200,000
      shares of common stock held by Perfect Sun Investments Ltd., a British
      Virgin Islands corporation, over which Mr. Liu’s spouse, Yongmei Wang, may
      be deemed to have voting and investment control.  Includes
      9,999,996 shares of common stock issuable upon the conversion of 1,666,666
      shares of Series A Convertible Preferred Stock, which are each convertible
      into 6 shares of common stock, upon the Company meeting certain required
      net income amounts for conversion for the fiscal years ending 2007, 2008
      and 2009, held by Boom Day
Investments.





(4)
            Includes
      1,200,000 shares of common stock owned by Perfect Sum Investments Ltd.,
      over which Ms. Wang may be deemed to have voting and investment
      control.  Also includes 5,400,000 shares of common stock held by
      Boom Day Investments, Ltd., over which Mr. Yongkiu Liu, Ms. Wang’s spouse,
      may be deemed to have voting and investment control.  Includes
      9,999,996 shares of common stock issuable upon the conversion of 1,666,666
      shares of Series A Convertible Preferred Stock, which are each convertible
      into 6 shares of common stock, upon the Company meeting certain required
      net income amounts for conversion for the fiscal years ending 2007, 2008
      and 2009, held by Boom Day
Investments.




48




(5)
            Includes
      442,845 shares owned by the Umesh Patel Family Trust No. 1, of which Mr.
      Patel is the trustee, and 1,250,000 shares issuable upon the exercise of
      warrants pursuant to the terms of the Agreement for Conversion of Debt
      dated November 12, 2007.




(6)
            Includes
      1,250,000 shares issuable upon the exercise of warrants pursuant to the
      terms of the Agreement for Conversion of Debt dated November 12, 2007, and
      9,999,996 shares of common stock issuable upon the conversion of 1,666,666
      shares of Series A Convertible Preferred Stock, which are each convertible
      into 6 shares of common stock upon the Company meeting certain required
      net income amounts for conversion for the fiscal years ending 2007, 2008
      and 2009.





(7)
            Tao
      Wang has voting and investment control over the shares owned by this
      entity.




(8)
            Yongkui
      Liu has voting and investment control over the shares owned by this
      entity.  Includes 9,999,996 shares of common stock issuable upon the
      conversion of 1,666,666 shares of Series A Convertible Preferred Stock,
      which are each convertible into 6 shares of common stock, upon the Company
      meeting certain required net income amounts for conversion for the fiscal
      years ending 2007, 2008 and 2009, held by Boom Day
      Investments.





(9)
            Yong
      Liu has voting and investment control over the shares owned by this
      entity.




(10)
            The
      address for Cede & Co. is P.O. Box 222 Bowling Green Station, New
      York, NY 10274.  The beneficial owners of these shares are not
      known to the Company.





(11)
            Huang
      Hai has voting and investment control over the shares owned by this
      entity.




(12)
            Dawei Sun has voting and
      investment control over the shares owned by this
      entity.




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





Transactions
with Related Persons





Changchun
Yongxin Dirui Medical Co., Ltd.





Yongxin
is our 80%-owned subsidiary and has interlocking executive and director
positions with us.





Policy
for Approval of Related Party Transactions





We
do not currently have a formal related party approval policy for review and
approval of transactions required to be disclosed pursuant to Item 404 (a) of
Regulation S-K.  We expect our board to adopt such a policy in the
near future.





Director
Independence





See
Item 10 “Directors, Executive Officers and Corporation Governance” for a
discussion of board member independence.





ITEM 14.  PRINCIPAL ACCOUNTING
FEES AND SERVICES





The
following table sets forth fees billed to us by our independent registered
accounting firm, Kabani & Company during the fiscal years ended December 31,
2008 and 2007 for: (i) services rendered for the audit of our annual financial
statements and the review of our quarterly financial statements, (ii) services
by our auditor that are reasonably related to the performance of the audit or
review of our financial statements and that are not reported as Audit Fees, and
(iii) services rendered in connection with tax compliance, tax advice and tax
planning. We did not engage our auditors for any other services during 2008 and
2007.




49




December 31,
                        2008
                      
                      
                      December 31,
                        2007(i)     
      Audit Fees(1)
                      
                      $
                      115,000
                      (2)
                      
                      $
                      115,000
                      (2)(ii)    
      Audit Related Fees
                      
                      
                      -
                      
                      
                      
                      -(iii)   
      Tax Fees
                      
                      
                      -
                      
                      
                      
                      -(iv)   
      All Other Fees
                      
                      
                      -
                      
                      
                      
                      -Total fees
                      
                      $
                      115,000
                      (2)
                      
                      $
                      115,000
                      (2)




(1) These
are fees for professional services performed by Kabani & Company for the
audit of our annual financial statements and review of our quarterly
reports.





(2)  Includes
$40,000 in fees related to services provided to Digital Learning Management
Corporation and $75,000 in fees related to services provided to
Yongxin.




Pre-Approval
Policy





Our
Board of Directors pre-approves all auditing services and permitted non-audit
services, if any, including tax services, to be performed for us by our
independent auditor, subject to the de minimis exceptions for
non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange
Act of 1934, as amended, which are approved by the Board of Directors prior to
the completion of the audit. The scope of the pre-approval shall include
pre-approval of all fees and terms of engagement. The Board of Directors may
form and delegate authority to subcommittees consisting of one or more members
when appropriate, including the authority to grant pre-approvals of audit and
permitted non-audit services, provided that decisions of such subcommittee to
grant pre-approvals shall be presented to the full Board of Directors at its
next scheduled meeting.




PART
IV




ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





Financial
Statements and Schedules





Our
consolidated financial statements for the fiscal years ending December 31, 2008
and 2007 begin on page F-1 of this annual report on Form 10-K.  We are
not required to file any financial statement schedules.





Exhibits





The
Exhibit Index lists those documents that we are required to file with this
annual report on Form 10-K.




50




EXHIBIT
INDEX




ExhibitNumber
                    
                    Description2.1
                    
                    Exchange
      Agreement by and between Digital Learning Management Corporation and
      Changchun Yongxin Dirui Medical Co., Ltd dated December 21, 2006
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed with the SEC on December 28, 2006).2.2
                    
                    First
      Amendment to Share Exchange Agreement, dated as of June 15, 2007, by and
      among Digital Learning Management Corporation, Chanchun Yongxin Dirui
      Medical Co., Ltd. (“Yongxin”) and the shareholders of Yongxin
      (incorporated by reference to Exhibit B to the Definitive Proxy Statement
      on Schedule 14A filed with the SEC on September 14,
  2007)2.3
                    
                    Second
      Amendment to the Share Exchange Agreement, dated as of April 12, 2008,and
      effective as of November 16, 2007, by and among Nutradyne Group, Inc.,
      Chanchun Yongxin Dirui Medical Co., Ltd. (“Yongxin”) and the shareholders
      of Yongxin (incorporated by reference to Exhibit 10.1 to the Current
      Report on Form 8-K filed with the SEC on April 15,
2008)3.1
                    
                    Certificate
      of Incorporation (incorporated by reference to Exhibit 3 to the Company’s
      General Form For Registration of Securities of Small Business Issuers on
      Form 10-SB, filed with the SEC on November 5, 1999).3.2
                    
                    Certificate
      of Amendment of Articles of Incorporation of the Company (incorporated by
      reference to Exhibit A of the Company’s definitive information statement
      on Schedule 14C filed with the SEC on February 25,
  2004).3.3
                    
                    Bylaws
      of the Company (incorporated by reference to Exhibit 3.2 to the Company’s
      Current Report on Form 8-K filed with the SEC on September 27,
      2004).3.4
                    
                    Certificate
      of Ownership and Merger Merging China Yongxin Pharmaceuticals Inc. and
      Nutradyne Group, Inc. (incorporated by reference to Exhibit 3.1 to the
      Current Report on Form 8-K Filed with the SEC on May 9,
    2008).10.1
                    
                    Summary
      English Translation of the Company’s Form Lease Agreement for its
      Retail Drugstores.*21.1
                    
                    List
      of Subsidiaries (incorporated by reference to Exhibit 21.2 to the
      Company’s Annual Report on Form 10-K filed with the SEC on April 15,
      2008).31.1
                    
                    Certification
      of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.*31.2
                    
                    Certification
      of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.*32.1
                    
                    Certifications
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.*99.1
                    
                    Press
      Release dated June 18, 2008 (incorporated by reference to Exhibit 99.1 to
      the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on July 2, 2008).99.2
                    
                    Press
      Release dated June 30, 2008 (incorporated by reference to Exhibit 99.2 to
      the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on July 2,
2008).









*           Filed
herewith.




51




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Changchun, People’s
Republic of China, on April 15, 2009.




CHINA
      YONGXIN PHARMACEUTICALS INC.(Registrant)Dated:
      April 15, 2009
                              By:
                              /s/ Yongxin
      LiuBy:  Yongxin
      LiuChief
      Executive Officer andChairman
      of the Board(Principal
      Executive Officer)Dated:
      April 15, 2009
                              By:
                              /s/ Yongkui
      LiuBy:  Yongkui
      LiuChief
      Financial Officer(Principal
      Financial Officer)




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




Signature
                                      
                                      Capacity
                                      
                                      Date/s/  Yongxin Liu
                                      
                                      Chief
      Executive Officer and
                                      
                                      April
      15, 2009By:  Yongxin
      Liu
                                      
                                      Chairman
      of the Board
                                        (Principal
      Executive Officer)/s/  Yongkiu Liu
                                      
                                      Chief
      Financial Officer and Director
                                      
                                      April
      15, 2009By:  Yongkiu
      Liu
                                      
                                      (Principal
      Financial and Accounting Officer)/s/  Ning
    Liu
                                      
                                      President,
      Chief Operating Officer and Director
                                      
                                      April
      15, 2009By:
      Ning Liu/s/   Yongmei
      Wang
                                      
                                      Vice
      President, Treasurer and Director
                                      
                                      April
      15, 2009By:
      Yongmei Wang/s/   Umesh I.
      Patel
                                      
                                      Vice
      President and Director
                                      
                                      April 15,
    2009By:
      Umesh I. Patel




52




CHINA
YONGXIN PHARMACEUTICALS INC.


(FORMERLY
NUTRADYNE GROUP, INC.)


CONSOLIDATED
FINANCIAL STATEMENTS


DECEMBER
31, 2008





TABLE
OF CONTENTS





Report of Independent Registered Public Accounting
      Firm
                        
                        F-1Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                        
                        F-2Consolidated
      Statements of IncomeFor
      the years ended December 31, 2008 and 2007
                        
                        F-3Consolidated
      Statements of Cash FlowsFor
      the years ended December 31, 2008 and 2007
                        
                        F-4Consolidated
      Statements of Stockholders’ EquityFor
      the years ended December 31, 2008 and 2007
                        
                        F-5Notes
      to Consolidated Financial Statements
                        
                        F-6-F-25










REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders


China
Yongxin Pharmaceuticals Inc.




We have
audited the accompanying consolidated balance sheets of China Yongxin
Pharmaceuticals Inc. (formerly Nutradyne Group, Inc.) and its
subsidiaries (the “Company”) as of December 31, 2008 and 2007,
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.




We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of China Yongxin
Pharmaceuticals Inc. and its subsidiaries as of December 31, 2008 and 2007,
and the results of its consolidated statements of operations, stockholders'
equity, and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.




/s/ KABANI & COMPANY,
INC.




CERTIFIED
PUBLIC ACCOUNTANTS




Los
Angeles, California


February 11,
2009




F-1




CHINA
      YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES(FORMERLY
      NUTRADYNE GROUP, INC.)CONSOLIDATED
      BALANCE SHEETSAS
      OF DECEMBER 31, 2008 AND
2007
  2008
                                
                                
                                2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                
                                $
                                609,422
                                
                                
                                $
                                1,180,029Accounts
      receivable, net
                                
                                
                                6,030,874
                                
                                
                                
                                6,586,105Notes
      receivable
                                
                                
                                1,334,078
                                
                                
                                
                                -Other
      receivable, net
                                
                                
                                356,573
                                
                                
                                
                                207,337Advances
      to suppliers
                                
                                
                                6,186,269
                                
                                
                                
                                5,729,235Prepaid
      expenses
                                
                                
                                345,686
                                
                                
                                
                                319,074Inventory,
      net
                                
                                
                                7,864,677
                                
                                
                                
                                6,257,450Total
      Current Assets
                                
                                
                                22,727,579
                                
                                
                                
                                20,279,230Property
      and Equipment, net
                                
                                
                                2,680,207
                                
                                
                                
                                2,038,629Construction
      In Progress
                                
                                
                                6,066,249
                                
                                
                                
                                -Intangible
      Assets, net
                                
                                
                                73,687
                                
                                
                                
                                81,152Total
      Assets
                                
                                $
                                31,547,722
                                
                                
                                $
                                22,399,011LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      Liabilities:Accounts
      payable
                                
                                $
                                3,255,148
                                
                                
                                $
                                5,030,340Accrued
      expenses & other payable
                                
                                
                                2,412,067
                                
                                
                                
                                1,435,235Advances
      from customers
                                
                                
                                2,580,894
                                
                                
                                
                                799,910Tax
      payable
                                
                                
                                1,240,411
                                
                                
                                
                                282,899Loan
      to related parties
                                
                                
                                184,662
                                
                                
                                
                                1,722,557Short-term
      loan payable
                                
                                
                                1,967,185
                                
                                
                                
                                389,977Deferred
      income
                                
                                
                                273,753
                                
                                
                                
                                239,937Shares
      to be issued
                                
                                
                                35,000
                                
                                
                                
                                35,000Net
      liabilities of discontinued operations
                                
                                
                                628,837
                                
                                
                                
                                628,777Total
      Current Liabilities
                                
                                
                                12,577,956
                                
                                
                                
                                10,564,632Long
      term loan
                                
                                
                                1,320,390
                                
                                
                                
                                959,616Minority
      Interests
                                
                                
                                4,098,940
                                
                                
                                
                                2,640,128Commitments
      and Contingency
                                
                                
                                -
                                
                                
                                
                                -Stockholders'
      Equity:Preferred
      stock, $0.001 par value; 5,000,000 shares authorized;5,000,000
      shares issued and outstanding
                                
                                
                                5,000
                                
                                
                                
                                5,000Common
      stock; $0.001 par value; 75,000,000 shares authorized;31,400,540
      and 31,041,845 shares issued and outstandingas
      of December 31, 2008 and December 31, 2007
                                
                                
                                31,401
                                
                                
                                
                                31,042Additional
      paid in capital
                                
                                
                                615,906
                                
                                
                                
                                -Deferred
      consulting expense - issuance of warrants
                                
                                
                                (72,815
                                )
                                
                                
                                -Prepaid
      consulting - issuance of shares
                                
                                
                                (68,750
                                )
                                
                                
                                -Receivable
      from a related party
                                
                                
                                (50,000
                                )
                                
                                
                                -Statutory
      reserve
                                
                                
                                1,841,241
                                
                                
                                
                                1,341,600Other
      comprehensive income
                                
                                
                                1,684,649
                                
                                
                                
                                859,688Retained
      earnings
                                
                                
                                9,563,803
                                
                                
                                
                                5,997,305Total
      Stockholders' Equity
                                
                                
                                13,550,435
                                
                                
                                
                                8,234,635Total
      Liabilities and Stockholders' Equity
                                
                                $
                                31,547,722
                                
                                
                                $
                                22,399,011
  The
accompanying notes are an integral part of these consolidated financial
statements
  F-2
  CHINA
      YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES(FORMERLY
      NUTRADYNE GROUP, INC.)CONSOLIDATED
      STATEMENTS OF INCOMEFOR
      THE YEARS ENDED DECEMBER 31, 2008 AND
2007
  2008
                                          
                                          
                                          2007Net
      Revenue
                                          
                                          
                                          59,123,256
                                          
                                          
                                          $
                                          47,892,833Cost
      of Revenue
                                          
                                          
                                          47,227,334
                                          
                                          
                                          
                                          39,898,004Gross
      Profit
                                          
                                          
                                          11,895,922
                                          
                                          
                                          
                                          7,994,829Operating
      ExpensesSelling
      expenses
                                          
                                          
                                          3,553,923
                                          
                                          
                                          
                                          2,561,721General
      and administrative expenses
                                          
                                          
                                          2,556,133
                                          
                                          
                                          
                                          1,314,229Total
      operating expenses
                                          
                                          
                                          6,110,056
                                          
                                          
                                          
                                          3,875,950Income
      From Operations
                                          
                                          
                                          5,785,866
                                          
                                          
                                          
                                          4,118,879Other
      Income ( Expense)Interest
      income
                                          
                                          
                                          2,470
                                          
                                          
                                          
                                          3,690Interest
      expense
                                          
                                          
                                          (9,148
                                          )
                                          
                                          
                                          (194,644
                                          )Other
      income
                                          
                                          
                                          690,517
                                          
                                          
                                          
                                          678,888Other
      expense
                                          
                                          
                                          (154,441
                                          )
                                          
                                          
                                          (101,114
                                          )Total
      other income
                                          
                                          
                                          529,397
                                          
                                          
                                          
                                          386,820Operating
      Income Before Income Tax And Minority Interest
                                          
                                          
                                          6,315,263
                                          
                                          
                                          
                                          4,505,699Provision
      For Income Tax
                                          
                                          
                                          (1,009,643
                                          )
                                          
                                          
                                          (17,888
                                          )Net
      Income Before Minority Interest
                                          
                                          
                                          5,305,620
                                          
                                          
                                          
                                          4,487,811Minority
      Interest
                                          
                                          
                                          (1,239,481
                                          )
                                          
                                          
                                          (910,433
                                          )Net
      Income
                                          
                                          
                                          4,066,139
                                          
                                          
                                          
                                          3,577,378Other
      Comprehensive Item:Foreign
      Currency Translation Gain
                                          
                                          
                                          824,961
                                          
                                          
                                          
                                          590,885Net
      Comprehensive Income
                                          
                                          
                                          4,891,100
                                          
                                          
                                          
                                          4,168,263Earning
      per shareBasic
                                          
                                          $
                                          0.13
                                          
                                          
                                          $
                                          0.16Diluted
                                          
                                          $
                                          0.13
                                          
                                          
                                          $
                                          0.16Weighted
      average  number of  shares outstandingBasic
                                          
                                          
                                          31,186,366
                                          
                                          
                                          
                                          22,238,036Diluted
                                          
                                          
                                          31,186,366
                                          
                                          
                                          
                                          22,372,676
  The
accompanying notes are an integral part of these consolidated financials
statements
  F-3
  CHINA
      YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES(FORMERLY
      NUTRADYNE GROUP, INC.)CONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED DECEMBER 31, 2008 AND
2007
  2008
                                                          
                                                          
                                                          2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Income
                                                          
                                                          $
                                                          4,066,139
                                                          
                                                          
                                                          $
                                                          3,577,378Adjustments
      to reconcile net income to net cashused
      in / (provided by) operating activities:Depreciation
      and amortization
                                                          
                                                          
                                                          311,992
                                                          
                                                          
                                                          
                                                          203,909Stock
      issued for consulting services
                                                          
                                                          
                                                          424,700
                                                          
                                                          
                                                          
                                                          -Minority
      interest
                                                          
                                                          
                                                          1,239,481
                                                          
                                                          
                                                          
                                                          910,433(Increase)
      / decrease in current assets:Accounts
      receivable
                                                          
                                                          
                                                          999,096
                                                          
                                                          
                                                          
                                                          (3,577,120
                                                          )Advances
      to suppliers
                                                          
                                                          
                                                          (53,949
                                                          )
                                                          
                                                          
                                                          (3,403,984
                                                          )Other
      receivable
                                                          
                                                          
                                                          (132,334
                                                          )
                                                          
                                                          
                                                          59,064Notes
      receivable
                                                          
                                                          
                                                          (1,310,799
                                                          )
                                                          
                                                          
                                                          -Prepaid
      expenses
                                                          
                                                          
                                                          (4,143
                                                          )
                                                          
                                                          
                                                          (94,404
                                                          )Inventory
                                                          
                                                          
                                                          (1,147,645
                                                          )
                                                          
                                                          
                                                          (2,510,863
                                                          )Increase
      / (decrease) in current liabilities:Accounts
      payable
                                                          
                                                          
                                                          (2,164,346
                                                          )
                                                          
                                                          
                                                          1,400,423Accrued
      expense and other payable
                                                          
                                                          
                                                          903,925
                                                          
                                                          
                                                          
                                                          625,276Deferred
      income
                                                          
                                                          
                                                          16,679
                                                          
                                                          
                                                          
                                                          230,968Advances
      from customers
                                                          
                                                          
                                                          1,821,591
                                                          
                                                          
                                                          
                                                          748,000Tax
      payable
                                                          
                                                          
                                                          924,573
                                                          
                                                          
                                                          
                                                          -Net
      cash provided by/ (used in) operating activities
                                                          
                                                          
                                                          5,894,960
                                                          
                                                          
                                                          
                                                          (1,830,920
                                                          )CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      acquired on reverse acquisition
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          5,334Contribution
      from minority shareholders
                                                          
                                                          
                                                          11,532
                                                          
                                                          
                                                          
                                                          -Additions
      to construction in progress
                                                          
                                                          
                                                          (5,960,396
                                                          )
                                                          
                                                          
                                                          -Purchase
      of property, equipment and intangible assets
                                                          
                                                          
                                                          (789,036
                                                          )
                                                          
                                                          
                                                          (1,029,925
                                                          )Net
      cash used in  investing activities
                                                          
                                                          
                                                          (6,737,900
                                                          )
                                                          
                                                          
                                                          (1,024,591
                                                          )CASH
      FLOWS FROM FINANCING ACTIVITIESReceipts
      of loan from non-related parties
                                                          
                                                          
                                                          1,818,271
                                                          
                                                          
                                                          
                                                          1,187,673Receipts
      of Loan from banks
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          1,516,067Payments
      of loan from non-related parties
                                                          
                                                          
                                                          (1,617,118
                                                          )
                                                          
                                                          
                                                          -Net
      cash provided by financing activities
                                                          
                                                          
                                                          201,153
                                                          
                                                          
                                                          
                                                          2,703,740NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                                                          
                                                          
                                                          (641,786
                                                          )
                                                          
                                                          
                                                          (151,771
                                                          )EFFECT
      OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
                                                          
                                                          
                                                          71,179
                                                          
                                                          
                                                          
                                                          83,396CASH
      AND CASH EQUIVALENTS, BEGINNING BALANCE
                                                          
                                                          
                                                          1,180,029
                                                          
                                                          
                                                          
                                                          1,248,404CASH
      AND CASH EQUIVALENTS, ENDING BALANCE
                                                          
                                                          $
                                                          609,422
                                                          
                                                          
                                                          $
                                                          1,180,029SUPPLEMENTAL
      DISCLOSURES:Interest
      paid
                                                          
                                                          $
                                                          167,156
                                                          
                                                          
                                                          $
                                                          161,888Income
      tax paid
                                                          
                                                          $
                                                          15,927
                                                          
                                                          
                                                          $
                                                          8,563NON
      CASH TRANSACTION:Issuance
      of shares and receivable from a related party
                                                          
                                                          $
                                                          50,000
                                                          
                                                          
                                                          $
                                                          -
  The
accompanying notes are an integral part of these consolidated financials
statements
  F-4
 CHINA
      YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES(FORMERLY
      NUTRADYNE GROUP, INC.)CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITYFOR
      THE YEARS ENDED DECEMBER 31, 2008 AND
2007
  Additional
                                                      
                                                      
                                                      Other
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Deferred
      consulting
                                                      
                                                      
                                                      Prepaid
      consulting
                                                      
                                                      
                                                      Receivable
      from
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      TotalCommon
      Stock
                                                      
                                                      
                                                      Preferred
      Stock
                                                      
                                                      
                                                      Paid-in
                                                      
                                                      
                                                      Comprehensive
                                                      
                                                      
                                                      Statutory
                                                      
                                                      
                                                      expense-
                                                      
                                                      
                                                      issuance
                                                      
                                                      
                                                      related
                                                      
                                                      
                                                      Retained
                                                      
                                                      
                                                      Stockholders'Shares
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Shares
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Capital
                                                      
                                                      
                                                      Income
                                                      
                                                      
                                                      Reserve
                                                      
                                                      
                                                      warrants
                                                      
                                                      
                                                      of shares
                                                      
                                                      
                                                      party
                                                      
                                                      
                                                      Earnings
                                                      
                                                      
                                                      EquityBalance
      as of December 31, 2006
                                                      
                                                      
                                                      21,000,000
                                                      
                                                      
                                                      $
                                                      21,000
                                                      
                                                      
                                                      
                                                      5,000,000
                                                      
                                                      
                                                      $
                                                      5,000
                                                      
                                                      
                                                      $
                                                      1,436,244
                                                      
                                                      
                                                      $
                                                      268,803
                                                      
                                                      
                                                      $
                                                      775,271
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      3,758,235
                                                      
                                                      
                                                      $
                                                      6,264,553Recapitalization
      on reverse merger
                                                      
                                                      
                                                      10,041,845
                                                      
                                                      
                                                      
                                                      10,042
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,436,244
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (768,206
                                                      )
                                                      
                                                      
                                                      (2,194,408
                                                      )Foreign
      exchange translation gain
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      590,885
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      590,885Dividends
      declared by a subsidiary
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (3,773
                                                      )
                                                      
                                                      
                                                      (3,773
                                                      )Transfer
      to statutory reserve
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      566,329
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (566,329
                                                      )
                                                      
                                                      
                                                      -Net
      income for the year
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,577,378
                                                      
                                                      
                                                      
                                                      3,577,378Balance
      as of December 31, 2007
                                                      
                                                      
                                                      31,041,845
                                                      
                                                      
                                                      
                                                      31,042
                                                      
                                                      
                                                      
                                                      5,000,000
                                                      
                                                      
                                                      
                                                      5,000
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      859,688
                                                      
                                                      
                                                      
                                                      1,341,600
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      5,997,305
                                                      
                                                      
                                                      
                                                      8,234,635Issuance
      of shares
                                                      
                                                      
                                                      108,695
                                                      
                                                      
                                                      
                                                      109
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      49,891
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (50,000
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Stock
      and warrants issued for consulting
                                                      
                                                      
                                                      250,000
                                                      
                                                      
                                                      
                                                      250
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      566,015
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (291,265
                                                      )
                                                      
                                                      
                                                      (275,000
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      --Amortization
      of prepaid consulting
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      218,450
                                                      
                                                      
                                                      
                                                      206,250
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      424,700-Foreign
      exchange translation gain
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      824,961
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      824,961-Transfer
      to statutory reserve
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      499,641
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (499,641
                                                      )
                                                      
                                                      
                                                      --Net
      income for the year
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      4,066,139
                                                      
                                                      
                                                      
                                                      4,066,139Balance
      as of December 31, 2008
                                                      
                                                      
                                                      31,400,540
                                                      
                                                      
                                                      $
                                                      31,401
                                                      
                                                      
                                                      
                                                      5,000,000
                                                      
                                                      
                                                      $
                                                      5,000
                                                      
                                                      
                                                      $
                                                      615,906
                                                      
                                                      
                                                      $
                                                      1,684,649
                                                      
                                                      
                                                      $
                                                      1,841,241
                                                      
                                                      
                                                      $
                                                      (72,815
                                                      )
                                                      
                                                      $
                                                      (68,750
                                                      )
                                                      
                                                      $
                                                      (50,000
                                                      )
                                                      
                                                      $
                                                      9,563,803
                                                      
                                                      
                                                      $
                                                      13,550,435
  The
accompanying notes are an integral part of these consolidated financials
statements
 F-5




CHINA
YONGXIN PHARMACEUTICALS INC.


(FORMERLY
NUTRADYNE GROUP, INC.)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 - ORGANIZATION





China
Yongxin Pharmaceuticals Inc. (formerly Digital Learning Management Corporation
and Nutradyne Group, Inc.) (the “Company") was incorporated in Delaware on
February 18, 1999 under the name of FreePCSQuote. The Company through its
Chinese subsidiaries is engaged in the pharmaceutical medicines and appliances
wholesale distribution, pharmacy retail drug stores and ginseng product
sales.





On
December 21, 2006, Changchun Yongxin Dirui Medical Co., Ltd, a Chinese
corporation ("Yongxin") and all of the shareholders of Yongxin entered into a
share exchange agreement with the Company. The agreement was amended on June 15,
2007. On November 16, 2007, Yongxin and the Company closed the Amended Exchange
Agreement. In accordance with the Amended Exchange Agreement, the Company issued
21,000,000 shares of newly issued common stock and 5 million shares of Series A
Preferred Stock to the Yongxin shareholders or their designees, representing,
immediately following closing, 70% of the total issued and outstanding shares of
common stock of the Company in exchange for 80% shares of Yongxin.





The
Series A Convertible Preferred Stock is convertible over a 3 year period, into
up to 30 million shares of common stock. In particular, the holder of any shares
of Series A Convertible Preferred Stock shall have the right, at its option, (i)
at any time hereafter (except that upon any liquidation of the Company, the
right of conversion shall terminate at the close of business on the business day
fixed for payment of the amount distributable on the Series A Convertible
Preferred Stock) to convert, any such shares of Series A Convertible Preferred
Stock into such number of fully paid and nonassessable shares of Common Stock on
a six (6) for one (1) basis. No more than 1,666,666 shares of the Series A
Convertible Preferred Stock may be converted in each of the three periods
following issuance. The conversion formula is conditioned on the Company earning
no less than $3 million of net income in for the fiscal year ending December 31,
2007; $4 million of net income in the fiscal year ending December 31, 2008 and
$5 million of net income in the fiscal year ending December 31, 2009. In the
event that in any of the three fiscal years, the Company earns less than
required net income amounts for conversion, then the conversion right shall be
proportionately reduced by the amount of the shortfall below the required net
income amount, with the "catch-up" right to convert additional shares to the
extent that the net income exceeds $3 million; $4 million and $5 million
respectively in each of the three consecutive years. In no event shall this
conversion right allow for the conversion of the Series A Preferred Stock into
more than 6 common shares for each share of Series A Preferred Stock over the
course of the aforementioned three calendar years. The net income requirements
shall be based upon an audit of the revenues for each fiscal year. All
conversions shall be made within 30 days of the completion of such
audit.




F-6




For
accounting purposes, this transaction has been accounted for as a reverse
merger, since the stockholders of Yongxin own a majority of the issued and
outstanding shares of common stock of the Company, and the directors and
executive officers of Yongxin became the directors and executive officers of the
Company.  This acquisition was accounted for at historical cost in a
manner similar to that in pooling of interests method since after the
acquisition, the former shareholders of Yongxin Medical acquired majority of the
outstanding shares of the Company. The financial statements of the legal
acquirer are not significant; therefore, no pro forma financial information is
submitted. The historical financial statements are those of "Changchun Yongxin
Dirui Medical Co, Inc. & Subsidiaries".





Changchun
Yongxin Dirui Medical Co, Inc. & subsidiaries ("Yongxin Medical"), was
established in 1993. The company is engaged in medicines wholesale and retail.
The company’s operations are based in Changchun City, Jilin Province,
China.





In 2004,
Yongxin Medical established Jilin Procince Yongxin Chain Drugstore Ltd.
(“Yongxin Drugstore”) with an investment of RMB 2,500,000 (equivalent to
$303,000) to develop customer-terminal network market. In July 2005, the company
achieved the franchise right in Jilin Province from American Medicine Shoppe
(Meixin International Medical Chains) and by now has developed 4 chains of
“Meixin·Yongxin”. As of December 31, 2008, Yongxin Drugstore has developed 21
retail chains drug stores in the name of Yongxin Drugstore which cover a
business area of 5,940 M2,
throughout Changchun city in China. These drugstores sell over-the counter
western and traditional Chinese medicines, and medical-related
products.





On, March
16, 2007, Jilin Province Yongxin Chain Drugstore Ltd entered into various
agreements with retail drug stores in Tianjin, established Tianjin Jingyongxin
Chain Drugstore Ltd. (“Jinyongxin Drugstore”) with an investment of $116,868, in
which the Company has the 90% ownership of the Jinyongxin Drugstore.The Company is located in
Tianjin City, China. As of December 31, 2007, Jinyongxin Drugstore has developed
20 retail chain drug stores which cover a business area of 2,928 M2,
throughout Tianjin city in China.





On May
15, 2007, Yongxin Medical established Jilin Dingjian Natural Health Products
Co., Ltd (“Dingjian”) with an investment of $116,868 whereby the shareholders of
the company have 90% ownership of Dingjian. Dingjian was formed under
laws of the People's Republic of China and is located in Changchun City, Jilin
Provincial.




On June
15 2007, Jilin Province Yongxin Chain Drugstore Ltd established “Baishan
Caoantang Chain Drugstore Ltd” (hereinafter referred to “Caoantang Drugstore”)
with an investment of $328,430, including $144,509 in cash and $183,921 cash to
purchase the property and equipment from former shareholder. And Yongxin
Drugstore was agreed to pay $80,076 evenly over the next 30 months for this
investment. Caoantang Drugstore is a 100% owned subsidiary of Yongxin Drugstore.
Caoantang Drugstore owns 31 chain retail drugstores and covers a business area
of 3,000 M2, which
sell over-the counter western and traditional Chinese medicines and other
medical-related products.





F-7





On May 5,
2008 the Company changed its name from Nutradyne Group, Inc to China Yongxin
Pharmaceutical Inc.




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





BASIS OF
PRESENTATION


The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. Our
functional currency is the Chinese Renminbi; however the accompanying financial
statements have been translated and presented in United States Dollars
($).





USE OF
ESTIMATES


The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States (“GAAP”) requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.  Significant estimates include collectability of accounts
receivable, accounts payable, sales returns and recoverability of long-term
assets.





PRINCIPLES OF
CONSOLIDATION


The
consolidated financial statements include the accounts of China Yongxin
Pharmaceuticals Inc. and its wholly owned subsidiaries collectively referred to
within as the Company.  All material inter-company accounts,
transactions and profits have been eliminated in consolidation.





MINORITY
INTEREST


The
Company owns 90% ownership interest in Tianjin Chain Store and Natural &
Health Products Company. The remaining 10% interest in each of the entities is
owned by outside third parties. As at December 31, 2008, minority interest in
Tianjin Chain Store and Natural & Health Products Company amounted to
$20,286 compared to $16,825 as at December 31, 2007. The Company acquired 80% of
Yongxin.  The remaining 20% represents minority interest amounting to
$4,078,654 and $2,623,303 as of December 31, 2008 and December 31, 2007,
respectively.





CASH AND CASH EQUIVALENTS


Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.





F-8





ACCOUNTS
RECEIVABLE


The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Reserves are recorded primarily on a specific
identification basis. As of December 31, 2008 and 2007, allowance for doubtful
debts amounted to $112,452 and $331,475, respectively.





ADVANCES TO
SUPPLIERS


The
Company advances to certain vendors for purchase of its material.  The
advances to suppliers are interest free and unsecured. As of December 31, 2008
and 2007, advance to suppliers amounted to $6,186,269 and $5,729,235,
respectively.





INVENTORIES


Inventories
are valued on a lower of weighted average cost or market
basis.   Inventory includes product cost, inbound freight,
warehousing costs and vendor allowances not included as a reduction of
advertising expense. The Management compares the cost of inventories with the
market value and allowance is made for writing down their inventories to market
value, if lower. Work in process inventories include the cost of raw materials
and outsource processing fees.





PROPERTY AND
EQUIPMENT




Property
and equipment are recorded at cost. Depreciation is computed using the
straight-line method over useful lives of 5 to 10 years. Expenditures for
maintenance and repairs are charged to earnings as incurred; additions, renewals
and betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Assets held under capital leases are recorded at the lesser of the present value
of the future minimum lease payments or the fair value of the leased property.
Expenditures for maintenance and repairs are charged to operations as incurred.
Depreciation of property and equipment is provided using the straight-line
method for substantially all assets with estimated lives of:




Buildings
                    20
      yearsInfrastructures
      and leasehold improvement
                    10
      yearsEquipment
      (including electronic facilities, sports, education and recreation
      facilities)
                    10
      yearsAutomobile
                    10
      yearsFurniture
      and Fixtures
                    5
      yearsComputer
      Hardware and Software
                    5
      years




F-9




IMPAIRMENT OF LONG-LIVED
ASSETS





Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”
and the accounting and reporting provisions of APB Opinion No. 30, “Reporting
the Results of Operations for a Disposal of a Segment of a Business.” The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Loss on long-lived assets to be
disposed of is determined in a similar manner, except that fair market values
are reduced for the cost of disposal.





REVENUE
RECOGNITION


The
Company’s revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectability is reasonably assured. The Company recognizes revenue net of
an allowance for estimated returns, at the time the merchandise is sold or
services performed. The allowance for sales returns is estimated based on the
Company’s historical experience. Sales taxes are presented on a net basis
(excluded from revenues and costs). Payments received before all of the relevant
criteria for revenue recognition are satisfied are recorded as unearned
revenue.





COST OF
SALES





Cost of
sales is derived based upon point-of-sale scanning information with an estimate
for shrinkage and is adjusted based on periodic inventories.  In
addition to merchandise cost, cost of sales includes warehousing costs,
purchasing costs, freight costs, cash discounts and vendor allowances not
included as a reduction of advertising expense.





ADVERTISING


Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred. The advertising expense for the years ended December 31, 2008
and 2007 was $26,124 and $69,697, respectively.





VENDOR
ALLOWANCES





Vendor
allowances are principally received as a result of purchase levels, sales or
promotion of vendors' products.  Allowances are generally recorded as
a reduction of inventory and are recognized as a reduction of cost of sales when
the related merchandise is sold.  Those allowances received for
promoting vendors' products are offset against advertising expense and result in
a reduction of selling, occupancy and administration expenses to the extent of
advertising costs incurred, with the excess treated as a reduction of inventory
costs.





F-10





INCOME
TAXES


The
Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.




The
Company accounts for income taxes using an asset and liability approach which
allows for the recognition and measurement of deferred tax assets based upon the
likelihood of realization of tax benefits in future years. Under the asset and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future deductibility is uncertain.




The
Company records a valuation allowance for deferred tax assets, if any, based on
its estimates of its future taxable income as well as its tax planning
strategies when it is more likely than not that a portion or all of its deferred
tax assets will not be realized. If the Company is able to utilize more of its
deferred tax assets than the net amount previously recorded when unanticipated
events occur, an adjustment to deferred tax assets would increase the Company
net income when those events occur. The Company does not have any significant
deferred tax asset or liabilities in the PRC tax jurisdiction.





FOREIGN CURRENCY
TRANSLATION


The
Company uses the United States dollar ("U.S. dollars") for financial reporting
purposes. The Company maintains books and records in their functional currency,
being the primary currency of the economic environment in which the operations
are conducted. In general, the Company translates the assets and liabilities
into U.S. dollars using the applicable exchange rates prevailing at the balance
sheet date, and the statement of income is translated at average exchange rates
during the reporting period. Gain or loss on foreign currency transactions are
reflected on the income statement. Gain or loss on financial statement
translation from foreign currency are recorded as a separate component in
the equity section of the balance sheet, as component of comprehensive income in
accordance with SFAS No. 130, "Reporting Comprehensive Income" as a component of
shareholders' equity. During the years ended December 31, 2008 and 2007 other
comprehensive income includes translation gain of $824,961 and $590,885,
respectively.




F-11




FAIR VALUE OF FINANCIAL
INSTRUMENTS


Statement
of financial accounting standard No. 107, Disclosures about fair value of
financial instruments, requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.




STOCK BASED
COMPENSATION




In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), which requires the measurement of all
employee share-based payments to employees, including grants of employee stock
options, using a fair-value-based method and the recording of such expense in
the consolidated statements of operations. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation
of SFAS 123R and the valuation of share-based payments for public companies. The
Company has adopted SFAS 123R and related FASB Staff Positions (“FSPs”) as of
January 01, 2006 and will recognize stock-based compensation expense using the
modified prospective method.




BASIC AND DILUTED EARNINGS
PER SHARE




Earnings
per share are calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), “Earnings per share”. SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net income (loss)
per share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic earnings per share are computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share are computed by dividing net income by the weighted
average number of common shares and dilutive common equivalent shares
(restricted stock awards and stock options) outstanding during the period.
Weighted average number of common shares was calculated in accordance with the
Statement of financial accounting standards No. 141R (SFAS No. 141R), “Business
combinations”. Basic and diluted earnings or loss per share were $0.14 and $0.16
for the years ended December 31, 2008 and 2007 respectively.




STATEMENT OF CASH
FLOWS


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. 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.





SEGMENT
REPORTING


Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure about
Segments of an Enterprise and Related Information" requires use of the
"management approach" model for segment reporting.  The management
approach model is based on the way a company's management organizes segments
within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company. The Company allocates its resources and assesses the
performance of its sales activities based upon its products and services (see
Note 19).





F-12





RISKS AND
UNCERTAINTIES


The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.





The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, by the general state of
the PRC’s economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.





CONCENTRATIONS OF CREDIT
RISK


Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, most of which are in China. The Company controls credit risk related to
accounts receivable through credit approvals, credit limits and monitoring
procedures. The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk, establishes an
allowance, if required, for uncollectible accounts and, as a consequence,
believes that its accounts receivable credit risk exposure beyond such allowance
is limited.





CONTINGENCIES


Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur.  The Company’s management
and legal counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment.  In assessing loss
contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company’s legal
counsel evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought.





If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial
statements.  If the assessment indicates that a potential material
loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material would be
disclosed.





F-13





Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.





RECENT ACCOUNTING
PRONOUNCEMENTS





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51.  This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results
of operations or financial position.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.”  This statement replaces FASB Statement No. 141,
“Business Combinations.” This statement retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. This statement defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. This statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the statement. This statement applies
prospectively to business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The Company does not expect the adoption of SFAS 160 to
have a significant impact on its results of operations or financial
position.





In March,
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows.




F-14




FASB
Statement No. 161 achieves these improvements by requiring disclosure of the
fair values of derivative instruments and their gains and losses in a tabular
format. It also provides more information about an entity’s liquidity by
requiring disclosure of derivative features that are credit risk–related.
Finally, it requires cross-referencing within footnotes to enable financial
statement users to locate important. Based on current conditions, the Company
does not expect the adoption of SFAS 161 to have a significant impact on its
results of operations or financial position.





In May 0f
2008, FSAB issued SFASB No.162, The Hierarchy of Generally Accepted Accounting
Principles.  The pronouncement mandates the GAAP hierarchy reside in
the accounting literature as opposed to the audit literature.  This
has the practical impact of elevating FASB Statements of Financial Accounting
Concepts in the GAAP hierarchy.  This pronouncement will become
effective 60 days following SEC approval.  The company does not
believe this pronouncement will impact its financial statements.





In May of
2008, FASB issued SFASB No. 163, Accounting for Financial Guarantee Insurance
Contracts-an interpretation of FASB Statement No. 60.  The scope of
the statement is limited to financial guarantee insurance (and reinsurance)
contracts.  The pronouncement is effective for fiscal years beginning
after December 31, 2008.  The company does not believe this
pronouncement will impact its financial statements.





NOTE
3 –OTHER RECEIVABLE


Other
receivables as of December 31, 2008 and 2007 are summarized as follows. The
receivable is interest free, unsecured, and due on demand.





2008
                      
                      
                      2007Advance
      to employees
                      
                      $
                      92,368
                      
                      
                      $
                      12,449Advances
      to store employees
                      
                      
                      2,685
                      
                      
                      
                      123,313Advances
      to third parties
                      
                      
                      93,364
                      
                      
                      
                      -Rent
      receivable
                      
                      
                      79,223
                      
                      
                      
                      -Deposits
                      
                      
                      7,619
                      
                      
                      
                      33,512Others
                      
                      
                      81,314,
                      
                      
                      
                      38,063$
                      356,573
                      
                      
                      $
                      207,337




F-15




NOTE
4 – PREPAID EXPENSES


The
balance of Company prepaid expenses as of December 31, 2008 and 2007 comprised
of the following:




2008
                          
                          
                          2007Prepaid
      heating fees
                          
                          $
                          -
                          
                          
                          $
                          27,321Prepaid
      rent
                          
                          
                          273,484
                          
                          
                          
                          275,696Other
      prepaid expenses
                          
                          
                          72,202
                          
                          
                          
                          16,057$
                          345,686
                          
                          
                          $
                          319,074





NOTE
5 – INVENTORIES


As of
December 31, 2008 and 2007, inventory consisted of the following:





2008
                        
                        
                        2007Raw
      Materials
                        
                        $
                        342,832
                        
                        
                        $
                        48,902Work-In-Process
                        
                        
                        -
                        
                        
                        
                        5,534Finished
      Goods
                        
                        
                        7,521,845
                        
                        
                        
                        6,203,014$
                        7,864,677
                        
                        
                        $
                        6,257,450





NOTE
6 - PROPERTIES AND EQUIPMENT


As of
December 31, 2008 and 2007 the property and equipment of the Company consisted
of the following:





2008
                      
                      
                      2007Office
      furniture and fixtures
                      
                      $
                      998,730
                      
                      
                      $
                      767,958Vehicles
                      
                      
                      441,921
                      
                      
                      
                      380,023Buildings
                      
                      
                      2,085,988
                      
                      
                      
                      1,400,166Total
      property and equipment
                      
                      
                      3,526,639
                      
                      
                      
                      2,548,147Less:
      Accumulated depreciation
                      
                      
                      (846,432
                      )
                      
                      
                      (509,518
                      )Net
      value of property and equipment
                      
                      $
                      2,680,207
                      
                      
                      $
                      2,038,629





The
Company had depreciation expense of $293,632 and $202,098 for the years
ended December 31, 2008 and 2007.





NOTE 7–CONSTRUCTION IN
PROGRESS& SOFTWARE
DEVELOPMENT:





As of
December 31, 2008 and December 31, 2007, construction in progress, representing
Infrastructures improvement and software development, amounted to $6,066,249 and
$0, respectively. The amount of capitalized interest included in
construction in progress is $311,702.  The Company will begin
depreciating these assets when they are placed in service.





As of
December 31, 2008 and 2007, the construction in progress of the Company
consisted of the following:




F-16




2008
                    
                    
                    2007Infrastructure
      improvement
                    
                    $
                    4,841,430
                    
                    
                    $
                    -Capitalized
      interest
                    
                    
                    913,117
                    
                    
                    
                    -Total
      infrastructure improvement
                    
                    
                    5,754,547
                    
                    
                    
                    -Software
      development
                    
                    
                    311,702
                    
                    
                    
                    -Total
                    
                    $
                    6,066,249
                    
                    
                    $
                    -





NOTE
8-   INTANGIBLE ASSETS


As of
December 31, 2008 and 2007, the intangible assets of the Company consisted of
the following:





2008
                      
                      
                      2007Trade
      mark
                      
                      $
                      1,174
                      
                      
                      $
                      1,097Software
                      
                      
                      109,293
                      
                      
                      
                      96,705Total
      intangible assets
                      
                      
                      110,467
                      
                      
                      
                      97,801Less:
      Accumulated
      amortization
                      
                      
                      (36,780
                      )
                      
                      
                      (16,649
                      )Net
      value of intangible assets
                      
                      $
                      73,687
                      
                      
                      $
                      81,152





The
amortization expense for the years ended December 31, 2008 and
2007 amounted to $18,360 and $1,811, respectively.





The
amortization expenses for intangible assets for next five years after December
31, 2008 are as follows:




December
      31, 2009
                    
                    $
                    16,469December
      31, 2010
                    
                    
                    14,888December
      31, 2011
                    
                    
                    13,921December
      31, 2012
                    
                    
                    9,234December
      31, 2013
                    
                    
                    5,667Total
                    
                    $
                    60,179





NOTE
9-   ACCRUED EXPENSES AND OTHER PAYABLE


The other
payable represents the deposits made by the sales representatives and sales
distributors for the right to sale products for the Company.  Other
payables and accrued expenses consist of the following as of December 31, 2008
and 2007:




F-17




2008
                          
                          
                          2007Accrued
      compensation
                          
                          $
                          998,824
                          
                          
                          $
                          889,382Accrued
      rent expense
                          
                          
                          247,573
                          
                          
                          
                          201,108Accrued
      professional fees
                          
                          
                          60,806
                          
                          
                          
                          -Accrued
      litigation
                          
                          
                          311,685
                          
                          
                          
                          -Accrued
      acquisition cost
                          
                          
                          -
                          
                          
                          
                          65,802Accrued
      interest
                          
                          
                          78,473
                          
                          
                          
                          56,737Accrued
      payable to other companies
                          
                          
                          435,135
                          
                          
                          
                          20,920Accrued
      education& employee funds
                          
                          
                          29,088
                          
                          
                          
                          -Other
      accrued expense
                          
                          
                          48,564
                          
                          
                          
                          -Sales
      agent deposits
                          
                          
                          84,668
                          
                          
                          
                          54,459Rent
      security deposit
                          
                          
                          -
                          
                          
                          
                          69,842Other
      payable
                          
                          
                          117,251
                          
                          
                          
                          76,985Total
                          
                          $
                          2,412,067
                          
                          
                          $
                          1,435,235





NOTE
10-   ADVANCE FROM CUSTOMERS


The
advances from customers amounted to $2,580,894 and $799,910, respectively as of
December 31, 2008 and 2007, represent the deposits made by customers to purchase
inventory from the Company.





NOTE
11-   DEFERRED INCOME


A portion
of the Company’s net revenue is derived directly from government-sponsored
healthcare programs, and the Company is therefore subject to government
regulations on reimbursement on the sales made through the healthcare programs.
The Jilin Province Social Insurance Bureau and Changchun City Insurance Bureau
reimburse 90% of the sales that the Company’s pharmacy retail stores made
through the healthcare program networks in the following month, and retain 10%
of the sales until the following year. The amount will be repaid proportionally
based on the level of evaluation made by the Insurance Bureau in the following
year. The Company classified the 10% of sales that made through the healthcare
program networks as deferred income as the collectability of the sales is
uncertain. As of December 31, 2008 and 2007, the Company has deferred income of
$273,753 and $239,937, respectively.





NOTE
12-   SHARES TO BE ISSUED


The
Company classifies all amounts, against which shares have not been issued, as
shares to be issued. Once the company issues shares, the amounts are classified
as Common stock. As of December 31, 2008 the Company has total 500,000 shares to
be issued with balance of $35,000 pursuant to an agreement with a software
consultant entered into by the Company in 2005.





NOTE
13 – OTHER INCOME





Other
income mainly consists of rental income and management fee
income.  The other income for the years ended December 31, 2008 and
2007 amounted to $690,517 and $678,888, respectively.


The
company sub-leases its building to an unrelated company.  The lease
term is one year.  The company recognizes rent income on a
straight-line basis over the term of the lease.




F-18




NOTE
14-   TAX PAYABLE





Tax
payable comprised of the following taxes as of December 31, 2008 and
2007:





2008
                  
                  
                  2007VAT
                  
                  $
                  14,247
                  
                  
                  $
                  20,651Business
      Tax
                  
                  
                  166,817
                  
                  
                  
                  88,574City
      Construction Tax
                  
                  
                  6,660
                  
                  
                  
                  6,613Education
      Tax
                  
                  
                  5,357
                  
                  
                  
                  5,229Income
      Tax
                  
                  
                  1,046,004
                  
                  
                  
                  160,109Others
                  
                  
                  1,326
                  
                  
                  
                  1,723Total
                  
                  $
                  1,240,011
                  
                  
                  $
                  282,899





The
Company is registered in the State of Delaware and has operations in primarily
two tax jurisdictions - the PRC and the United States. For certain operations in
the US, the Company has incurred net accumulated operating losses for income tax
purposes The Company believes that it is more likely than not that these net
accumulated operating losses will not be utilized in the future. Therefore, the
Company has provided full valuation allowance for the deferred tax assets
arising from the losses at these locations as of December 31,
2008.  Accordingly, the Company has no net deferred tax
assets.





The
provision for income taxes from continuing operations on income consists of the
following for the years ended December 31, 2008 and 2007:


2008
                  
                  
                  2007US
      Current Income Tax Expense (Benefit)Federal
                  
                  $
                  -
                  
                  
                  $
                  -State
                  
                  
                  -
                  
                  
                  
                  -$
                  -
                  
                  
                  $
                  -PRC
      Current Income Tax Expense
                  
                  $
                  1,009,643
                  
                  
                  $
                  17,888Total
      Provision for Income Tax
                  
                  $
                  1,009,643
                  
                  
                  $
                  17,888





The
following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Statement of
Operations:


2008
                  
                  
                  2007Tax
      expense (credit) at statutory rate - federal
                  
                  
                  34
                  %
                  
                  
                  -State
      tax expense net of federal tax
                  
                  
                  6
                  %
                  
                  
                  -Changes
      in valuation allowance
                  
                  
                  (40
                  )%
                  
                  
                  -Foreign
      income tax - PRC
                  
                  
                  25
                  %
                  
                  
                  33
                  %Exempt
      from income tax
                  
                  
                  (9
                  )%
                  
                  
                  (32.6
                  )%Tax
      expense at actual rate
                  
                  
                  16
                  %
                  
                  
                  0.4
                  %




F-19




United States of
America


The
Company has significant income tax net operating losses carried forward from
prior years. Due to the change in ownership of more than fifty percent, the
amount of NOL which may be used in any one year will be subject to a restriction
under section 382 of the Internal Revenue Code. Due to the uncertainty of the
realizability of the related deferred tax assets of $4,816,248, a reserve equal
to the amount of deferred income taxes has been established at December 31,
2008. The Company has provided 100% valuation allowance to the deferred tax
assets as of December 31, 2008.





People’s Republic of China
(PRC)


Pursuant
to the PRC Income Tax Laws, the Company's subsidiary is generally subject to
Enterprise Income Taxes ("EIT") at a statutory rate of 25%, The Company received
income tax exemption from the People's Republic of China for the three year
period ended December 31, 2007. As of December 31, 2008, the Company’s PRC
subsidiary had net taxable income of $7,245,543. The Company accrued income
taxes at the rate of 25% on net taxable income.





The
following table sets forth the significant components of the provision for
income taxes for operation in PRC as of December 31, 2008 and
2007.





2008
                    
                    
                    2007Net
      taxable income
                    
                    $
                    7,245,543
                    
                    
                    $
                    4,569,869Income
      tax @25% & 33%, respectively
                    
                    $
                    1,009,643
                    
                    
                    $
                    17,888





NOTE
15-   SHORT-TERM LOANS PAYABLE




The Company had loans payable amounting
to $1,967,185 as of December 31, 2008 and $389,977 as of December 31, 2007. The
loans are secured by personal properties of a main shareholder of the Companies.
The loans payable comprised ofthe following:


2008
                    
                    
                    2007Loan
      payable to Changchun Beilong Logistic Trading Co., interest at 12%
      annually, due by June 25, 2008
                    
                    
                    -
                    
                    
                    
                    274,176Loan
      payable to a non-related party, interest at 12% annually, due by July 23,
      2008
                    
                    
                    -
                    
                    
                    
                    20,563Loan
      payable to a non-related party, interest free, due by December 31,
      2009
                    
                    
                    249,406Loan
      payable to a non-related party, interest free, due by December 31,
      2009
                    
                    
                    772,156Loan
      payable to a non-related party, interest free, due by December 31,
      2009
                    
                    
                    558,642Loan
      payable to a non-related party, interest free, due by December 31,
      2009
                    
                    
                    234,736Loan
      payable to a non-related party, interest free, due by February 24,
      2009
                    
                    
                    22,007Various
      loans, interest free, unsecured and due on demand
                    
                    
                    130,238
                    
                    
                    
                    95,238Total
                    
                    $
                    1,967,185
                    
                    
                    $
                    389,997





F-20




NOTE
16- LONG-TERM LOAN PAYABLE




The
Company had long term loans payable in the total principal amount
of $1,320,390 as of December 31, 2008 and $959,616 as of December 31, 2007.
The loans are secured by personal properties of a major shareholder of the
Company. The loans payable at December 31, 2008 comprised of the
following:




2008
                
                
                2007Loan
      payable to Runfeng Agriculture Credit Union, interest at 11.02% annually,
      due by January 26, 2011
                
                
                1,320,390
                
                
                
                959,616




The
following is the future payment schedule of the long term loan:




Due
      by January 26, 2011
                    
                    $
                    1,320,390




NOTE
17-   LOANS FROM RELATED PARTIES




As of
December 31, 2008 and 2007, the loans from related parties were comprised of the
following:


2008
                    
                    
                    2007Loans
      payable to  a shareholder, interest free, due by March 22, 2008,
      and unsecured
                    
                    
                    -
                    
                    
                    $
                    41,126Loans
      payable to  a shareholder, interest at 12% annually, due by
      February 28, 2008, and unsecured
                    
                    
                    -
                    
                    
                    
                    704,811Loans
      payable to  a shareholder, interest free, due by March 22, 2008,
      and unsecured
                    
                    
                    -
                    
                    
                    
                    791,957Loans
      payable to officers, interest free, due on demand, and
      unsecured
                    
                    
                    184,662
                    
                    
                    
                    184,663Total
                    
                    $
                    184,662
                    
                    
                    $
                    1,722,557





The
interest expense was $6,321 and $54,616 for the year ended December 31, 2008 and
2007.





NOTE
18 - SHAREHOLDERS' EQUITY


As of
December 31, 2008 and 2007, the Company had 31,400,540 and 31,041,845 shares of
common stock issued and outstanding.




F-21




On April
1, 2008, the Company issued to Investor Relations International (“IRI”) 250,000
restricted common stocks valued at $275,000, to render investor relations and
financial communication services. The Company is amortizing the prepaid
consulting over 1 year period based upon the terms of the
agreement.




As of
December 31, 2008, the unamortized fee amounted to $68,750 for shares issued and
$72,815 for warrants granted.




As of
October 30, 2008, the Company sold 108,695 shares to an unrelated party for
$50,000.  The amount was received directly by a related party, and the
Company shows a receivable from the related party for such
amount.  The related party receivable is interest free, due on demand,
unsecured and has been reflected in the equity section in the accompanying
consolidated financial statements.





NOTE
19 - WARRANTS





Following
is a summary of the warrant activity for the year ended December 31,
2008:





Outstanding,
      December 31, 2007
                          
                          
                          1,810,923Granted
      during the year
                          
                          
                          300,000Expired
      during the year
                          
                          
                          (88,843
                          )Exercised
      during the year
                          
                          
                          -Outstanding,
      December 31, 2008
                          
                          
                          2,022,080





Following
is a summary of the status of warrants outstanding at December 31,
2008:





Outstanding
      Warrants
                        
                        
                        Exercisable
      WarrantsExercise
                          Price
                        
                        Number
      of
                          Underlying Shares
                        
                        
                        Average
                          Remaining
                          Contractual
      Life
                        
                        
                        Average
      Exercise Price
                        
                        
                        Number
      of
                          Underlying Shares
                        
                        
                        Intrinsic
      Value$0.5-$4.575
                        
                        2,022,080
                        
                        
                        
                        3.02
                        
                        
                        $
                        0.93
                        
                        
                        
                        2,022,080
                        
                        
                        $
                        -





The
assumptions used in calculating the fair value of options granted using the
Black-Scholes option pricing model are as follows:





The
300,000 warrants granted at March 15, 2008:





Risk-free
      interest rate
                  
                  
                  2.47
                  %Expected
      life of the warrants
                  
                  5.00
      yearExpected
      volatility
                  
                  
                  199
                  %Expected
      dividend yield
                  
                  
                  0





NOTE
20 – COMMITMENTS AND CONTINGINCY




Consulting
agreements:




On April
1, 2008, the Company signed a letter of engagement with Investor Relations
International (“IRI”).  According to the terms of the agreement, IRI
agreed to perform investor relations and financial communication services. The
agreement was for a twelve-month period and the Company agreed to pay $10,000
per month to IRI, issue 250,000 shares of restricted common stock, and issue
300,000 warrants at an exercise price from $1.5 to $4 per
share.  During the year ended December 31, 2008, the Company expensed
$424,700 and deferred $141,565 in the consolidated financial statements for the
shares and warrants, respectively.




F-22





Leases:





The
Company leases its operating locations.  Initial terms are typically 5
to 10 years, followed by additional terms containing priority of renewal options
at the maturity of the lease agreements, and may include rent escalation
clauses.  The company recognizes rent expense on a straight-line basis
over the term of the lease.





Minimum
rental commitments at December 31, 2008, under all leases having an initial or
remaining non-cancelable term of more than one year are shown:





2009
                        
                        $
                        759,1012010
                        
                        
                        712,5212011
                        
                        
                        640,7922012
                        
                        
                        86,5222013
                        
                        
                        -Total
      minimum lease payments
                        
                        $
                        2,198,936





Legal
proceedings:




On or
about October 17, 2008, a former officer initiated an action in the Superior
Court for the State of California, County of Los Angeles, Central District,
against the Company alleging claims for damages related to an alleged employment
agreement.  On December 29, 2008, the Company filed an Answer to the
Complaint.  The Company strongly disputes the claims and is diligently
defending against them. The matter is presently in the discovery stage and has
been set for trial to commence on October 6, 2009.





The
Company is defending itself against claims for open account and intentional
misrepresentation.  The Plaintiff is seeking past due attorneys’ fees
for services rendered in the amount of $193,100.  The Plaintiff is
also seeking 67,000 shares of the Company’s common stock. The Company’s
management has indicated willingness to settle this matter
out-of-court.  The Company believes that it is likely that the Court
will award the Plaintiff attorneys’ fees.  The Company has accrued
$92,685 in the accompanying financial statements.





The
Company is also involved in an ongoing legal proceeding filed in Orange County
Superior Court on or about November 9, 2004.  In this action, the
Cross-Complainant, Terry Koosed, is seeking to amend a $219,000 judgment he
obtained to include a subsidiary of the predecessor-in-interest of the Company,
which was not named or a participant in such lawsuit.  The Company
strongly disputes the lawsuit and is aggressively defending such action. The
Company has accrued $219,000 in the accompanying financial
statements.




NOTE
21 – SEGMENT INFORMATION





The Company operates in
three business segments: retail drug stores, pharmaceutical medicine wholesales
and ginseng product sales. These segments were identified based on their
separate and distinct products and services, technology, marketing strategies
and management reporting. Management evaluates the segments’ operating
performance separately and allocates resources based on their respective
financial condition, results of operations and cash flows. Inter-segment
transactions and balances are eliminated in consolidation.




The
retail drug store segment is complemented by such core front-end categories as
over-the-counter medications, health and beauty products, and other
items.  As of June 30, 2008, the retail drug store segment operated 50
retail stores with business area of 18,462 M2in three
cities in China primarily.




F-23





The
pharmaceutical medicine wholesales segment, operated through Yongxin Medical,
provides logistics wholesale distribution of over-the-counter and prescribed
medicines to hospitals, clinics, medical institutions and retail drug
stores.





The
ginseng products segment operated through Dingjian, processing and manufacturing
ginseng electuary, pellets and liquid extracts that distributed by wholesalers
and in retail drug stores.





The
following table summarizes significant financial information by
segment:





2008
                                                          
                                                          
                                                          2007Revenues
      from unaffiliated customers:Retail
      Drug Stores
                                                          
                                                          $
                                                          10,871,822
                                                          
                                                          
                                                          $
                                                          8,496,344Pharmaceutical
      Medicine Wholesale
                                                          
                                                          
                                                          53,117,095
                                                          
                                                          
                                                          
                                                          39,303,098Unallocated
                                                          
                                                          
                                                          1,000
                                                          
                                                          
                                                          
                                                          93,390Revenues
      from Inter-company sales
                                                          
                                                          
                                                          (4,866,661
                                                          )
                                                          
                                                          
                                                          (4,636,799
                                                          )Consolidated
      Totals
                                                          
                                                          $
                                                          59,123,256
                                                          
                                                          
                                                          $
                                                          47,892,833Net
      income:Retail
      Drug Stores
                                                          
                                                          $
                                                          599,589
                                                          
                                                          
                                                          $
                                                          472,328Pharmacy
      Wholesale
                                                          
                                                          
                                                          4,482,397
                                                          
                                                          
                                                          
                                                          3,264,587Unallocated
                                                          
                                                          
                                                          (930,279
                                                          )
                                                          
                                                          
                                                          (159,537
                                                          )Net Income from
      Inter-company
                                                          
                                                          
                                                          (85,568
                                                          )
                                                          
                                                          
                                                          -Consolidated
      Totals
                                                          
                                                          $
                                                          4,066,139
                                                          
                                                          
                                                          $
                                                          3,577,378Depreciation
      and amortization:Retail
      Drug Stores
                                                          
                                                          $
                                                          167,680
                                                          
                                                          
                                                          $
                                                          92,692Pharmacy
      Wholesale
                                                          
                                                          
                                                          142,182
                                                          
                                                          
                                                          
                                                          110,388Unallocated
                                                          
                                                          
                                                          2,130
                                                          
                                                          
                                                          
                                                          829Consolidated
      Totals
                                                          
                                                          $
                                                          311,992
                                                          
                                                          
                                                          $
                                                          203,909Capital  expenditures:Retail
      Drug Stores
                                                          
                                                          $
                                                          1,350,129
                                                          
                                                          
                                                          $
                                                          695,068Pharmacy
      Wholesale
                                                          
                                                          
                                                          5,399,303
                                                          
                                                          
                                                          
                                                          330,608Unallocated
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          4,249Consolidated
      Totals
                                                          
                                                          $
                                                          6,749,432
                                                          
                                                          
                                                          $
                                                          1,029,925Identifiable
      assets:Retail
      Drug Stores
                                                          
                                                          $
                                                          8,333,213
                                                          
                                                          
                                                          $
                                                          6,904,424Pharmacy
      Wholesale
                                                          
                                                          
                                                          23,206,845
                                                          
                                                          
                                                          
                                                          15,292,694Unallocated
                                                          
                                                          
                                                          7,664
                                                          
                                                          
                                                          
                                                          201,893Consolidated
      Totals
                                                          
                                                          $
                                                          31,547,722
                                                          
                                                          
                                                          $
                                                          22,399,011





F-24





NOTE
22 – STATUTORY RESERVE


As
stipulated by the Company Law of the People’s Republic of China (PRC), net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:





i.
            Making
      up cumulative prior years’ losses, if
any;


ii.
            Allocations
      to the “Statutory surplus reserve” of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company’s registered
  capital;


iii.
            Allocations of 5-10% of income
      after tax, as determined under PRC accounting rules and regulations, to
      the Company’s “Statutory common welfare fund”, which is established for
      the purpose of providing employee facilities and other collective benefits
      to the Company’s employees; and and statutory common welfare fund is no
      longer required per the new cooperation law executed in 2006.


iv.
            Allocations
      to the discretionary surplus reserve, if approved in the stockholders’
      general meeting.





In
accordance with the Chinese Company Law, the company allocated 10% of its annual
net income, amounting to $499,641 and $566,329 as statutory reserve for the year
ended December 31, 2008 and 2007, respectively.




NOTE
23 - DISCONTINUED OPERATIONS




On
September 30, 2005, Software Education of America, Inc., subsidiary of Digital
Learning Institute, Inc., filed a petition in bankruptcy under Chapter 7 of the
U.S. Bankruptcy Code. The petition was necessitated because SEA was unable to
continue to meet its financial obligations. SEA is presented in the accompanying
financial statements as a discontinued operation.





Balance
Sheet information for the discontinued subsidiaries of Digital Learning
Institute, Inc., SEA and Global as of December 31, 2008 is as
follows:





As
      of
                            December
      31,
                            2008Assets:Cash
                          
                          $
                          46Liabilities:Accounts
      payable
                          
                          $
                          227,636Accrued
      expenses
                          
                          
                          238,581Notes
      payable
                          
                          
                          162,666Total
      liabilities
                          
                          $
                          628,883Net
      liabilities of discontinued operations
                          
                          $
                          628,837





Notes
payable consist of two unsecured, non-interest bearing notes payable to two
former stockholders of SEA totaling $16,666 due January 15, 2005. No payments
have been made.





Notes
payable also include a $146,000 line of credit acquired from SEA and converted
into a term loan payable with interest at the prime rate plus 3.5% secured by
all assets of SEA of approximately $83,000 and guaranteed by the former
stockholders of SEA. This loan is payable in monthly principal payments of
$6,083 plus interest until November 15, 2006, at which time all unpaid principal
and accrued interest is due. A technical event of default occurred with
this note.





F-25