##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 20-F
 (Mark One)
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 or
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008.
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from to
 or
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 Commission file number: 001-33340
 Tongjitang Chinese Medicines Company
   (Translation of Registrants name into English)
  (Jurisdiction of incorporation or organization)
 th
 (Address of principal executive offices)
 th
 (Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredAmerican Depositary Shares, each representing four
    
    New York Stock ExchangeOrdinary Shares, par value $0.001 per share
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
  None
(Title of Class)
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
  None
(Title of Class)
  135,209,722 ordinary shares as of December 31, 2008.
 Yes
o No þ
 o þ
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  þ o o
 o o
 o þ
  Yes o No o




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##### 



TABLE OF CONTENTS
 INTRODUCTION
    
    
    1FORWARD-LOOKING INFORMATION
    
    
    1PART I
    
    
    3ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    3ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3. KEY INFORMATION
    
    
    3ITEM 4. INFORMATION ON THE COMPANY
    
    
    22ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    41ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    41ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    59ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    66ITEM 8. FINANCIAL INFORMATION
    
    
    69ITEM 9. THE OFFER AND LISTING
    
    
    70ITEM 10. ADDITIONAL INFORMATION
    
    
    71ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    81ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    82PART II
    
    
    83ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    83ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    83ITEM 15. CONTROLS AND PROCEDURES
    
    
    83ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    84ITEM 16B. CODE OF ETHICS
    
    
    84ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    85ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    85ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
    
    
    85ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
    
    
    85ITEM 16G. CORPORATE GOVERNANCE
    
    
    85PART III
    
    
    86ITEM 17. FINANCIAL STATEMENTS
    
    
    86ITEM 18. FINANCIAL STATEMENTS
    
    
    86ITEM 19. EXHIBITS
    
    
    86Exhibit 1.1Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1Exhibit 13.2Exhibit 15.1Exhibit 15.2
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INTRODUCTION
  
    
    $, US$, USD and U.S. dollars are to the legal currency of the United States;
    
    ADSs are to our American depositary shares, each of which represents four ordinary shares;
    
    ADRs are to the American depositary receipts, which, if issued, evidence our ADSs;
    
    China and the PRC are to the Peoples Republic of China, excluding, for the
purposes of this annual report only, Taiwan and the special administrative regions of
Hong Kong and Macau;
    
    ordinary shares are to our ordinary shares, par value US$0.001 per share;
    
    National Medical Insurance Program is to Chinas national medical insurance program;
    
    provinces are to 31 provincial level governments in China, including 22 provinces,
four municipalities directly administered under the PRC central government (for example,
Beijing and Shanghai) and five autonomous regions (for example, Guangxi and Tibet);
    
    RMB and Renminbi are to the legal currency of China;
    
     and Euro are to the legal currency of the European Union; and
    
    we, us, our company and our are to Tongjitang Chinese Medicines Company, its
predecessor entities and its consolidated subsidiaries.
   
 FORWARD-LOOKING INFORMATION
  
    
    our anticipated growth and marketing strategies;
    
    our future business development, results of operations and financial condition;
    
    expansion of the National Medical Insurance Program in terms of both funding and enrollment;
    
    our ability to maintain exclusive production rights for Xianling Gubao;
    
    market acceptance of our products;
    
    our ability to develop and commercialize new products;
  1




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
    
    our ability to obtain regulatory approvals for new products and to maintain or update
the regulatory approvals for our existing products;
    
    our ability to maintain regulatory approvals for our production facilities and to
obtain new approvals for expansions of our production facilities;
    
    our ability to expand our business through organic growth and strategic acquisitions;
    
    our expectations regarding governmental support for the development of the
traditional Chinese pharmaceutical industry;
    
    our expectations with respect to our ability to secure raw materials in the future;
    
    competition from other manufacturers of pharmaceutical products, including
manufacturers of traditional Chinese medicines;
    
    our ability to effectively protect our existing and future intellectual property and
not to infringe on the intellectual property of others; and
    
    fluctuations in general economic and business conditions in China.
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PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 Selected Financial Data
   Year Ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(in thousands, except share and per share data)Consolidated Statement of Operations DataNet revenues
    
    
    234,724
    
    
    
    346,147
    
    
    
    484,992
    
    
    
    596,007
    
    
    
    451,032
    
    
    
    66,109Cost of revenues
    
    
    (126,160
    )
    
    
    (141,784
    )
    
    
    (161,675
    )
    
    
    (206,019
    )
    
    
    (167,345
    )
    
    
    (24,528
    )Gross profit
    
    
    108,564
    
    
    
    204,363
    
    
    
    323,317
    
    
    
    389,988
    
    
    
    283,687
    
    
    
    41,581Advertising expenses
    
    
    (40,127
    )
    
    
    (47,504
    )
    
    
    (85,088
    )
    
    
    (96,876
    )
    
    
    (80,180
    )
    
    
    (11,752
    )Other selling and marketing expenses
    
    
    (34,052
    )
    
    
    (37,626
    )
    
    
    (51,462
    )
    
    
    (68,357
    )
    
    
    (80,031
    )
    
    
    (11,730
    )General and administrative expenses
    
    
    (25,070
    )
    
    
    (26,164
    )
    
    
    (33,484
    )
    
    
    (92,487
    )
    
    
    (91,325
    )
    
    
    (13,386
    )Research and development expenses
    
    
    (1,678
    )
    
    
    (2,484
    )
    
    
    (4,680
    )
    
    
    (12,673
    )
    
    
    (17,368
    )
    
    
    (2,546
    )Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,062
    )
    
    
    (4,113
    )Impairment loss on intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,910
    )
    
    
    (10,687
    )Government grant (related to research and
development)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,428
    
    
    
    209Gain (loss) on disposal of property, plant and
equipment and land use right
    
    
    3,201
    
    
    
    22,723
    
    
    
    
    
    
    
    (72
    )
    
    
    3,970
    
    
    
    582Gain on disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,312
    
    
    
    192Other operating income
    
    
    471
    
    
    
    935
    
    
    
    1,283
    
    
    
    1,395
    
    
    
    1,801
    
    
    
    264Income (loss) from operations
    
    
    11,309
    
    
    
    114,243
    
    
    
    149,886
    
    
    
    120,918
    
    
    
    (77,678
    )
    
    
    (11,386
    )Other income (expenses)
    
    
    4,001
    
    
    
    732
    
    
    
    873
    
    
    
    51,424
    
    
    
    25,672
    
    
    
    3,764Income (loss) before income taxes and minority interest
    
    
    15,310
    
    
    
    114,975
    
    
    
    150,759
    
    
    
    172,342
    
    
    
    (52,006
    )
    
    
    (7,622
    )Provision for income taxes
    
    
    (4,074
    )
    
    
    (4,359
    )
    
    
    (16,392
    )
    
    
    (1,200
    )
    
    
    (502
    )
    
    
    (74
    )Minority interest
    
    
    126
    
    
    
    60
    
    
    
    (88
    )
    
    
    51
    
    
    
    208
    
    
    
    30Equity in earnings of an affiliate
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    11,362
    
    
    
    110,790
    
    
    
    134,279
    
    
    
    171,193
    
    
    
    (52,300
    )
    
    
    (7,666
    )Earnings (loss) per sharebasic and diluted
Ordinary shares
    
    
    0.14
    
    
    
    1.39
    
    
    
    1.47
    
    
    
    1.35
    
    
    
    (0.39
    )
    
    
    (0.06
    )Ordinary shares classified as mezzanine equity
    
    
    N/A
    
    
    
    N/A
    
    
    
    1.47
    
    
    
    1.35
    
    
    
    N/A
    
    
    
    N/AShares used in computation of earnings (loss) per
share Ordinary sharesBasic
    
    
    79,520,000
    
    
    
    79,520,000
    
    
    
    89,799,518
    
    
    
    124,479,794
    
    
    
    134,758,695
    
    
    
    134,758,695Diluted
    
    
    79,520,000
    
    
    
    79,520,000
    
    
    
    89,799,518
    
    
    
    124,483,978
    
    
    
    134,758,695
    
    
    
    134,758,695Ordinary shares classified as mezzanine equity
    
    
    N/A
    
    
    
    N/A
    
    
    
    1,468,949
    
    
    
    2,149,018
    
    
    
    N/A
    
    
    
    N/A
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Year Ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008Other Consolidated Financial DataGross margin
    
    
    46.3
    %
    
    
    59.0
    %
    
    
    66.7
    %
    
    
    65.4
    %
    
    
    62.9
    %Operating margin
    
    
    4.8
    %
    
    
    33.0
    %
    
    
    30.9
    %
    
    
    20.3
    %
    
    
    (17.2
    %)Net margin
    
    
    4.8
    %
    
    
    32.0
    %
    
    
    27.7
    %
    
    
    28.7
    %
    
    
    (11.6
    %)
 As of December 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(in thousands)Consolidated Balance Sheet DataCash and cash equivalents
    
    
    17,340
    
    
    
    35,488
    
    
    
    231,009
    
    
    
    797,755
    
    
    
    516,087
    
    
    
    75,645Inventories
    
    
    38,701
    
    
    
    28,176
    
    
    
    41,390
    
    
    
    76,194
    
    
    
    97,553
    
    
    
    14,299Accounts receivable, net of allowance for doubtful accounts
    
    
    61,760
    
    
    
    142,809
    
    
    
    172,102
    
    
    
    272,562
    
    
    
    214,543
    
    
    
    31,446Property, plant and equipment, net
    
    
    117,160
    
    
    
    115,611
    
    
    
    151,568
    
    
    
    155,849
    
    
    
    152,249
    
    
    
    22,316Total assets
    
    
    329,967
    
    
    
    453,750
    
    
    
    748,872
    
    
    
    1,494,055
    
    
    
    1,383,098
    
    
    
    202,726Short-term borrowings
    
    
    28,164
    
    
    
    133,072
    
    
    
    27,100
    
    
    
    89,100
    
    
    
    85,100
    
    
    
    12,473Total current liabilities
    
    
    162,549
    
    
    
    251,803
    
    
    
    132,482
    
    
    
    169,892
    
    
    
    190,536
    
    
    
    27,927Long-term bank loans
    
    
    95,000
    
    
    
    59,000
    
    
    
    118,000
    
    
    
    74,000
    
    
    
    50,000
    
    
    
    7,329Accrued expenses and other current liabilities
    
    
    95,159
    
    
    
    47,189
    
    
    
    64,461
    
    
    
    57,810
    
    
    
    81,130
    
    
    
    11,892Mezzanine equity
    
    
    
    
    
    
    
    
    
    
    120,643
    
    
    
    
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    72,013
    
    
    
    142,602
    
    
    
    377,064
    
    
    
    1,236,576
    
    
    
    1,134,815
    
    
    
    166,334Total liabilities and shareholders equity
    
    
    329,967
    
    
    
    453,750
    
    
    
    748,872
    
    
    
    1,494,055
    
    
    
    1,383,098
    
    
    
    202,726
 Exchange Rate Information
   Noon Buying RatePeriod
    
    Period End
    
    
    Average(1)
    
    
    Low
    
    
    High(RMB per US$1.00)2004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.27642005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.2765
    
    
    
    8.07022006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    8.0702
    
    
    
    7.80412007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.8127
    
    
    
    7.29462008
    
    
    6.8225
    
    
    
    6.9193
    
    
    
    7.2946
    
    
    
    6.7800November
    
    
    6.8254
    
    
    
    6.8281
    
    
    
    6.8373
    
    
    
    6.8220December
    
    
    6.8225
    
    
    
    6.8539
    
    
    
    6.8842
    
    
    
    6.82252009January
    
    
    6.8392
    
    
    
    6.8360
    
    
    
    6.8403
    
    
    
    6.8360February
    
    
    6.8395
    
    
    
    6.8363
    
    
    
    6.8470
    
    
    
    6.8241March
    
    
    6.8329
    
    
    
    6.8360
    
    
    
    6.8438
    
    
    
    6.8240April
    
    
    6.8180
    
    
    
    6.8306
    
    
    
    6.8361
    
    
    
    6.8180May
    
    
    6.8278
    
    
    
    6.8235
    
    
    
    6.8326
    
    
    
    6.8176
 
 (1)
    
    Averages for a period are calculated by using the average of the exchange rates at the end of
each month during the period. Monthly averages are calculated by using the average of the
daily rates during the relevant period. Capitalization and Indebtedness
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Reasons for the Offer and Use of Proceeds
  Risk Factors
 Risks Related to Our Company
 We depend heavily on the success of Xianling Gubao. Continued reduction in the volume of Xianling
Gubao that we sell or the average price at which we sell Xianling Gubao would cause our net
revenues to decline.
  The growth and success of our business depends on our ability to successfully market Xianling Gubao
to hospitals and the selection of Xianling Gubao as a winning medicine under the tender process
used by state-owned hospitals for medicine purchases.
   The growth and success of our business depends on our ability to successfully market Xianling Gubao
to retail pharmacies.
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The retail prices of our principal products are subject to price controls administered by the PRC
government authorities. Therefore, the retail prices of our principal products may not be raised
above their respective price ceilings without the governments
prior approval, which we may not be able to obtain. Furthermore, as has previously happened, we may be
required to lower the wholesale prices of our products as a result of any government-mandated
reduction in the price ceilings of these products.
   Our products that have been included in national and provincial medicine catalogs of the National
Medical Insurance Program may be removed from such catalogs or downgraded to a lower tier, and we
may encounter difficulty in seeking inclusion of our new products in these catalogs.
   Failure to obtain approval from the SFDA to convert a provisional national production standard of
our principal products to a national final production standard would require us to suspend or cease
the production of these products.
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If we lose the exclusive production rights for our products, such as Xianling Gubao and Zaoren
Anshen Capsules, other pharmaceutical manufacturers in China may produce medicines based on
identical or similar formulations to these products.
   Our failure to further improve our barrenwort extraction efficiency could limit or impair our
ability to absorb or mitigate the impact of any future price increase of barrenwort, which in turn
would have an adverse effect on our profit margins.
  Our current products have certain side effects. If side effects associated with our current or
future products are not identified prior to their marketing and sale, we may be required to
withdraw such products from the market, perform lengthy additional clinical trials or change the
labeling of our products, any of which could hinder or adversely affect our ability to generate
revenues.
  
    
    those medicines listed in the national and provincial medicine catalogs may be
removed from the catalogs or downgraded to a lower tier;
    
    regulatory authorities may withdraw or modify their approvals of such medicines;
    
    we may be required to reformulate these medicines, change the ways in which they
are marketed, conduct additional clinical trials, change the labeling of these
medicines or implement changes to obtain new approvals for our manufacturing
facilities;
    
    we may be less successful in tendering processes used by state-owned hospitals for medicine purchases;
    
    we may have to recall these medicines from the market and may not be able to re-launch them;
    
    we may experience a significant decline in sales of the affected products;
    
    our reputation may suffer; and
    
    we may become a target of lawsuits.
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We may not be able to obtain manufacturing or marketing approval for our future products, and
failure to obtain approvals for our future products could materially harm our business prospects.
  We depend on a limited number of distributors for a significant portion of our net revenues and
this dependence is likely to continue.
  Distributors potentially could divert our products designated for hospitals to retail pharmacies in
order to retain the difference between the wholesale prices for these two channels, and if we fail
to timely ascertain and promptly take actions against such diverted sales, our profitability would
be materially and adversely affected and our relationship with hospitals could be harmed.
  We may incur losses resulting from product liability claims or business interruptions resulting
from occurrence of natural catastrophes, acts of terrorism or fires, and we have limited insurance
coverage.
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We may not be able to manage the expansion of our operations effectively.
  In 2008 we were required to record impairment losses on goodwill and intangible assets and we may
have similar impairment losses in the future, which could cause our financial condition and results
of operations to be negatively affected in the future.
  Our future research and development projects may be unsuccessful, which would decrease our future
sources of revenues.
  Our failure to protect our intellectual property rights may undermine our competitive position, and
litigation to protect our intellectual property rights or defend against third-party allegations of
infringement may be costly and ineffective.
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Our failure to identify and acquire additional product candidates, or our failure to maintain or
expand our existing research cooperation arrangements with these research partners on terms we
desire, or if at all, could hinder our ability to develop new products and improve our existing
products, which in turn could limit our business prospects.
  We may be exposed to infringement or misappropriation claims by third parties, which, if adversely
determined against us, could cause us to pay significant damage awards.
  Customers may confuse our products with products of other traditional Chinese medicine companies
that use the Chinese characters of Tongjitang in their company names.
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Adverse publicity associated with our company or our products could have a material adverse effect
on our results of operations.
  Our business depends substantially on the continuing efforts of our executive officers, and our
business may be severely disrupted if we lose their services.
  If we are unable to attract, train, retain and motivate our prescription medicine and OTC medicine
salespeople, sales of our products may be materially and adversely affected.
  Our future success depends in part on our ability to make strategic acquisitions and investments.
Our failure to consummate or handle the risks associated with these acquisitions and investments
could have a material adverse effect on our market penetration and revenues growth.
  
    
    high acquisition and financing costs;
    
    potential ongoing financial obligations and unforeseen or hidden liabilities;
    
    failure to achieve the intended objectives, benefits or revenue-enhancing opportunities;
    
    cost of and difficulties in integrating acquired businesses and managing a larger business; and
    
    diversion of our resources and management attention.
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Our existing shareholders have substantial influence over our company and their interests may not
be aligned with the interests of our other shareholders.
  Our limited operating history may not serve as an adequate basis to judge our future prospects and
results of operations.
  
    
    maintain our leading position in the traditional Chinese medicine sector for the
treatment of osteoporosis in China;
    
    market our products to hospitals and retail pharmacies;
    
    diversify our revenue sources by successfully developing and marketing new medicines;
    
    respond to changes in Chinas regulatory environment;
    
    manage risks associated with intellectual property rights;
    
    maintain effective control over our costs and expenses;
    
    raise sufficient capital to sustain and expand our business; and
    
    attract, retain and motivate qualified personnel.
  Sales of Xianling Gubao are subject to seasonal fluctuations, which may cause our operating results
to fluctuate from quarter to quarter. This may result in volatility in the price of our ADSs.
  Our future capital needs are uncertain and we may need to raise additional funds in the future.
  
    
    changes in business conditions or other future developments;
    
    the time and expenses required to obtain regulatory clearances and approvals;
    
    the resources we devote to developing, manufacturing, marketing and selling our products;
    
    our ability to identify and our desire or need to pursue acquisitions or other investments; and
    
    the extent to which our products generate market demand.
  12




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The recent financial crisis and current uncertainty in global economic conditions could negatively
affect our business, results of operations and financial condition.
  We may be adversely affected by changes in environmental, employee health and safety and other laws
and regulations.
  Risks Related to Our Industry
 We face intense competition that may prevent us from maintaining or increasing market share for our
existing products and gaining market acceptance of our future products. Our competitors may develop
or commercialize products before or more successfully than us.
  The production of traditional Chinese medicines depends on the supply of quality medicinal raw
materials.
  Pharmaceutical companies in China are required to hold a number of permits and licenses to carry on
their business. Our ability to obtain and maintain these regulatory approvals is uncertain.
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The ongoing anti-corruption efforts initiated by the Chinese government targeting state-owned
hospitals could adversely affect our sales designated for hospitals.
  If we do not keep pace with rapid technological change, we may be unable to capture and sustain a
meaningful market position.
  Risks Related to Doing Business in China
 Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
products and materially and adversely affect our competitive position.
  
    
    the degree of government involvement;
    
    the level of development;
    
    the growth rate;
    
    the control of foreign exchange;
    
    the access of companies to financing; and
    
    the allocation of resources.
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##### Table of Contents



Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
    Any limitation on the ability of our subsidiaries to make dividend or distribution payments to us
could have a material adverse effect on our ability to conduct our business.
   15




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##### Table of Contents



The dividends we receive from our wholly-owned operating subsidiaries and our global income may be
subject to PRC tax under the new PRC tax law, which would have a material adverse effect on our
results of operations.
    Our foreign ADS holders may be subject to PRC withholding tax on dividends payable by us and on
gains realized on the sale of our ADSs, if we are classified as a PRC resident enterprise.
  The regulations relating to offshore investment activities by PRC residents may limit our ability
to acquire PRC companies and could adversely affect our business, financial condition and results
of operations. The regulation also establishes more complex procedures for acquisitions by foreign
investors, which could make it more difficult to pursue growth through acquisitions.
   16




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Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
  Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
    17




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##### Table of Contents



Our business benefits from PRC government incentives, particularly those available to
foreign-invested enterprises. Expiration of, or changes to, these incentives could have a material
adverse effect on our operating results.
     Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the
CSRC, for the listing and trading of our ADSs could have a material adverse effect on our business,
operating results, reputation and trading price of our ADSs.
    18




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##### Table of Contents



PRC regulation of loans and direct investment by offshore holding companies to PRC entities may
delay or prevent us from making loans or additional capital contributions to our PRC operating
subsidiaries.
    Risks Related to Our Ordinary Shares and ADSs
 The market price for our ADSs has been and is likely to continue to be, highly volatile.
  
    
    announcements of technological or competitive developments;
    
    regulatory developments in our target markets affecting us, our customers or our competitors;
    
    announcements regarding patent litigation or the issuance of patents to us or our competitors;
    
    announcements of studies and reports relating to the efficacy of our products or those of our competitors;
    
    actual or anticipated fluctuations in our quarterly operating results;
    
    changes in financial estimates by securities research analysts;
    
    changes in the economic performance or market valuations of our competitors;
    
    additions or departures of our executive officers and key marketing personnel;
    
    release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and
    
    sales or perceived sales of additional ordinary shares or ADSs.
  We have a number of material weaknesses in our internal control over financial reporting. If we
fail to maintain an effective system of internal control over financial reporting, we may not be
able to accurately report our financial results or prevent fraud.
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We were a passive foreign investment company for the taxable year ended December 31, 2008, which
could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or
ordinary shares.
  Substantial future sales orexpected sales of our ADSs or ordinary shares in the public market
could cause the price of our ADSs to decline.
  Holders of our ADSs may have fewer rights than shareholders and must act through the depositary to
exercise those rights.
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Holders of our ADSs may be subject to limitations on transfers of their ADSs.
  Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings and you may not receive cash dividends or other distributions if it is impractical
to make them available to you.
   We are a Cayman Islands company and, because judicial precedent regarding the rights of
shareholders is more limited under Cayman Islands law than under U.S. law, you may have less
protection for your shareholder rights than you would have under U.S. law.
  You may have difficulty enforcing judgments obtained against us.
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##### Table of Contents



We have incurred and will continue to incur increased costs as a result of being a public company.
  Our articles of association contain anti-takeover provisions that could have a material adverse
effect on the rights of holders of our ordinary shares and ADSs.
  
 ITEM 4. INFORMATION ON THE COMPANY
 History and Development of the Company
  
    
    Tongjitang Pharmaceutical, a wholly-owned subsidiary and our principal
operating company, engaging in the business of developing, manufacturing,
marketing and selling of medicines;
    
    Guizhou Tongjitang Pharmaceutical Distribution Co., Ltd., or Tongjitang
Distribution, a 92.76%-owned subsidiary of Tongjitang Pharmaceutical, engaging in
the business of wholesale distribution of medicines;
    
    Guizhou Tongjitang Pharmacy Chain Stores Co., Ltd., or Tongjitang Chain Stores,
a 96%-owned subsidiary of Tongjitang Distribution, engaging in the business of
retail sales of medicines;
    
    Guizhou Long-Life Pharmaceutical Company Limited, or Guizhou LLF, a
wholly-owned subsidiary of Tongjitang Pharmaceutical, engaging in the business of
producing and selling traditional Chinese medicines and nutritional products;
  22




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
    
    Qinghai Pulante Pharmaceutical Co. Ltd, or Pulante, a wholly-owned subsidiary
of Tongjitang Pharmaceutical, engaging in the business of developing,
manufacturing, marketing and distributing Tibetan recipe-originated plant-based
medicines; and
    
    Anhui Jingfang Pharmaceutical Co. Ltd, or Jingfang, a 99.13%-owned subsidiary
of Tongjitang Pharmaceutical, engaging in the business of producing and selling
western and traditional Chinese medicines. Guizhou LLF owns the remaining equity
interests in Jingfang.
  
  23




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th
  Business Overview
     2  2
  24




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 Manufacturing exclusivity
  Pricing
  SFDA approval
  Products
  Selected Marketed Drugs
    
    Indication
    
    Status
    
    Next MilestoneXianling Gubao
    
    Osteoporosis (Prescription)
    
    Marketed
    
    Osteoarthritis (Prescription)
    
    Marketed
    
    Ischemic bone necrosis (Prescription)
    
    Marketed
    
    Phase IV clinical
trial in the
process of
recruiting patientsBone fractures (Prescription)
    
    Marketed
    
    Osteoporosis (OTC)
    
    Marketed
    
    Zaoren Anshen Capsules
    
    Insomnia
    
    Marketed
    
    Moisturizing and Anti-Itching Capsules
    
    Inflammatory skin conditions
    
    Marketed
    
    
    25




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Xianling Gubao
          26




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##### Table of Contents



Zaoren Anshen Capsules
      Moisturizing and Anti-Itching Capsules
     27




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##### Table of Contents



Other Medicines
  Medicines
    
    Function
    
    IndicationDianbaizhu Syrup
    
    Increase the volume of blood flow
in heart and brain
    
    Treatment of vertigoCompound Glycyrrhiza Oral Solution
    
    Relieves cough and expectoration
    
    Treatment of upper respiratory infectionsJiao Ti Guo Jiao Bi Capsules
    
    Protects stomach lining
    
    Prevents gastritis and ulcersBu Shen Yi Lao Capsules
    
    Invigorates kidney and improves Qi
    
    Improves memory, breathing, hearing, and
general malaiseXin Nao Kang Capsules
    
    Improves coronary, cerebral, and
peripheral circulation
    
    Treatment of stroke and coronary artery diseaseJincishen Mixture
    
    Alleviates side-effects of
radiotherapy and chemotherapy for
cancer patients
    
    Ancillary to treatment of cancerHeiguteng Capsules
    
    Relieves rheumatic pain and
promotes blood circulation
    
    Treatment of rheumatoid arthritisChongcao Qingfei Capsules
    
    Alleviates the symptoms of
respiratory diseases
    
    Treatment of Chronic Obstructive Pulmonary
Disease (COPD)Fengshi Gutong Capsules
    
    Relieve rheumatic pain
    
    Treatment of rheumatoid arthritisJingshu Granules
    
    Relieve stiffness and pain,
promote blood circulation
    
    Treatment of degenerative osteoarthritis
(cervical spondylosis)
 Product Pipeline .
 Selected Pipeline Candidates
    
    Indication
    
    Status
    
    Next MilestoneJing Tong Ting
    
    Menstrual pain
    
    Phase III clinical trial completed
    
    Applying for certificate of
manufacturing and  marketingDa An Granules
    
    Anxiety
    
    Phase III ongoing
    
    Release of clinical
data in the second
half of 2009Yushuda Tablets
    
    Depression
    
    Phase III ongoing
    
    Release of clinical
data in the second
half of 2009Dan Xian Kang Gu Capsules
    
    Ischemic necrosis
    
    Phase III design ongoing
    
    Initiation of
clinical trial in
the second half of
2009Methylthioninium Chloride and
Procainimide Injection
    
    Post-surgical acute pain
    
    Application filed with SFDA for conducting clinical trials
    
    OA-008
    
    Osteoarthritis
    
    Pre-clinical
    
    Xianling Gubao Chewable Tablets
    
    Osteoporosis
    
    Pre-clinical
    
    
  28




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Marketing and Sales
  Marketing Strategy Division.
   Prescription Medicine Sales Force.
   29




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##### Table of Contents



2006
    
    
    2007
    
    
    2008Province
    
    Class 3
    
    
    Class 2
    
    
    Total
    
    
    Class 3
    
    
    Class 2
    
    
    Total
    
    
    Class 3
    
    
    Class 2
    
    
    TotalBeijing
    
    
    52
    
    
    
    89
    
    
    
    386
    
    
    
    52
    
    
    
    89
    
    
    
    387
    
    
    
    128
    
    
    
    129
    
    
    
    1,321Zhejiang
    
    
    36
    
    
    
    125
    
    
    
    283
    
    
    
    42
    
    
    
    258
    
    
    
    481
    
    
    
    59
    
    
    
    114
    
    
    
    487Guangdong
    
    
    42
    
    
    
    90
    
    
    
    221
    
    
    
    51
    
    
    
    104
    
    
    
    249
    
    
    
    70
    
    
    
    158
    
    
    
    324Jiangsu
    
    
    33
    
    
    
    72
    
    
    
    157
    
    
    
    40
    
    
    
    100
    
    
    
    193
    
    
    
    45
    
    
    
    128
    
    
    
    281Shanghai
    
    
    40
    
    
    
    113
    
    
    
    291
    
    
    
    40
    
    
    
    113
    
    
    
    299
    
    
    
    22
    
    
    
    64
    
    
    
    277Other 26 provinces
    
    
    285
    
    
    
    421
    
    
    
    919
    
    
    
    362
    
    
    
    588
    
    
    
    1,182
    
    
    
    407
    
    
    
    669
    
    
    
    1,525Total
    
    
    488
    
    
    
    910
    
    
    
    2,257
    
    
    
    587
    
    
    
    952
    
    
    
    2,791
    
    
    
    731
    
    
    
    1,262
    
    
    
    4,215
  2006
    
    
    2007
    
    
    2008Total Class 3 hospitals
    
    
    1,045
    
    
    
    1,186
    
    
    
    1,192Xianling Gubao formulary Class 3 hospitals
    
    
    488
    
    
    
    587
    
    
    
    731As a percentage of total Class 3 hospitals
    
    
    42.8
    %
    
    
    49.5
    %
    
    
    61.3
    %
 
 Source:
    
    The total number of Class 3 hospitals is based on statistics from the PRC Ministry of
Health in the relevant periods, which do not include hospitals administered by the Chinese
military or the Chinese Peoples Armed Police. OTC Medicine Sales Force.
   2006
    
    
    2007
    
    
    2008Stocking Retail
    
    
    Authorized
    
    
    Stocking
    
    
    Authorized
    
    
    Stocking
    
    
    AuthorizedProvinces
    
    Pharmacies
    
    
    Pharmacies(1)
    
    
    Retail Pharmacies
    
    
    Pharmacies(1)
    
    
    Retail Pharmacies
    
    
    Pharmacies(1)Shanghai
    
    
    1,365
    
    
    
    251
    
    
    
    1400
    
    
    
    245
    
    
    
    1,650
    
    
    
    275Jiangsu
    
    
    2,668
    
    
    
    572
    
    
    
    3400
    
    
    
    850
    
    
    
    3,900
    
    
    
    930Zhejiang
    
    
    2,653
    
    
    
    375
    
    
    
    2605
    
    
    
    500
    
    
    
    2,042
    
    
    
    665Liaoning
    
    
    1,450
    
    
    
    1,114
    
    
    
    1460
    
    
    
    1207
    
    
    
    1,780
    
    
    
    1,250Other 27 provinces
    
    
    29,540
    
    
    
    N/A
    
    
    
    26,770
    
    
    
    N/A
    
    
    
    24,720
    
    
    
    N/AAll Provinces
    
    
    37,676
    
    
    
    N/A
    
    
    
    35,635
    
    
    
    N/A
    
    
    
    34,092
    
    
    
    N/A
 
 (1)
    
    We do not have information regarding the total number of authorized pharmacies that stocked
Xianling Gubao in the periods indicated other than for the four provinces listed in this
table. Sales Support Division
  30




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Seasonality
  Distributors and Customers
    Manufacturing
   31




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##### Table of Contents



Production Capacity
  Annualized
    
    CapacityFacility
    
    Production Line
    
    Manufacturing Capacity
    
    Utilization RateXiuwen Facility
    
    Capsules
    
    600 million capsules
    
    
    110.8
    %Tablets
    
    600 million tablets
    
    
    18.1
    %Granules
    
    14.4 million packs
    
    
    68.1
    %Preliminary processing and extraction
    
    1,600 tonnes
    
    
    67.4
    %Xiaohe Facility
    
    Powder
    
    300 million packs
    
    
    55.7
    %Lozenge
    
    300 million pieces
    
    
    20.3
    %Capsules
    
    400 million capsules
    
    
    33.3
    %Tablets
    
    300 million tablets
    
    
    39.0
    %Syrup
    
    500 tonnes
    
    
    0.5
    %Plaster
    
    2.7 million pieces
    
    
    18.8
    %Alcoholature
    
    100 tonnes
    
    
    4.9
    %Liquor taken orally
    
    500 tonnes
    
    
    5.5
    %Guizhou LLF
    
    Mixture and liquor taken orally
    
    200 tonnes
    
    
    12.8
    %Capsules
    
    130 million capsules
    
    
    13.5
    %Pulante
    
    Capsules
    
    320 million capsules
    
    
    3.9
    %Granules
    
    10 million packs
    
    
    Tablets
    
    480 million tablets
    
    
    Ointment
    
    2.4 million pieces
    
    
    4.0
    %
  Raw Materials
    
    
    selecting variants of barrenwort that contain a higher level of active
ingredients;
    
    selecting parts of barrenwort that contain a higher level of active ingredients,
such as active ingredient-richer leaves and stems, instead of roots;
    
    using and purchasing barrenwort that is harvested between March and May, because
barrenwort harvested during this period has a higher level of active ingredients than
that harvested in other periods;
    
    using processing methods that can retain a higher amount of active ingredients extracted from barrenwort;
    
    teaming with research partners to research extraction methods and technologies; and
    
    using a combination of various technical ratios to arrive at a formula that enables us to increase our extraction efficiency.
  2
  32




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Intellectual Property
  Patents
 Invention Patents
 No.
    
    Description
    
    Valid Period
    
    Expiration Date1
    
    A controlled release pain killer chiefly used in the treatment of post-surgical wound and trauma wounds(1)
    
    20 years
    
    March 25, 20192
    
    A Chinese medicine preparation used in treatment of upper respiratory tract infections
    
    20 years
    
    October 29, 20233
    
    Moisturizing and Anti-Itching Capsules processing technology
    
    20 years
    
    January 29, 20224
    
    A plaster to treat aches and swelling
    
    20 years
    
    February 6, 20225
    
    Toothache treatment and processing technology(2)
    
    20 years
    
    February 24, 20156
    
    Shaoshi eye-protecting preparation and its processing method and usage
    
    20 years
    
    August 23, 20257
    
    A Chinese medicine for menorrhalgia treatment and its processing method
    
    20 years
    
    April 25, 20248
    
    A pharmaceutical preparation for depression treatment and its processing method
    
    20 years
    
    August 16, 20259
    
    An indication of a medicine for osteoporosis treatment
    
    20 years
    
    April 27, 202510
    
    A Chinese medicine preparation for bone necrosis treatment and its processing method
    
    20 years
    
    June 28, 202511
    
    A medicine for the treatment of painful obstructions
    
    20 years
    
    December 2, 202212
    
    An adjuvant medicine for treatment following radiotherapy for cancer
    
    20 years
    
    December 2, 202213
    
    A medicine to treat abdominal pain and diarrhea due to large intestine conditions
    
    20 years
    
    December 2, 202214
    
    Heiguteng Shenjin Tougu Spray and its processing method
    
    20 years
    
    December 29, 202415
    
    A Chinese medicated tape and method of preparation for the treatment of arthraligia due to wind, cold and dampness
    
    20 years
    
    August 9, 202516
    
    An oral solution of Rheum officinale Baill fruit acid and its processing method
    
    20 years
    
    August 1, 202617
    
    A choleretic capsule for the treatment of liver and gall system diseases
    
    20 years
    
    December 12, 202618
    
    An oral medicine for the treatment of gastric ulcer and digestive system diseases
    
    20 years
    
    April 24, 202719
    
    An externally used medicine for the treatment of skin diseases
    
    20 years
    
    January 27, 202920
    
    A processing method of barrenwort
    
    20 years
    
    April 8, 202821
    
    A Chinese medicine preparation for the treatment of generalized anxiety disorder and its processing method
    
    20 years
    
    June 24, 202822
    
    Antipyretic effervescent granules made of Cinnamomum delavayi Lecte for children and its processing method
    
    20 years
    
    September 23, 202823
    
    The processing method of Epmedin C as a control and its products
    
    20 years
    
    September 30, 202824
    
    A quality control method for preparation of drugs for the treatment of depression
    
    20 years
    
    October 23, 202825
    
    A synthetic method of medicinal Methylene blue
    
    20 years
    
    November 25, 2028
  33




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##### Table of Contents



Note:(1)
    
    The owner of Patent 1, Professor Zhitao Xia, has granted an exclusive license to Guizhou
Tongjitang Pharmaceutical Joint Stock Limited Company, the predecessor of Tongjitang
Pharmaceutical for the periods from March 30, 2004 to the expiration dates of this patent.(2)
    
    Mr. Xiaochun Wang, the chairman of Tongjitang Pharmaceutical, is the owner of Patent 5 and
has licensed this patent to us. Trademarks
   Proprietary Information
 Competition
   
    
    brand name and reputation;
    
    price;
    
    perceived efficacy;
    
    side effects;
    
    marketing ability;
    
    economies of scale;
    
    customer service and customer support capabilities; and
    
    customer base and customer loyalty.
  34




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##### Table of Contents




    
    Qiang Gu (Bone-Strengthening) Capsules, and
    
    Gu Song Bao Capsules/Granules.
   Competing MedicinesTraditional Chinese Medicines
    
    Western MedicinesZaoren Anshen Capsules
    
    Fufang Zaoren Capsules
    
    Alprazolam (Xanax)Zaoren Anshen Granules
    
    Zolpidem (Ambien)Anshen Bunao LiquidMoisturizing and Anti-Itching Capsules
    
    Shiduqing Capsules
    
    
 Environmental Matters
   
    
    organic waste from the extraction processwe have set aside a specific area
within our Guizhou facilities to gather this organic waste for local farmers to
remove and use as fertilizer;
    
    waste waterwe have our own waste water treatment facilities to treat the waste water from our production
processes; and
    
    alcoholwe have our own facilities for recycling alcohol.
 Insurance
  Regulations Relating to the Pharmaceutical Industry
   35




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##### Table of Contents



Registration and Approval of Medicine
  New Medicine
 Provisional National Production Standard
 Transitional Period
  Continuing SFDA Regulation
  Pharmaceutical Product Manufacturing
 Permits and Licenses for Pharmaceutical Manufacturers.
 Good Manufacturing Practice.
  36




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##### Table of Contents



Pharmaceutical Distribution
   Restrictions on Foreign Ownership of Pharmaceutical Wholesale and Retail Businesses in China.
 Good Supply Practice Standards.
  Price Controls
     37




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##### Table of Contents



Tendering Requirement for Hospital Purchases of Medicines
   Reimbursement under the National Medical Insurance Program
    Other Regulations
  Foreign Currency Exchange
    38




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##### Table of Contents



Foreign Exchange Registration of Offshore Investment by PRC Residents
    Employee Stock Options
       39




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##### Table of Contents



Dividend Distribution
  
    
    Wholly Foreign-Owned Enterprise Law (1986), as amended;
    
    Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended;
    
    Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended;
    
    Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended; and
    
    The Enterprise Income Tax Law (2007) and its Implementation Regulations (2007).
  Patents
  Organizational Structure
  Percentage ofordinary share/Place of
    
    registeredestablishment
    
    capital heldName of company
    
    and operation
    
    by the Company
    
    Principal activitiesTongjitang Pharmaceutical (Hong Kong) Limited
    
    Hong Kong
    
    
    100
    %
    
    Investment holdingUnisources
    
    BVI
    
    
    100
    %
    
    Investment holdingTongjitang Pharmaceutical
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and
sales of medicine productsTongjitang Distribution
    
    PRC
    
    
    92.76
    %
    
    Wholesale distribution of medicine productsTongjitang Chain Stores
    
    PRC
    
    
    89.05
    %
    
    Retail sales of medicine products and
medical devicesGuizhou LLF
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and
sales of medicine productsPulante
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and
distribution of Tibetan medicinesJingfang
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and
sales of medicine products
 Property, Plants and Equipment
 2
  2 2
  40




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##### Table of Contents



2 2 2
 2 2
 2 2
 2 2 2 2
   
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 You should read the following discussion and analysis of our financial condition and results
of operations in conjunction with our consolidated financial statements and the related notes
included elsewhere in this annual report on Form 20-F . This discussion may contain forward-looking
statements based upon current expectations that involve risks and uncertainties. Our actual results
may differ materially from those anticipated in these forward-looking statements as a result of
various factors, including those set forth under Item 3. Key InformationD. Risk Factors or in
other parts of this annual report on Form 20-F.
 Operating Results
 Overview
    41




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Acquisitions
        42




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##### Table of Contents



Disposition
  Key Performance Indicators
    Industry-wide Factors Affecting Our Results of Operations
   Specific Factors Affecting Our Results of Operations
  
    
    sales of Xianling Gubao designated for hospitals as a prescription medicine and
designated for retail pharmacies as an OTC medicine;
    
    pricing of Xianling Gubao and our other principal products;
  43




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##### Table of Contents




    
    cost of barrenwort, the primary raw material used in manufacturing Xianling Gubao; and
    
    seasonal variations in the demand for Xianling Gubao.
  Sales of Xianling Gubao Designated for Hospitals.
 
    
    Our ability to communicate to physicians and hospital administrators that Xianling
Gubao is efficacious and safe for the treatment of osteoporosis and other approved
medical indications based on Xianling Gubaos clinical results; and
    
    Patients perception of Xianling Gubaos efficacy and side effects.
   Sales of Xianling Gubao Designated for Retail Pharmacies.
 
    
    the level of consumer awareness of Xianling Gubao, which is significantly affected
by the effectiveness of our marketing of Xianling Gubao as an OTC medicine, including
our mass media advertising, community-based marketing activities, in-store
promotions, pharmacy salespeople education and incentive programs, and our direct
marketing to consumers; and
    
    consumers perception of Xianling Gubaos efficacy and side effects.
   44




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##### Table of Contents



Pricing of Our Principal Products.
 Retail Price Control
  Hospital Purchase Price Control
   45




---



##### Table of Contents



Cost of Barrenwort.
   Seasonal Variations.
 Net Revenues
   
    
    Sales to Hospitals. A substantial majority of our sales of Xianling Gubao and
our other prescription medicines designated for hospitals was made through
third-party distributors, and a very small portion of these medicines, as well as
third-party medicines, was sold directly to hospitals in Guizhou Province through
Tongjitang Distribution, our wholesale distribution subsidiary. In particular,
 
    
    In 2007 and 2008, we generated 56.1% and 66.4% of our sales of Xianling
Gubao from hospitals, respectively.
    
    In 2006, since we did not track sales of Xianling Gubao designated for
hospitals separately from those designated for retail pharmacies, we cannot
separately quantify these sales for these two markets. Based on our analysis
of sales data in light of Xianling Gubaos different pricing patterns for
hospitals and for retail
pharmacies, however, we believe that a substantial
majority of sales of Xianling Gubao was designated for hospitals in this
period and that these sales declined as a percentage of total sales of
Xianling Gubao in 2006.
  46




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##### Table of Contents




    
    Sales to Retail Pharmacies. A substantial majority of sales of our OTC
medicines was designated for retail pharmacies through distributors, and a very small
portion of these medicines, as well as third-party medicines, was sold to retail
pharmacies in Guizhou Province through Tongjitang Distribution and directly to
consumers through Tongjitang Chain Stores. In particular,
 
    
    In 2007 and 2008, we generated 43.9% and 33.6% of our sales of Xianling
Gubao from retail pharmacies, respectively.
    
    In 2006, since we did not track sales of Xianling Gubao designated for
hospitals separately from those designated for retail pharmacies, we cannot
separately quantify these sales for these two markets. Based on our analysis
of sales data in light of Xianling Gubaos different pricing patterns for
hospitals and for retail pharmacies, however, we believe that sales of
Xianling Gubao designated for retail pharmacies accounted for a material
portion of total sales of Xianling Gubao in this period and that these sales
grew larger as a percentage of total sales of Xianling Gubao in 2006.
   Cost of Revenues
  Years Ended December 31,2006
    
    
    2007
    
    
    2008RMB
    
    
    %
    
    
    RMB
    
    
    %
    
    
    RMB
    
    
    US$
    
    
    %(in thousands, except percentages)Net revenues
    
    
    484,992
    
    
    
    100.0
    
    
    
    596,007
    
    
    
    100
    
    
    
    451,032
    
    
    
    66,109
    
    
    
    100.0Cost of revenues
    
    
    161,675
    
    
    
    33.3
    
    
    
    206,019
    
    
    
    34.6
    
    
    
    167,345
    
    
    
    24,528
    
    
    
    37.1Gross profit
    
    
    323,317
    
    
    
    66.7
    
    
    
    389,988
    
    
    
    65.4
    
    
    
    283,687
    
    
    
    41,581
    
    
    
    62.9
  
    
    raw materials, which are primarily comprised of barrenwort and other medicinal
herbs. Barrenwort, the primary raw material used in manufacturing Xianling Gubao,
constituted 61.0% of our cost of raw materials used in 2008, as compared to 65.7% in
2007 and 84.2% in 2006. The average price per kilogram of barrenwort increased by
1.4% to RMB21.5(US$3.2) in 2008 from the average price of RMB21.2 in 2007 and decreased by 1.4%
in 2007 from RMB21.5 in 2006. The unit prices of most of the raw materials we used
increased only slightly during the same periods, while the unit prices of a few other
raw materials decreased slightly. We expect that the price of barrenwort will continue
to stabilize in the next few years and prices of our other raw materials will rise in
the near future. Our cost of raw materials will continue to constitute a significant
percentage of our cost of revenues;
    
    labor, including salaries and benefits for employees directly involved in manufacturing activities;
    
    packaging costs, including cost of packaging materials for our products;
    
    depreciation and amortization of manufacturing equipment and facilities. Due to
our capacity expansion, depreciation and amortization expenses, measured in absolute
terms, have increased significantly. We expect that depreciation and amortization
expenses in absolute terms will continue to increase in the near future as we
continue to grow; and
    
    overhead, including utility, parts for and maintenance of production equipment,
testing, and other expenses related to the manufacturing of our products.
   47




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Operating Expenses
  Years Ended December 31,2006
    
    
    2007
    
    
    2008RMB
    
    
    %
    
    
    RMB
    
    
    %
    
    
    RMB
    
    
    %(in thousands, except percentages)Net revenues
    
    
    484,992
    
    
    
    100.0
    %
    
    
    596,007
    
    
    
    100.0
    %
    
    
    451,032
    
    
    
    100.0
    %Advertising expenses
    
    
    85,088
    
    
    
    17.5
    %
    
    
    96,876
    
    
    
    16.3
    %
    
    
    80,180
    
    
    
    17.8
    %Other selling and marketing expenses
    
    
    51,462
    
    
    
    10.6
    %
    
    
    68,357
    
    
    
    11.5
    %
    
    
    80,031
    
    
    
    17.7
    %General and administrative expenses
    
    
    33,484
    
    
    
    6.9
    %
    
    
    92,487
    
    
    
    15.5
    %
    
    
    91,325
    
    
    
    20.3
    %Research and development expenses
    
    
    4,680
    
    
    
    1.0
    %
    
    
    12,673
    
    
    
    2.1
    %
    
    
    17,368
    
    
    
    3.9
    %
 Advertising Expenses
   Other Selling and Marketing Expenses
  General and Administrative Expenses
  Research and Development Expenses
   48




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##### Table of Contents



Taxation
  PRC Enterprise Income Tax
    Results of Operations
  Years Ended December 31,2006
    
    
    2007
    
    
    2008% of Net
    
    
    
    
    
    
    % of Net
    
    
    
    
    
    
    
    
    
    
    % of NetRMB
    
    
    Revenue
    
    
    RMB
    
    
    Revenue
    
    
    RMB
    
    
    US$
    
    
    Revenue(in thousands, except percentages)Net revenues
    
    
    484,992
    
    
    
    100.0
    
    
    
    596,007
    
    
    
    100.0
    
    
    
    451,032
    
    
    
    66,109
    
    
    
    100.0Cost of revenues
    
    
    (161,675
    )
    
    
    (33.3
    )
    
    
    (206,019
    )
    
    
    (34.6
    )
    
    
    (167,345
    )
    
    
    (24,528
    )
    
    
    (37.1
    )Gross profit
    
    
    323,317
    
    
    
    66.7
    
    
    
    389,988
    
    
    
    65.4
    
    
    
    283,687
    
    
    
    41,581
    
    
    
    62.9Advertising expenses
    
    
    (85,088
    )
    
    
    (17.6
    )
    
    
    (96,876
    )
    
    
    (16.3
    )
    
    
    (80,180
    )
    
    
    (11,752
    )
    
    
    (17.8
    )Other selling and marketing expenses
    
    
    (51,462
    )
    
    
    (10.6
    )
    
    
    (68,357
    )
    
    
    (11.5
    )
    
    
    (80,031
    )
    
    
    (11,730
    )
    
    
    (17.7
    )General and administrative expenses
    
    
    (33,484
    )
    
    
    (6.9
    )
    
    
    (92,487
    )
    
    
    (15.5
    )
    
    
    (91,325
    )
    
    
    (13,386
    )
    
    
    (20.2
    )Research and development expenses
    
    
    (4,680
    )
    
    
    (1.0
    )
    
    
    (12,673
    )
    
    
    (2.1
    )
    
    
    (17,368
    )
    
    
    (2,546
    )
    
    
    (3.9
    )Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,062
    )
    
    
    (4,113
    )
    
    
    (6.2
    )Impairment loss on intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,910
    )
    
    
    (10,687
    )
    
    
    (16.2
    )Government grant (related to research and development)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,428
    
    
    
    209
    
    
    
    0.3Gain (loss) on disposal of property, plant and equipment and land
use rights
    
    
    
    
    
    
    
    
    
    
    (72
    )
    
    
    0.0
    
    
    
    3,970
    
    
    
    582
    
    
    
    0.9Gain on disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,312
    
    
    
    192
    
    
    
    0.3Other operating income
    
    
    1,283
    
    
    
    0.3
    
    
    
    1,395
    
    
    
    0.3
    
    
    
    1,801
    
    
    
    264
    
    
    
    0.4Income (loss) from operations
    
    
    149,886
    
    
    
    30.9
    
    
    
    120,918
    
    
    
    20.3
    
    
    
    (77,678
    )
    
    
    (11,386
    )
    
    
    (17.2
    )
  49




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##### Table of Contents



Years Ended December 31,2006
    
    
    2007
    
    
    2008% of Net
    
    
    
    
    
    
    % of Net
    
    
    
    
    
    
    
    
    
    
    % of NetRMB
    
    
    Revenue
    
    
    RMB
    
    
    Revenue
    
    
    RMB
    
    
    US$
    
    
    Revenue(in thousands, except percentages)Other income (expenses):Interest income
    
    
    2,392
    
    
    
    0.5
    
    
    
    27,906
    
    
    
    4.7
    
    
    
    17,114
    
    
    
    2,508
    
    
    
    3.8Interest expenses
    
    
    (12,735
    )
    
    
    (2.6
    )
    
    
    (9,858
    )
    
    
    (1.7
    )
    
    
    (16,599
    )
    
    
    (2,433
    )
    
    
    (3.7
    )Government grants
    
    
    10,108
    
    
    
    2.1
    
    
    
    17,064
    
    
    
    2.9
    
    
    
    6,752
    
    
    
    990
    
    
    
    1.5Investment income (expenses)
    
    
    
    
    
    
    
    
    
    
    8,409
    
    
    
    1.4
    
    
    
    (1,830
    )
    
    
    (268
    )
    
    
    (0.4
    )Other income, net
    
    
    1,108
    
    
    
    0.2
    
    
    
    7,903
    
    
    
    1.3
    
    
    
    20,235
    
    
    
    2,967
    
    
    
    4.5Income (loss) before income taxes and minority interest
    
    
    150,759
    
    
    
    31.1
    
    
    
    172,342
    
    
    
    28.9
    
    
    
    (52,006
    )
    
    
    (7,622
    )
    
    
    (11.6
    )Provision for income taxes
    
    
    (16,392
    )
    
    
    (3.4
    )
    
    
    (1,200
    )
    
    
    (0.2
    )
    
    
    (502
    )
    
    
    (74
    )
    
    
    (0.1
    )Minority interest, net of taxes
    
    
    (88
    )
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    208
    
    
    
    30
    
    
    
    0.1Net income (loss)
    
    
    134,279
    
    
    
    27.7
    
    
    
    171,193
    
    
    
    28.7
    
    
    
    (52,300
    )
    
    
    (7,666
    )
    
    
    (11.6
    )
 Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 Net Revenues
 
    
    a decrease in sales of Xianling Gubao from RMB444.9 million in 2007 to RMB315.5
million (US$46.2 million) in 2008;
    
    a decrease in sales of Zaoren Anshen Capsules from RMB21.7 million in 2007 to
RMB11.4 million (US$1.7 million) in 2008; and
    
    a decrease in sales of Dianbaizhu Syrup from RMB25.9 million in 2007 to RMB0.8
million (US$0.1 million) in 2008.
  Cost of Revenues
 Gross Profit
 Advertising Expenses
 Other Selling and Marketing Expenses
  50




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##### Table of Contents



General and Administrative Expenses
 Research and Development Expenses
 Impairment Loss on Goodwill
 Impairment Loss on Intangible Assets
 Other Operating Income
 Loss from Operations
 Other Income (expenses)
 Loss Before Income Taxes and Minority Interest
 Provision for Income Taxes
 Net Loss
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
 Net Revenues
 
    
    an 18.8% increase in sales of Xianling Gubao from RMB374.6 million in 2006 to RMB444.9 million in 2007;
    
    an increase in sales of Zaoren Anshen Capsules from RMB12.0 million in 2006 to RMB21.7 million in 2007;
    
    an increase in sales of Moisturizing and Anti-Itching Capsules from RMB10.2
million to RMB40.0 million in 2007; and
    
    an increase in sales of Dianbaizhu Syrup from RMB5.7 million in 2006 to RMB25.9
million in 2007.
   51




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##### Table of Contents



Cost of Revenues
 Gross Profit
 Advertising Expenses
 Other Selling and Marketing Expenses
 General and Administrative Expenses
 Research and Development Expenses
 Other Operating Income (expenses)
 Income from Operations
 Other Income
 Income (Loss) Before Income Taxes and Minority Interest
 Provision for Income Taxes
 Net Income (loss)
  52




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##### Table of Contents



Critical Accounting Policies
  Revenue Recognition
   Allowance for Doubtful Accounts
  Useful Life of Intangible Assets
  Goodwill
  Impairment of Long-lived Assets
   53




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##### Table of Contents



Share-based Compensation
  Liquidity and Capital Resources
  Cash Flows and Working Capital
  Years Ended December 31,2006
    
    
    2007
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$(in thousands)Net cash provided by operating activities
    
    
    130,653
    
    
    
    23,294
    
    
    
    100,210
    
    
    
    14,688Net cash used in investing activities
    
    
    (55,274
    )
    
    
    (7,016
    )
    
    
    (296,207
    )
    
    
    (43,416
    )Net cash provided by (used in) financing activities
    
    
    120,142
    
    
    
    593,422
    
    
    
    (40,585
    )
    
    
    (5,949
    )Effect of exchange rate changes
    
    
    
    
    
    
    (42,954
    )
    
    
    (45,086
    )
    
    
    (6,608
    )Net increase (decrease) in cash and cash equivalents
    
    
    195,521
    
    
    
    566,746
    
    
    
    (281,668
    )
    
    
    (41,285
    )Cash and cash equivalents at beginning of year
    
    
    35,488
    
    
    
    231,009
    
    
    
    797,755
    
    
    
    116,930Cash and cash equivalents at end of year
    
    
    231,009
    
    
    
    797,755
    
    
    
    516,087
    
    
    
    75,645
 Operating Activities
     54




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##### Table of Contents



Investing Activities
    Financing Activities
    Accounts Receivable
      55




---



##### Table of Contents



Restrictions on Cash Dividends
  Borrowings
  Capital Expenditures
  Recently Issued Pronouncements
 The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
 Business Combination Accounting for Costs Associated with Exit or
Disposal Activities, Accounting for
Contingencies,
  56




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##### Table of Contents



Noncontrolling Interests in Consolidated
Financial Statements  An Amendment of ARB No. 51
 Determination of the Useful Life of Intangible
Assets. Goodwill and Other Intangible Assets
 Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.
 Accounting for Defensive Intangible Assets
 Research and Development
     57




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##### Table of Contents



Trend Information
  Off-Balance Sheet Arrangements
  Tabular Disclosure of Contractual Obligations
  Payment Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    5 Years orTotal
    
    
    1 Year
    
    
    1-2 Years
    
    
    3-4 Years
    
    
    more(in RMB thousands)Long-term debt obligations(1)
    
    
    142,796
    
    
    
    90,263
    
    
    
    52,533
    
    
    
    
    
    
    
    Operating lease obligations(2)
    
    
    3,228
    
    
    
    1,895
    
    
    
    1,338
    
    
    
    49
    
    
    
    46Capital purchase and other purchase obligations(3)
    
    
    16,696
    
    
    
    16,696
    
    
    
    
    
    
    
    
    
    
    
    Other liabilities reflected on the balance sheet(4)
    
    
    22,190
    
    
    
    22,190
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    184,910
    
    
    
    131,044
    
    
    
    53,871
    
    
    
    49
    
    
    
    46
 
 (1)
    
    Includes future interest obligations.(2)
    
    Includes lease obligations for our office premises and buildings under non-cancelable leases.(3)
    
    Represents commitments for the purchase of property, plant and equipment and acquired
intangible assets and payments for research and development services. These commitments are
not recorded on our balance sheet as of December 31, 2008, as we have not received related
goods or services or taken title to the properties.(4)
    
    Represents payable for the acquisition of Pulante recorded on our balance sheet as of
December 31, 2008. Safe Harbor
  
    
    our anticipated growth and marketing strategies;
    
    our future business development, results of operations and financial condition;
    
    expansion of the National Medical Insurance Program in terms of both funding and enrollment;
    
    our ability to maintain exclusive production rights for Xianling Gubao;
    
    market acceptance of our products;
    
    our ability to develop and commercialize new products;
    
    our ability to obtain regulatory approvals for new products and to maintain or update
the regulatory approvals for our existing products;
  58




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##### Table of Contents




    
    our ability to maintain regulatory approvals for our production facilities and to
obtain new approvals for expansions of our production facilities;
    
    our ability to expand our business through organic growth and strategic acquisitions;
    
    our expectations regarding governmental support for the development of the
traditional Chinese pharmaceutical industry;
    
    our expectations with respect to our ability to secure raw materials in the future;
    
    competition from other manufacturers of pharmaceutical products, including
manufacturers of traditional Chinese medicines;
    
    our ability to effectively protect our existing and future intellectual property and
not to infringe on the intellectual property of others; and
    
    fluctuations in general economic and business conditions in China.
   
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Senior Management
  Name
    
    Age
    
    Position/TitleXiaochun Wang
    
    41
    
    Chairman of the Board of Directors, Chief Executive OfficerJustin Yan Chen
    
    43
    
    Director and Chief Operating OfficerYongcun Chen
    
    43
    
    Independent DirectorHarry K. Genant
    
    66
    
    Independent DirectorDavid Ray White
    
    54
    
    Independent DirectorCharles Wang
    
    43
    
    Chief Financial OfficerLing Qin
    
    49
    
    Chief Technology OfficerEric Chan
    
    33
    
    Financial Controller
 Mr. Xiaochun Wang
 Mr. Justin Yan Chen
  59




---



##### Table of Contents



Mr. Yongcun Chen
 Dr. Harry K. Genant
 Mr. David Ray White
 Mr. Charles Wang
 Dr. Ling Qin
 Mr. Eric Chan
  60




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##### Table of Contents



Compensation of Directors and Executive Officers
  2006 Share Incentive Plan
  Types of Awards
 
    
    options to purchase our ordinary shares;
    
    share appreciation rights, which entitle the grantee the right to ordinary shares
or cash compensation measured by the appreciation in the value of ordinary shares;
    
    dividend equivalent rights, which entitle the grantee to compensation equivalent
to dividends paid with respect to ordinary shares;
    
    restricted shares, which are ordinary shares issued to the grantee that are
subject to transfer restrictions, right of first refusal, repurchase, forfeiture, and
other terms and conditions as established by our plan administrator;
    
    restricted share units, which may be earned upon the passage of time or the
attainment of performance criteria and which may be settled for cash, ordinary shares
or other securities, or a combination of cash, ordinary shares or other securities as
established by our plan administrator;
    
    share payments, which may be (a) payments in the form of shares; or (b) options or
other rights to purchase ordinary shares, as part of any bonus, deferred compensation
or other arrangement, made in lieu of all or any portion of the compensation; and
    
    deferred shares, which are rights to receive a specified number of ordinary shares
during specified time periods.
 Plan Administration
 Award Agreement
 Eligibility
 Acceleration of Awards upon Corporate Transactions
 Exercise Price and Term of Awards
  61




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##### Table of Contents



Vesting Schedule
  No. ofRestricted Shares
    
    
    
    
    
    
    No. ofName
    
    Granted
    
    
    Vesting Period
    
    
    Share Options Granted
    
    
    Vesting PeriodXiaochun Wang
    
    
    400,000
    
    
    130,000 on June 30, 2007
    
    
    1,200,000
    
    
    400,000 on June 30, 2007130,000 on June 30, 2008
    
    
    
    
    
    400,000 on June 30, 2008140,000 on June 30, 2009
    
    
    
    
    
    400,000 on June 30, 2009Justin Yan Chen
    
    
    100,000
    
    
    30,000 on June 30, 2007
    
    
    1,200,000
    
    
    400,000 on June 30, 200730,000 on June 30, 2008
    
    
    
    
    
    400,000 on June 30, 200840,000 on June 30, 2009
    
    
    
    
    
    400,000 on June 30, 2009Yongcun Chen
    
    
    50,000
    
    
    16,000 on June 30, 2007
    
    
    1,200,000
    
    
    400,000 on June 30, 200716,000 on June 30, 2008
    
    
    
    
    
    400,000 on June 30, 200818,000 on June 30, 2009
    
    
    
    
    
    400,000 on June 30, 2009Harry K. Genant
    
    
    40,000
    
    
    13,000 on June 30, 2007
    
    
    
    
    
    
    13,000 on June 30, 200814,000 on June 30, 2009David R. White
    
    
    40,000
    
    
    13,000 on June 30, 2007
    
    
    
    
    
    
    13,000 on June 30, 200814,000 on June 30, 2009Ling Qin
    
    
    40,000
    
    
    13,000 on June 30, 2007
    
    
    400,000
    
    
    130,000 on June 30, 200713,000 on June 30, 2008
    
    
    
    
    
    130,000 on June 30, 200814,000 on June 30, 2009
    
    
    
    
    
    140,000 on June 30, 2009Other employees
    
    
    586,714
    
    
    Mostly on June 30, 2007Total:
    
    
    1,256,714
    
    
    
    
    
    
    
    4,000,000
  Board Practices
  Committees of the Board of Directors
   62




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##### Table of Contents



Audit Committee
  
    
    appointing our independent auditors and pre-approving all auditing and
non-auditing services permitted to be performed by our independent auditors;
    
    reviewing with our independent auditors any audit problems or difficulties and managements response;
    
    reviewing and approving all proposed related-party transactions;
    
    reviewing and discussing the annual audited financial statements with management and our independent auditors;
    
    reviewing major issues as to the adequacy of our internal controls and any special
audit steps adopted in light of material control deficiencies;
    
    annually reviewing and reassessing our audit committee charter;
    
    such other matters that are specifically delegated to our audit committee by our
board of directors from time to time;
    
    meeting separately and periodically with management and our independent auditors; and
    
    reporting regularly to the board of directors.
  Compensation Committee
  
    
    determining the compensation package of our executive officers;
    
    reviewing and making recommendations to the board with respect to the compensation of our directors;
    
    reviewing and approving corporate goals and objectives relevant to the
compensation of our chief executive officer, evaluating the performance of our chief
executive officer in light of those goals and objectives, and setting the
compensation level of our chief executive officer based on this evaluation; and
    
    reviewing periodically and making recommendations to the board regarding any
long-term incentive compensation or equity plans, programs or similar arrangements,
annual bonuses, employee pension and welfare benefit plans.
  Corporate Governance and Nominating Committee
  
    
    identifying and recommending to the board nominees for election or re-election to
the board, or for appointment to fill any vacancy;
    
    reviewing annually with the board the current composition of the board in light of
the characteristics of independence, qualification, experience and availability of
service to us;
    
    identifying and recommending to the board the directors to serve as members of the
boards committees;
    
    developing and recommending to the board a set of corporate governance guidelines
and principles applicable to us; and
    
    monitoring compliance with our code of business conduct and ethics, including
reviewing the adequacy and effectiveness of our procedures to ensure proper
compliance.
   63




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##### Table of Contents



Interested Transactions
  Remuneration
  Qualification
  Duties of Directors
  Terms of Directors and Executive Officers
  Employees
  Number of Employees
    
    
    Percentage of Total EmployeesManufacturing
    
    
    336
    
    
    
    20.2
    %Marketing and Sales
    
    
    972
    
    
    
    58.2
    %General and Administration
    
    
    156
    
    
    
    9.3
    %Research and Development
    
    
    72
    
    
    
    4.3
    %Others
    
    
    134
    
    
    
    8.0
    %Total
    
    
    1,670
    
    
    
    100
    %
  National
    
    
    
    
    
    
    
    
    
    
    
    Work RelatedMedical
    
    
    
    
    
    
    
    
    
    
    
    Injuries
    
    MaternityPension
    
    
    Insurance
    
    
    Housing
    
    Unemployment
    
    Insurance
    
    InsuranceEmployees plans and funds
    
    Plan
    
    
    Program
    
    
    Fund
    
    Insurance Plan
    
    Plan
    
    PlanPercentages
    
    
    20.0
    %
    
    
    7.5
    %
    
    
    5.0
    %
    
        
    
    
    2.0
    %
    
    1.2
    %
    0.7
    %
    64




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##### Table of Contents



Share Ownership
  
    
    each of our directors and executive officers; and
    
    each person known to us to own beneficially more than 5.0% of our ordinary shares.
 Shares Beneficially Owned(1)Number
    
    
    %Directors and Executive Officers:Xiaochun Wang (2)
    
    
    53,935,584
    
    
    
    39.5Justin Yan Chen (3)
    
    
    1,300,000
    
    
    
    1.0Yongcun Chen (4)
    
    
    1,234,000
    
    
    
    *Harry K. Genant (5)
    
    
    40,000
    
    
    
    *David Ray White (6)
    
    
    40,000
    
    
    
    *Charles Wang
    
    
    
    
    
    
    Ling Qin (7)
    
    
    440,000
    
    
    
    *Eric Chan
    
    
    
    
    
    
    All directors and executive officers as a group
    
    
    56,989,584
    
    
    
    40.9Principal Shareholders:Hanmax Investment Limited (8)
    
    
    52,449,892
    
    
    
    38.8Fosun Industrial Co., Limited (9)
    
    
    25,649,392
    
    
    
    19.0Merrill Lynch & Co., Inc. (10)
    
    
    9,934,608
    
    
    
    7.3Samtung Investment Limited (11)
    
    
    8,344,000
    
    
    
    6.2
 
 *
    
    Upon exercise of all options granted, would beneficially own less than 1.0% of our
outstanding ordinary shares.(1)
    
    Percentage of beneficial ownership of each listed person is based on 135,209,722 ordinary
shares outstanding as of May 29, 2009, as well as the ordinary shares underlying share options
exercisable by such person within 60 days of this annual report. Beneficial ownership is
determined in accordance with Rule 13d-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended, and includes voting or investment power with
respect to the securities.(2)
    
    Includes 52,449,892 ordinary shares held by Hanmax Investment Limited, a British Virgin
Islands company wholly owned and controlled by Xiaochun Wang, 145,692 ordinary shares directly
owned by Mr. Wang, 1,200,000 ordinary shares issuable upon exercise of options held by Mr.
Wang within 60 days of the date of this annual report and 140,000 unvested restricted shares
held by Mr. Wang that will vest within 60 days of the date of this annual report. The business
address of Mr. Wang is 5th Floor, Block B, Nanshan Medical Device Park, 1019 Nanhai Avenue,
Shekou, Nanshan District, Shenzhen, 518067 Guangdong Province, Peoples Republic of China.  65




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##### Table of Contents



(3)
    
    Includes 60,000 ordinary shares held by Justin Yan Chen, 1,200,000 ordinary shares issuable
upon exercise of options held by Mr. Chen within 60 days of the date of this annual report and
40,000 unvested restricted shares held by Mr. Chen that will vest within 60 days of the date
of this annual report. The business address of Mr. Chen is 5th Floor, Block B,
Nanshan Medical Device Park, 1019 Nanhai Avenue, Shekou, Nanshan District, Shenzhen, 518067
Guangdong Province, Peoples Republic of China.(4)
    
    Includes 16,000 ordinary shares held by Yongcun Chen, 1,200,000 ordinary shares issuable upon
exercise of options held by Mr. Chen within 60 days of the date of this annual report and
18,000 unvested restricted shares held by Mr. Chen that will vest within 60 days of the date
of this annual report. Mr. Yongcun Chen disclaims beneficial ownership of these shares except
to the extent of his pecuniary interest therein. The business address of Mr. Chen is
5th Floor, Block B, Nanshan Medical Device Park, 1019 Nanhai Avenue, Shekou,
Nanshan District, Shenzhen, 518067 Guangdong Province, Peoples Republic of China.(5)
    
    Includes 26,000 ordinary shares held by Harry K. Genant and 14,000 unvested restricted shares
held by Mr. Genant that will vest within 60 days of the date of this annual report. The
business address of Mr. Genant is 7 Tara Hill Road, Tiburon, CA 94920, U.S.A.(6)
    
    Includes 26,000 ordinary shares held by David R. White and 14,000 unvested restricted shares
held by Mr. White that will vest within 60 days of the date of this annual report. The
business address of Mr. White is 841 Deer Ridge, Waco, Texas 76712, U.S.A.(7)
    
    Includes 26,000 ordinary shares held by Ling Qin, 400,000 ordinary shares issuable upon
exercise of options held by Mr. Qin within 60 days of the date of this annual report and
14,000 unvested restricted shares held by Mr. Qin that will vest within 60 days of the date of
this annual report. The business address of Mr. Qin is Flat D, 3/F, Royal Ascot, Futan,
Shatin, N.T., Hong Kong.(8)
    
    Hanmax Investment Limited, a company incorporated in the British Virgin Islands, is wholly
owned and controlled by Xiaochun Wang. The registered address of Hanmax Investment Limited is
Pasea Estate, Road Town, Tortola, the British Virgin Islands.(9)
    
    Represents 25,649,392 ordinary shares held by Fosun Industrial Co., Limited (Fosun
Industrial), a company incorporated in Hong Kong, China. The business address of Fosun
Industrial is Flat/Room 808, ICBC Tower, 3 Garden Road, Hong Kong, China. Fosun Industrial is
a wholly owned subsidiary of Shanghai Fosun Pharma R&D Co. Ltd. (Fosun Pharma R&D). Fosun
Pharma R&D is a wholly owned subsidiary of Shanghai Fosun Pharmaceutical Group Co. Ltd (Fosun
Pharma), which in turn is a subsidiary of Fosun International Limited (Fosun
International), a Hong Kong company listed on the Hong Kong Stock Exchange. Fosun
International is a subsidiary of Fosun Holdings Limited (Fosun Holdings), which in turn is a
subsidiary of Fosun International Holdings Ltd. (Fosun International Holdings). Fosun
International Holdings is controlled by Guo Guangchang.(10)
    
    Merrill Lynch & Co., Inc., a Delaware corporation, may be deemed to beneficially own a total
of 9,934,608 ordinary shares. Merrill Lynch & Co., Inc. is a wholly owned subsidiary of the
Bank of America Corporation. ML Global Private Equity Fund, L.P., a Cayman Islands exempted
limited partnership, holds 7,446,756 ordinary shares and Merrill Lynch Ventures L.P. 2001, a
Delaware limited partnership, holds 2,482,252 ordinary shares. MLGPE Ltd., the general partner
of ML Global Private Equity Fund L.P., and Merrill Lynch Ventures, LLC, the general partner of
Merrill Lynch Ventures L.P. 2001, are affiliates of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, a joint book runner of our initial public offering.As of December 31, 2008,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, a wholly owned subsidiary of Merrill Lynch
& Co., Inc., owned 5,600 ordinary shares of our company.(11)
    
    Samtung Investment Limited is a British Virgin Islands company wholly owned and controlled by
Silver Grant International Industries Limited, or Silver Grant. Silver Grant is a public
limited company incorporated in Hong Kong and whose shares are listed on the Stock Exchange of
Hong Kong Limited. The registered address of Samtung Investment Limited is Pasea Estate, Road
Town, Tortola, the British Virgin Islands.     
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 Major Shareholders
   66




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Related Party Transactions
 Transactions among Subsidiaries
   Transactions among Certain Directors, Shareholders and Affiliates
 Related Party Balances
    Disposition of Subsidiaries and investment in an affiliate
  Other Related Party Transactions
     67




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Restructuring
      Registration Rights
  Demand Registration Rights
 Piggyback Registration Rights
 Expenses of Registration
  68




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Employment Agreements
    Share Incentives
  Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 Consolidated Statements and Other Financial Information
  Legal and Administrative Proceedings
  Dividend Policy
    69




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##### Table of Contents



Significant Changes
  
 ITEM 9. THE OFFER AND LISTING
 Offer and Listing Details
    Sales PriceHigh
    
    
    LowAnnual Highs and Lows2007 (from March 16, 2007)
    
    
    12.88
    
    
    
    7.502008
    
    
    9.95
    
    
    
    1.97Quarterly Highs and Lows2007First Quarter (from March 16, 2007)
    
    
    11.27
    
    
    
    9.65Second Quarter
    
    
    12.88
    
    
    
    9.21Third Quarter
    
    
    12.62
    
    
    
    7.50Fourth Quarter
    
    
    12.39
    
    
    
    8.332008First Quarter
    
    
    9.95
    
    
    
    6.57Second Quarter
    
    
    8.95
    
    
    
    3.80Third Quarter
    
    
    4.50
    
    
    
    2.35Fourth Quarter
    
    
    3.38
    
    
    
    1.972009First Quarter
    
    
    3.90
    
    
    
    2.33Monthly Highs and LowsDecember 2008
    
    
    3.01
    
    
    
    2.02January 2009
    
    
    3.00
    
    
    
    2.33February 2009
    
    
    3.50
    
    
    
    2.75March 2009
    
    
    3.90
    
    
    
    2.75April 2009
    
    
    3.85
    
    
    
    3.22May 2009
    
    
    4.99
    
    
    
    3.43
  70




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Plan of Distribution
  Markets
  Selling Shareholders
  Dilution
  Expenses of the Issue
  
 ITEM 10. ADDITIONAL INFORMATION
 Share Capital
  Memorandum and Articles of Association
  Registered Office and Objects
   Board of Directors
  Ordinary Shares
 General
  Dividends
   71




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Voting Rights
    Transfer of Ordinary Shares
   Liquidation
  Calls on Ordinary Shares and Forfeiture of Ordinary Shares
  Redemption of Ordinary Shares
  Variations of Rights of Shares
  Inspection of Books and Records
  Changes in Capital
  
    
    increase the share capital by such sum, to be divided into shares of such classes and
amount, as the resolution shall prescribe;
    
    consolidate and divide all or any of our share capital into shares of a larger amount
than our existing shares;
    
    sub-divide our existing shares, or any of them, into shares of a smaller amount than
is fixed by our memorandum of association;
    
    cancel any shares which, at the date of the passing of the resolution, have not been
taken or agreed to be taken by any person.
  72




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Differences in Corporate Law
  Mergers and Similar Arrangements
   
    
    the statutory provisions as to the due majority vote have been met;
    
    the shareholders have been fairly represented at the meeting in question;
    
    the arrangement is such that a businessman would reasonably approve; and
    
    the arrangement is not one that would more properly be sanctioned under some other
provision of the Companies Law.
   Shareholders Suits
   73




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Indemnification of Directors and Executive Officers and Limitation of Liability
   Anti-Takeover Provisions in the Amended and Restated Memorandum and Articles of Association
   Directors Fiduciary Duties
   Shareholder Action by Written Consent
   74




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Shareholder Proposals
   Cumulative Voting
  Removal of Directors
  Transactions with Interested Shareholders
   Dissolution; Winding up
  Variation of Rights of Shares
   75




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Amendment of Governing Documents
  Rights of Non-resident or Foreign Shareholders
  Material Contracts
  Exchange Controls
  Taxation
 The following summary of the material Cayman Islands and United States federal income tax
consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date of this annual report on Form 20-F , all of which
are subject to change. This summary does not discuss all possible tax consequences relating to an
investment in our ADSs or ordinary shares, such as the tax consequences under U.S. state, local and
other tax laws not addressed herein.
 Cayman Islands Taxation
  United States Federal Income Taxation
   
    
    banks;
    
    insurance companies;
    
    broker-dealers;
    
    traders that elect to mark to market;
    
    tax-exempt entities;
  76




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##### Table of Contents




    
    persons liable for alternative minimum tax;
    
    U.S. expatriates;
    
    regulated investment companies or real estate investment trusts;
    
    persons holding an ADS or ordinary share as part of a straddle, hedging,
conversion or integrated transaction;
    
    persons who acquired ADSs or ordinary shares pursuant to the exercise of any
employee stock options or otherwise as compensation;
    
    persons that actually or constructively own 10% or more of the total combined
voting power of all classes of our voting stock; or
    
    persons holding ADSs or ordinary shares through partnerships or other
pass-through entities.
 INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL
TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.
  
    
    an individual who is a citizen or resident of the United States;
    
    a corporation (or other entity taxable as a corporation for U.S. federal income
tax purposes) organized under the laws of the United States, any state thereof or
the District of Columbia;
    
    an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
    
    a trust that (1) is subject to the primary supervision of a court within the
United States and the control of one or more U.S. persons for all substantial
decisions or (2) has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
    Passive Foreign Investment Company
  
    
    at least 75% of its gross income for such year is passive income, or
    
    at least 50% of the value of its assets (based on an average of the quarterly
values of the assets) during such year is attributable to assets that produce
passive income or are held for the production of passive income (the asset test).
  77




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You are strongly urged to consult your tax advisors as to the
possibility and consequences of making a deemed sale election if we cease to be a PFIC and such
election becomes available to you.
  
    
    the excess distribution or realized gain will be allocated ratably over your
holding period for the ADSs or ordinary shares,
    
    the amount allocated to the current taxable year, and any taxable years in your
holding period prior to the first taxable year in which we were a PFIC, will be
treated as ordinary income, and
    
    the amount allocated to each other year will be subject to tax at the highest tax
rate in effect for individuals or corporations, as applicable, for each such year
and the interest charge generally applicable to underpayments of tax will be imposed
on the resulting tax attributable to each such year.
     78




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##### Table of Contents



YOU ARE STRONGLY URGED TO CONSULT YOUR TAX ADVISORS REGARDING THE IMPACT OF OUR BEING A PFIC
FOR 2008 ON YOUR INVESTMENT IN OUR ADSs AND ORDINARY SHARES AS WELL AS THE APPLICATION OF THE PFIC
RULES AND THE POSSIBILITY OF MAKING A MARK-TO-MARKET ELECTION.
 Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
     79




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##### Table of Contents



Taxation of Disposition of the ADSs or Ordinary Shares
   Information Reporting and Backup Withholding
   Dividends and Paying Agents
  Statement by Experts
  Documents on Display
   80




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##### Table of Contents



Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Foreign Exchange Risk
   81




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##### Table of Contents



Inflation
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
   82




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##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
   
    
    approximately US$3.9 million to enhance our marketing of Xianling Gubao and other
products;
    
    approximately US$2.5 million to strengthen our research and development
infrastructure and broaden and commercialize our product pipeline; and
    
    approximately US$34.5 million for general corporate purposes, which include (1)
approximately US$3.8 million for our acquisition of Guizhou LLF, (2) approximately
US$6.1 million for our acquisition of Pulante, (3) approximately US$8.8 million for
our acquisition of Anhui Jingfang, and (4) approximately US$15.8 million for our
acquisition of a parcel of land in Guiyang, Guizhou Province.
  
 ITEM 15. CONTROLS AND PROCEDURES
           83




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##### Table of Contents



Managements Remediation Initiatives
         Changes in Internal Control Over Financial Reporting
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
   84




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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2007
    
    
    2008Audit fees (1)
    
    US$
    420,000
    
    
    US$
    430,000Audit-related fees(2)
    
    US$
    1,756,000
    
    
    US$
    230,500
 
 (1)
    
    Audit fees means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements.(2)
    
    Audit-related fees means the aggregate fees billed in each of the fiscal years listed for
assurance and related services by our principal auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not reported under
Audit fees. Services comprising the fees disclosed under the category of Audit-related
fees in 2007 involve principally the issuance of a comfort letter, providing listing advice
in connection with our initial public offering and interim review. Services comprising the
fees disclosed under the category of Audit-related fees in 2008 involve principally the
interim review of financial statements.  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
  Total Number of ADSs
    
    
    Approximate DollarPurchased as Part of
    
    
    Value of ADSs thatTotal Number of
    
    
    Average Price Paid
    
    
    Publicly Announced
    
    
    may Yet be PurchasedPeriod
    
    ADSs Purchased
    
    
    Per ADS(1)
    
    
    Plan(2)
    
    
    Under the Plan(1)December 1, 2008 
December 31, 2008
    
    
    440,900
    
    
    
    2.38
    
    
    
    440,900
    
    
    US$
    18,938,374January 2, 2009 
May 29, 2009
    
    
    1,320,300
    
    
    
    3.11
    
    
    
    1,320,300
    
    
    US$
    14,791,591Total
    
    
    1,761,200
    
    
    
    2.93
    
    
    
    1,761,200
    
    
    US$
    14,791,591
 (1)
    
    Each of our ADSs represents four ordinary shares.(2)
    
    On September 9, 2008, we announced that our board of directors had approved a share
repurchase program to repurchase from the open market up to US$20 million worth of our
outstanding ADSs within 18 months after the shareholders approval. On October 30, 2008, our
shareholders approved the share repurchase program at the annual general meeting for the year
2008. We will cancel the ADSs repurchased and their underlying ordinary shares in due course. 
 ITEM 16F . CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
  
 ITEM 16G . CORPORATE GOVERNANCE
   85




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PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 Exhibit Number
    
    Description of Document1.1
    *
    
    Amended and Restated Memorandum and Articles of Association of the
Registrant2.1
    
    
    Form of Registrants American Depositary Receipt (included in Exhibit 2.3)2.2
    
    
    Registrants Specimen Certificate for Ordinary Shares (incorporated by
reference to Exhibit 4.2 from our F-1 registration statement (File
No. 333-140888), as amended, initially filed with the Commission on
February 26, 2007)2.3
    
    
    Form of Deposit Agreement among the Registrant, the Depositary and Holders
of the American Depositary Receipts (incorporated by reference to
Exhibit 4.3 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)2.4
    
    
    Shareholders Agreement dated as of November 8, 2006 among the Registrant
and Shareholders (incorporated by reference to Exhibit 4.4 from our F-1
registration statement (File No. 333-140888), as amended, initially filed
with the Commission on February 26, 2007)2.5
    
    
    Registration Rights Agreement dated as of November 8, 2006 among the
Registrant and certain Shareholders (incorporated by reference to
Exhibit 4.5 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)4.1
    
    
    Form of Indemnification Agreement with the Registrants Directors
(incorporated by reference to Exhibit 10.1 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.2
    
    
    Form of Employment Agreement (incorporated by reference to Exhibit 10.2
from our F-1 registration statement (File No. 333-140888), as amended,
initially filed with the Commission on February 26, 2007)4.3
    
    
    2006 Share Incentive Plan (as amended on October 30, 2008) (incorporated
by reference to Exhibit 99.1 from our Post-Effective Amendment No. 1 to
S-8 registration statement (File No. 333-140888) filed with the Commission
on December 23, 2008)4.4
    
    
    Subscription Agreement dated December 21, 2005 among Samtung Investment
Limited, Unisources Enterprises Limited, Xiaochun Wang and Shaolan Wang
(incorporated by reference to Exhibit 10.4 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.5
    
    
    Sale and Purchase Agreement dated June 15, 2006 among the Registrant,
Unisources Enterprises Limited and shareholders of Unisources Enterprises
Limited (incorporated by reference to Exhibit 10.5 from our F-1
registration statement (File No. 333-140888), as amended, initially filed
with the Commission on February 26, 2007)4.6
    
    
    Share Purchase Agreement dated November 8, 2006 among the Registrant, ML
Global Private Equity Fund, L.P. and Merrill Lynch Ventures L.P. 2001
(incorporated by reference to Exhibit 10.6 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.7
    
    
    English Translation of License Agreement dated January 12, 2005 between
Xiaochun Wang and Tongjitang Pharmaceutical (incorporated by reference to
Exhibit 10.7 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)4.8
    
    
    Real Property Lease Agreement dated July 11, 2006 (incorporated by
reference to Exhibit 10.13 from our F-1 registration statement (File
No. 333-140888), as amended, initially filed with the Commission on
February 26, 2007)8.1
    *
    
    Subsidiaries of the Registrant11.1
    
    
    Code of Business Conduct and Ethics (incorporated by reference to
Exhibit 99.1 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)12.1
    *
    
    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2
    *
    
    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1
    *
    
    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
    *
    
    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1
    *
    
    Consent of Deloitte Touche Tohmatsu15.2
    *
    
    Consent of Global Law Office
 
 *
    
    Filed with this Annual Report on Form 20-F  86




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##### Table of Contents



SIGNATURES
  TONGJITANG CHINESE MEDICINES COMPANYBy:
    /s/ Xiaochun WangName:
    Xiaochun WangTitle:
    Chairman and Chief Executive Officer   87




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2006, 2007 AND 2008
 PAGE(S)Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations for the Years Ended December 31, 2006, 2007 and 2008
    
    
    F-3Consolidated Balance Sheets as of December 31, 2007 and 2008
    
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2006, 2007 and 2008
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2007 and 2008
    
    
    F-6  F-7Notes to Consolidated Financial Statements
    
    
    F-8  F-47Schedule I  Condensed Financial Information of Tongjitang Chinese Medicines Company
    
    
    F-48  F-52
  F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      
  F-2




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Net revenues
    
    
    484,992
    
    
    
    596,007
    
    
    
    451,032
    
    
    
    66,109Cost of revenues
    
    
    (161,675
    )
    
    
    (206,019
    )
    
    
    (167,345
    )
    
    
    (24,528
    )Gross profit
    
    
    323,317
    
    
    
    389,988
    
    
    
    283,687
    
    
    
    41,581Advertising expenses
    
    
    (85,088
    )
    
    
    (96,876
    )
    
    
    (80,180
    )
    
    
    (11,752
    )Other selling and marketing expenses
    
    
    (51,462
    )
    
    
    (68,357
    )
    
    
    (80,031
    )
    
    
    (11,730
    )General and administrative expenses
    
    
    (33,484
    )
    
    
    (92,487
    )
    
    
    (91,325
    )
    
    
    (13,386
    )Research and development expenses
    
    
    (4,680
    )
    
    
    (12,673
    )
    
    
    (17,368
    )
    
    
    (2,546
    )Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    (28,062
    )
    
    
    (4,113
    )Impairment loss on intangible assets
    
    
    
    
    
    
    
    
    
    
    (72,910
    )
    
    
    (10,687
    )Government grant (related to research and development)
    
    
    
    
    
    
    
    
    
    
    1,428
    
    
    
    209(Loss) gain on disposal of property, plant and equipment and land
use rights
    
    
    
    
    
    
    (72
    )
    
    
    3,970
    
    
    
    582Gain on disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    1,312
    
    
    
    192Other operating income
    
    
    1,283
    
    
    
    1,395
    
    
    
    1,801
    
    
    
    264Income (loss) from operations
    
    
    149,886
    
    
    
    120,918
    
    
    
    (77,678
    )
    
    
    (11,386
    )Other income (expenses):Interest income
    
    
    2,392
    
    
    
    27,906
    
    
    
    17,114
    
    
    
    2,508Interest expense
    
    
    (12,735
    )
    
    
    (9,858
    )
    
    
    (16,599
    )
    
    
    (2,433
    )Government grants
    
    
    10,108
    
    
    
    17,064
    
    
    
    6,752
    
    
    
    990Investment income (expenses)
    
    
    
    
    
    
    8,409
    
    
    
    (1,830
    )
    
    
    (268
    )Waiver of other payable
    
    
    
    
    
    
    5,542
    
    
    
    
    
    
    
    Other income, net
    
    
    1,108
    
    
    
    2,361
    
    
    
    4,171
    
    
    
    612Tax refund on reinvestment of profits
    
    
    
    
    
    
    
    
    
    
    16,064
    
    
    
    2,355Income (loss) before income taxes and minority interest
    
    
    150,759
    
    
    
    172,342
    
    
    
    (52,006
    )
    
    
    (7,622
    )Provision for income taxes
    
    
    (16,392
    )
    
    
    (1,200
    )
    
    
    (502
    )
    
    
    (74
    )Minority interest
    
    
    (88
    )
    
    
    51
    
    
    
    208
    
    
    
    30Net income (loss)
    
    
    134,279
    
    
    
    171,193
    
    
    
    (52,300
    )
    
    
    (7,666
    )Earnings (loss) per shareOrdinary shares basic
    
    
    1.47
    
    
    
    1.35
    
    
    
    (0.39
    )
    
    
    (0.06
    ) diluted
    
    
    1.47
    
    
    
    1.35
    
    
    
    (0.39
    )
    
    
    (0.06
    )Ordinary shares classified as mezzanine equitybasic
and diluted
    
    
    1.47
    
    
    
    1.35
    
    
    
    N/A
    
    
    
    N/AShare-based compensation expenses during the related periods
included in:Cost of revenues
    
    
    
    
    
    
    2,120
    
    
    
    
    
    
    
    Other selling and marketing expenses
    
    
    
    
    
    
    3,860
    
    
    
    
    
    
    
    General and administrative expenses
    
    
    
    
    
    
    30,671
    
    
    
    20,446
    
    
    
    2,997Research and development expenses
    
    
    
    
    
    
    449
    
    
    
    
    
    
    
    
   F-3




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$ASSETSCurrent assets:Cash and cash equivalents
    
    
    797,755
    
    
    
    516,087
    
    
    
    75,645Short-term bank deposit
    
    
    
    
    
    
    50,000
    
    
    
    7,329Notes receivable
    
    
    48,959
    
    
    
    55,987
    
    
    
    8,206Accounts receivable, net of allowance for doubtful accounts of RMB4,414
and RMB6,028 (US$884) as of 2007 and 2008, respectively
    
    
    272,562
    
    
    
    214,543
    
    
    
    31,446Amounts due from related parties
    
    
    535
    
    
    
    9,189
    
    
    
    1,347Inventories
    
    
    76,194
    
    
    
    97,553
    
    
    
    14,299Trading securities
    
    
    2,797
    
    
    
    792
    
    
    
    116Prepaid advertising expenses
    
    
    9,334
    
    
    
    1,692
    
    
    
    248Receivable on sale of property, plant and equipment
    
    
    
    
    
    
    12,600
    
    
    
    1,847Other prepaid expenses and current assets, net of allowance for doubtful
accounts of RMB175 and RMB147 (US$22) as of 2007 and 2008,
respectively
    
    
    7,776
    
    
    
    21,548
    
    
    
    3,158Total current assets
    
    
    1,215,912
    
    
    
    979,991
    
    
    
    143,641Property, plant and equipment, net
    
    
    155,849
    
    
    
    152,249
    
    
    
    22,316Land use rights, net
    
    
    18,739
    
    
    
    28,902
    
    
    
    4,236Deposits for acquisition of property, plant and equipment,
and intangible assets
    
    
    11,197
    
    
    
    188,103
    
    
    
    27,571Acquired intangible assets, net
    
    
    90,018
    
    
    
    24,736
    
    
    
    3,626Receivable on sale of property, plant and equipment
    
    
    
    
    
    
    6,210
    
    
    
    910Long-term other assets
    
    
    333
    
    
    
    1,800
    
    
    
    264Deferred tax assets
    
    
    2,007
    
    
    
    1,107
    
    
    
    162Total assets
    
    
    1,494,055
    
    
    
    1,383,098
    
    
    
    202,726LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    
    89,100
    
    
    
    85,100
    
    
    
    12,473Accounts payable
    
    
    18,009
    
    
    
    14,663
    
    
    
    2,149Amounts due to related parties
    
    
    1,893
    
    
    
    8,717
    
    
    
    1,277Accrued expenses and other current liabilities
    
    
    57,810
    
    
    
    81,130
    
    
    
    11,892Income taxes payable
    
    
    3,080
    
    
    
    926
    
    
    
    136Total current liabilities
    
    
    169,892
    
    
    
    190,536
    
    
    
    27,927Long-term bank loans
    
    
    74,000
    
    
    
    50,000
    
    
    
    7,329Deferred tax liabilities
    
    
    12,955
    
    
    
    7,272
    
    
    
    1,066Total liabilities
    
    
    256,847
    
    
    
    247,808
    
    
    
    36,322Commitments (Note 18)Minority interest
    
    
    632
    
    
    
    475
    
    
    
    70Shareholders equity:Ordinary shares (US$0.001 par value: 500,000,000 shares
authorized and 135,349,722 shares as of December 31, 2007,
and 135,209,722 shares as of December 31, 2008, respectively,
issued and outstanding)
    
    
    1,071
    
    
    
    1,070
    
    
    
    157Treasury stock (US$0.001 par value: nil shares and 1,763,600 shares as
of December 31, 2007 and 2008 outstanding, respectively)
    
    
    
    
    
    
    (7,159
    )
    
    
    (1,049
    )Additional paid-in capital
    
    
    870,980
    
    
    
    891,427
    
    
    
    130,659Accumulated other comprehensive loss
    
    
    (42,990
    )
    
    
    (88,093
    )
    
    
    (12,912
    )Retained earnings
    
    
    407,515
    
    
    
    337,570
    
    
    
    49,479Total shareholders equity
    
    
    1,236,576
    
    
    
    1,134,815
    
    
    
    166,334Total liabilities and shareholders equity
    
    
    1,494,055
    
    
    
    1,383,098
    
    
    
    202,726
   F-4




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 Additional

    
    
    Accumulated other
    
    
    
    
    
    
    TotalOrdinary share
    
    
    Treasury
    
    paid-in

    
    
    comprehensive
    
    
    Retained
    
    
    shareholders
    
    
    Comprehensivecapital
    
    
    stock


    
    capital

    
    
    losses
    
    
    earnings
    
    
    equity
    
    
    income (loss)Number of shares
    
    
    RMB
    
    
    Number of shares
    
    
    RMB
    

    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBAt as January 1, 2006
    
    
    79,520,000
    
    
    
    642
    
    
    
    
    
    
    
    
    
    
    
    39,917
    
    
    
    
    
    
    
    102,043
    
    
    
    142,602Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,279
    
    
    
    134,279
    
    
    
    134,279Issuance of share capital
    
    
    10,844,000
    
    
    
    81
    
    
    
    
    
    
    
    
    
    
    
    99,916
    
    
    
    
    
    
    
    
    
    
    
    99,997Deemed contribution from a shareholder on
disposal of an affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    186At as December 31, 2006
    
    
    90,364,000
    
    
    
    723
    
    
    
    
    
    
    
    
    
    
    
    140,019
    
    
    
    
    
    
    
    236,322
    
    
    
    377,064Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,193
    
    
    
    171,193
    
    
    
    171,193Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,990
    )
    
    
    
    
    
    
    (42,990
    )
    
    
    (42,990
    )Conversion of mezzanine equity
    
    
    9,929,008
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    120,568
    
    
    
    
    
    
    
    
    
    
    
    120,645Issuance of shares upon the initial public
offering
    
    
    33,400,000
    
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    645,548
    
    
    
    
    
    
    
    
    
    
    
    645,806Offering expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,242
    )
    
    
    
    
    
    
    
    
    
    
    (72,242
    )Issuance of restricted shares
    
    
    1,656,714
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,100
    
    
    
    
    
    
    
    
    
    
    
    37,100128,203At as December 31, 2007
    
    
    135,349,722
    
    
    
    1,071
    
    
    
    
    
    
    
    
    
    
    
    870,980
    
    
    
    (42,990
    )
    
    
    407,515
    
    
    
    1,236,576Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,300
    )
    
    
    (52,300
    )
    
    
    (52,300
    )Deemed distribution to a shareholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,645
    )
    
    
    (17,645
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,103
    )
    
    
    
    
    
    
    (45,103
    )
    
    
    (45,103
    )Forfeiture of restricted shares
    
    
    (140,000
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of shares
    
    
    
    
    
    
    
    
    
    
    1,763,600
    
    
    
    (7,159
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,159
    )Deemed contribution from a shareholder on
share-based compensation to an employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,424
    
    
    
    
    
    
    
    
    
    
    
    20,424Balance at December 31, 2008
    
    
    135,209,722
    
    
    
    1,070
    
    
    
    1,763,600
    
    
    
    (7,159
    )
    
    
    891,427
    
    
    
    (88,093
    )
    
    
    337,570
    
    
    
    1,134,815
    
    
    
    (97,403
    )Balance at December 31, 2008 (in US$)
    
    
    
    
    
    
    157
    
    
    
    
    
    
    
    (1,049
    )
    
    
    130,659
    
    
    
    (12,912
    )
    
    
    49,479
    
    
    
    166,334
   F-5




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    134,279
    
    
    
    171,193
    
    
    
    (52,300
    )
    
    
    (7,666
    )Adjustments to reconcile net income to net cash provided by
operating activities:Amortization of intangible assets
    
    
    1,509
    
    
    
    4,563
    
    
    
    11,697
    
    
    
    1,714Amortization of land use right
    
    
    368
    
    
    
    360
    
    
    
    543
    
    
    
    80Depreciation of property, plant and equipment
    
    
    11,040
    
    
    
    12,306
    
    
    
    13,878
    
    
    
    2,034Allowance for doubtful accounts and other receivables
    
    
    321
    
    
    
    2,389
    
    
    
    1,586
    
    
    
    233Gain on disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    (1,312
    )
    
    
    (192
    )Loss (gain) on disposal of property, plant and equipment and land
use rights
    
    
    
    
    
    
    72
    
    
    
    (3,970
    )
    
    
    (582
    )Income (loss) attributable to the minority interests
    
    
    88
    
    
    
    (51
    )
    
    
    (208
    )
    
    
    (30
    )Share-based compensation expenses
    
    
    
    
    
    
    37,100
    
    
    
    20,446
    
    
    
    2,997Impairment loss on intangible assets
    
    
    
    
    
    
    
    
    
    
    72,910
    
    
    
    10,687Impairment loss on goodwill
    
    
    
    
    
    
    
    
    
    
    28,062
    
    
    
    4,113Impairment on deposit for property, plant and equipment and land
use rights
    
    
    
    
    
    
    
    
    
    
    399
    
    
    
    58Write-down of inventories
    
    
    
    
    
    
    458
    
    
    
    1,181
    
    
    
    173Deferred tax
    
    
    
    
    
    
    164
    
    
    
    (8,023
    )
    
    
    (1,176
    )Changes in current assets and liabilities (net of effects of acquisition and
dispositions):Notes receivable
    
    
    (11,027
    )
    
    
    (36,227
    )
    
    
    (7,028
    )
    
    
    (1,030
    )Accounts receivable
    
    
    (29,293
    )
    
    
    (103,001
    )
    
    
    56,700
    
    
    
    8,311Amounts due from related parties
    
    
    (16
    )
    
    
    
    
    
    
    (7,965
    )
    
    
    (1,166
    )Inventories
    
    
    (13,214
    )
    
    
    (34,037
    )
    
    
    (15,274
    )
    
    
    (2,239
    )Trading securities
    
    
    
    
    
    
    (2,797
    )
    
    
    2,005
    
    
    
    294Prepaid advertising expenses
    
    
    (31
    )
    
    
    17,062
    
    
    
    7,642
    
    
    
    1,120Other prepaid expenses and current assets
    
    
    9,020
    
    
    
    6,784
    
    
    
    (14,495
    )
    
    
    (2,125
    )Amount due from former shareholders of a subsidiary
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    7Accounts payable
    
    
    (1,047
    )
    
    
    (4,262
    )
    
    
    (4,544
    )
    
    
    (666
    )Amounts due to related parties
    
    
    (2,705
    )
    
    
    (4
    )
    
    
    
    
    
    
    Accrued expenses and other current liabilities
    
    
    15,269
    
    
    
    (32,749
    )
    
    
    386
    
    
    
    57Income taxes payable
    
    
    16,092
    
    
    
    (16,029
    )
    
    
    (2,154
    )
    
    
    (316
    )Net cash provided by operating activities
    
    
    130,653
    
    
    
    23,294
    
    
    
    100,210
    
    
    
    14,688Cash flows from investing activities:Purchase of property, plant and equipment and land use rights
    
    
    (22,477
    )
    
    
    (13,595
    )
    
    
    (3,058
    )
    
    
    (448
    )Proceeds from disposal of property, plant and equipment and
land use rights
    
    
    1,597
    
    
    
    3,089
    
    
    
    78
    
    
    
    12Deposits paid for acquisition of property, plant and equipment
and intangible assets
    
    
    (8,401
    )
    
    
    (10,451
    )
    
    
    (189,785
    )
    
    
    (27,818
    )Acquisition of intangible assets
    
    
    (150
    )
    
    
    (10,012
    )
    
    
    
    
    
    
    Acquisition of a subsidiary, net of cash acquired
    
    
    
    
    
    
    (27,751
    )
    
    
    (35,694
    )
    
    
    (5,232
    )Proceeds on disposal of subsidiaries, net of cash disposed
    
    
    
    
    
    
    
    
    
    
    (103
    )
    
    
    (15
    )Proceeds on disposal of an affiliate
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    Advance to a director and shareholder
    
    
    
    
    
    
    
    
    
    
    (17,645
    )
    
    
    (2,586
    )Repayment from a related party
    
    
    9,457
    
    
    
    1,704
    
    
    
    
    
    
    
    Repayment from independent third parties
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from disposal of investment
    
    
    12,400
    
    
    
    
    
    
    
    
    
    
    
    Increase (decrease) in short-term bank deposit
    
    
    (50,000
    )
    
    
    50,000
    
    
    
    (50,000
    )
    
    
    (7,329
    )Net cash used in investing activities
    
    
    (55,274
    )
    
    
    (7,016
    )
    
    
    (296,207
    )
    
    
    (43,416
    )
  F-6




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)

(In thousands of Renminbi and United States Dollars, except share data and per share data)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flows from financing activities:Repayment of borrowings
    
    
    (159,908
    )
    
    
    (44,150
    )
    
    
    (201,500
    )
    
    
    (29,536
    )Repurchase of shares
    
    
    
    
    
    
    
    
    
    
    (7,159
    )
    
    
    (1,049
    )New borrowings raised
    
    
    115,000
    
    
    
    50,000
    
    
    
    170,000
    
    
    
    24,918Repayment to former shareholders of a subsidiary
    
    
    
    
    
    
    
    
    
    
    (1,365
    )
    
    
    (200
    )Issuance of share capital
    
    
    177,998
    
    
    
    645,806
    
    
    
    
    
    
    
    Direct and incremental offering expenses paid
    
    
    (13,200
    )
    
    
    (58,193
    )
    
    
    
    
    
    
    Advance from (repayment to) related parties
    
    
    2
    
    
    
    (41
    )
    
    
    (561
    )
    
    
    (82
    )Contribution from minority shareholder
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    120,142
    
    
    
    593,422
    
    
    
    (40,585
    )
    
    
    (5,949
    )Effect of exchange rate changes
    
    
    
    
    
    
    (42,954
    )
    
    
    (45,086
    )
    
    
    (6,608
    )Net increase (decrease) in cash and cash equivalents
    
    
    195,521
    
    
    
    566,746
    
    
    
    (281,668
    )
    
    
    (41,285
    )Cash and cash equivalents at beginning of the year
    
    
    35,488
    
    
    
    231,009
    
    
    
    797,755
    
    
    
    116,930Cash and cash equivalents at end of the year
    
    
    231,009
    
    
    
    797,755
    
    
    
    516,087
    
    
    
    75,645Supplemental schedule of cash flow information:Income tax paid
    
    
    300
    
    
    
    17,065
    
    
    
    11,097
    
    
    
    1,627Interest paid
    
    
    12,735
    
    
    
    9,858
    
    
    
    16,599
    
    
    
    2,433Non-cash investing and financing activities:Payables for acquisition of a subsidiary
    
    
    
    
    
    
    
    
    
    
    22,190
    
    
    
    3,252Deemed distribution of earnings to a director and shareholder
    
    
    
    
    
    
    
    
    
    
    17,645
    
    
    
    2,587Proceeds on disposal of property, plant and equipment and
land use rights included in other receivables
    
    
    
    
    
    
    310
    
    
    
    
    
    
    
    Proceeds on disposal of property, plant and equipment and
land use rights included in receivables on sale of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    18,065
    
    
    
    2,648Refund of deposit for property, plant and equipment included
in receivables on sale of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    745
    
    
    
    109Accounts payable for construction costs and acquisition of
property, plant and equipment
    
    
    10,753
    
    
    
    6,683
    
    
    
    6,882
    
    
    
    1,009Forfeiture of unvested restricted shares
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
   F-7




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 1. Organization and Principal Activities
     F-8




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands of Renminbi and United States Dollars, except share data and per share data)
 1. Organization and Principal Activitiescontinued
  Percentage ofordinary share/Place of
    
    registered capitalestablishment
    
    held by theName of company
    
    and operation
    
    Company
    
    
    Principal activitiesUnisources
    
    BVI
    
    
    100
    %
    
    Investment holdingTongjitang
Pharmaceutical (Hong
Kong) Limited
    
    Hong Kong
    
    
    100
    %
    
    InactiveTongjitang Pharmaceutical
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and sales of
medicine productsGuizhou Tongjitang
Pharmaceutical
Distribution Co., Ltd.
(Tongjitang
Distribution)
    
    PRC
    
    
    92.76
    %
    
    Wholesale distribution of medicine productsGuizhou Tongjitang
Pharmacy Chain Stores
Co., Ltd. (Tongjitang
Chain Stores)
    
    PRC
    
    
    89.05
    %
    
    Retail sales of medicines products and medical devicesGuizhou Longlife
Pharmaceutical Co., Ltd
(Guizhou Longlife)
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and sales of
medicine productsQinghai Pulante
Pharmaceutical Co., Ltd
(Qinghai Pulante)
    
    PRC
    
    
    100
    %
    
    Development, manufacturing, marketing and sales of
medicine productsGuizhou Jincili
Technology Development
Co., Ltd (Guizhou
Jincili)
    
    PRC
    
    
    100
    %
    
    Development of medicine products
 2. Summary of Significant Accounting Policies
 (a) Basis of presentation and principles of consolidation
   (b) Cash and cash equivalents
   F-9




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands of Renminbi and United States Dollars, except share data and per share data)
 2. Summary of Significant Accounting Policiescontinued
 (c) Notes receivable
  (d) Inventories
  (e) Trading securities
   2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Realized gain on trading securities
    
    
    
    
    
    
    9,555
    
    
    
    
    
    
    
    Unrealized loss on trading securities
    
    
    
    
    
    
    (1,146
    )
    
    
    (1,830
    )
    
    
    (268
    )Total
    
    
    
    
    
    
    8,409
    
    
    
    (1,830
    )
    
    
    (268
    )
 (f) Property, plant and equipment, net
   Buildings
    
    lesser of 50 years or lease termLeasehold improvements
    
    lesser of 10 years or lease termPlant and machinery
    
    5  10 yearsOffice equipment, furniture and fixtures
    
    5 yearsMotor vehicles
    
    10 years
  F-10




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands of Renminbi and United States Dollars, except share data and per share data)
 2. Summary of Significant Accounting Policiescontinued
 (g) Land use rights
    (h) Goodwill
      F-11




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands of Renminbi and United States Dollars, except share data and per share data)
 2. Summary of Significant Accounting Policiescontinued
 (i) Acquired intangible assets, net
  (j) Impairment of long-lived assets
  (k) Revenue recognition
    (l) Shipping and handling costs
  (m) Advertising costs
   F-12




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands of Renminbi and United States Dollars, except share data and per share data)
 2. Summary of Significant Accounting Policiescontinued
 (n) Government grants
   (o) Research and development costs
  (p) Earnings (loss) per share
     F-13




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands of Renminbi and United States Dollars, except share data and per share data)
 2. Summary of Significant Accounting Policiescontinued
 (p) Earnings (loss) per sharecontinued
  Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Income (loss) available to ordinary shareholders
    
    
    134,279
    
    
    
    171,193
    
    
    
    (52,300
    )
    
    
    (7,666
    )Weighted average number of ordinary shares for
the calculation of basic earnings (loss) per
share
    
    
    89,799,518
    
    
    
    124,479,794
    
    
    
    134,758,695
    
    
    
    134,758,695Effect of dilutive securitiesrestricted shares
    
    
    
    
    
    
    4,184
    
    
    
    
    
    
    
    Weighted average number of ordinary shares for
the calculation of diluted earnings (loss) per
share
    
    
    89,799,518
    
    
    
    124,483,978
    
    
    
    134,758,695
    
    
    
    134,758,695Weighted average number of ordinary shares
classified as mezzanine equity for the
calculation of basic earnings per share
    
    
    1,468,949
    
    
    
    2,149,018
    
    
    
    
    
    
    
    Ordinary sharesBasic earnings (loss) per share
    
    
    1.47
    
    
    
    1.35
    
    
    
    (0.39
    )
    
    
    (0.06
    )Ordinary sharesDiluted earnings (loss) per share
    
    
    1.47
    
    
    
    1.35
    
    
    
    (0.39
    )
    
    
    (0.06
    )Ordinary shares classified as mezzanine
equitybasic and diluted earnings per share
    
    
    1.47
    
    
    
    1.35
    
    
    
    N/A
    
    
    
    N/A
  F-14




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands of Renminbi and United States Dollars, except share data and per share data)
 2. Summary of Significant Accounting Policiescontinued
 (q) Income taxes
  Accounting for Uncertainty in Income Taxesan interpretation of
FASB Statement No. 109
 (r) Foreign currency transactions
   (s) Convenience translation into United States Dollars
   F-15




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands of Renminbi and United States Dollars, except share data and per share data)
 2. Summary of Significant Accounting Policiescontinued
 (t) Share-based compensation
  (u) Comprehensive income (loss)
  (v) Use of estimates
  (w) Fair value of financial instruments
  Fair Value Measurements Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
  F-16




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(In thousands of Renminbi and United States Dollars, except share data and per share data)
 2. Summary of Significant Accounting Policiescontinued
 (w) Fair value of financial instrumentscontinued
 Effective Date of FASB Statement No. 157
 Fair Value Hierarchy
     (x) Concentration of risk
   F-17




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands of Renminbi and United States Dollars, except share data and per share data)
 2. Summary of Significant Accounting Policiescontinued
 (x) Concentration of riskcontinued
  (y) Recently Issued Pronouncements
 The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
 Business Combination Accounting for Costs Associated with Exit or
Disposal Activities Accounting for
Contingencies
 Noncontrolling Interests in Consolidated
Financial Statements  An Amendment of ARB No. 51
  F-18




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(In thousands of Renminbi and United States Dollars, except share data and per share data)
 2. Summary of Significant Accounting Policiescontinued
 (y) Recently Issued Pronouncementscontinued
 Determination of the Useful Life of Intangible
Assets. Goodwill and Other Intangible Assets
 Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.
 Accounting for Defensive Intangible Assets
  F-19




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 3. Acquisition
 Acquisition in 2008
   RMBAssets acquired:Cash and cash equivalents
    
    
    2,066Accounts receivable
    
    
    295Amounts due from related parties
    
    
    736Inventories
    
    
    7,266Other prepaid expenses and current assets
    
    
    262Property, plant and equipment
    
    
    24,452Intangible assetsPatents
    
    
    9,698Trademarks
    
    
    2,289Distribution network
    
    
    4,106Total
    
    
    51,170Liabilities assumed:Short-term borrowings
    
    
    3,500Accounts payable
    
    
    1,199Amounts due to related parties
    
    
    8,750Accrued expenses and other current liabilities
    
    
    2,593Deferred tax liabilities
    
    
    3,240Total
    
    
    19,282
  F-20




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 3. Acquisitioncontinued
 Acquisition in 2008continued
 Goodwill
    
    
    28,062Net assets acquired
    
    
    59,950Consideration  cash
    
    
    37,760Consideration  payable
    
    
    22,190Total
    
    
    59,950
  Patents
    
    10 yearsTrademarks
    
    10 yearsDistribution network
    
    5 years
  Acquisition in 2007
   RMBCash consideration paid
    
    
    32,170Direct expenses incurred
    
    
    608Total purchase price
    
    
    32,778
  F-21




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 3. Acquisitioncontinued
 Acquisition in 2007continued
  RMBAssets acquired:Cash and cash equivalents
    
    
    5,027Accounts receivable
    
    
    335Inventories
    
    
    1,225Other prepaid expenses and current assets
    
    
    5,910Property, plant and equipment
    
    
    1,152Deferred tax assets
    
    
    1,808Total
    
    
    15,457Liabilities assumed:Short-term borrowings
    
    
    8,150Accounts payable
    
    
    2,397Accrued expenses and other current liabilities
    
    
    29,321Deferred tax liabilities
    
    
    13,280Long-term bank loans
    
    
    4,000Total
    
    
    57,148Acquired intangible asset:Patents
    
    
    56,325Trademarks
    
    
    18,144Total
    
    
    74,469Net assets acquired
    
    
    32,778
  Patents
    
    
    2 to 10 yearsTrademarks
    
    
    3 to 10 years
  F-22




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 4. Disposal
  RMBNet liabilities disposed of:Cash and cash equivalents
    
    
    103Other prepaid expenses and current assets
    
    
    2,267Property, plant and equipment
    
    
    641Amounts due to related parties
    
    
    (2,380
    )Accrued expenses and other current liabilities
    
    
    (1,652
    )Minority interest
    
    
    51(970
    )Gain on disposal
    
    
    1,312Total consideration receivable
    
    
    342Cash and cash equivalents disposal of
    
    
    103
  Net revenue
    
    
    Net loss
    
    
    3,212
 5. Allowance for doubtful debt accounts
  Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$At the beginning of the year
    
    
    3,118
    
    
    
    2,270
    
    
    
    4,589
    
    
    
    673Allowances recognized during the year
    
    
    321
    
    
    
    2,389
    
    
    
    1,586
    
    
    
    233Amounts written off as uncollectible
    
    
    (123
    )
    
    
    (70
    )
    
    
    
    
    
    
    Allowances written back
    
    
    (1,046
    )
    
    
    
    
    
    
    
    
    
    
    At the end of the year
    
    
    2,270
    
    
    
    4,589
    
    
    
    6,175
    
    
    
    906
  F-23




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 6. Receivables on sale of property, plant and equipment
  7. Inventories
  As of December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$Raw materials
    
    
    36,251
    
    
    
    54,364
    
    
    
    7,969Work-in-process
    
    
    20,973
    
    
    
    20,094
    
    
    
    2,945Finished goods
    
    
    18,970
    
    
    
    23,095
    
    
    
    3,38576,194
    
    
    
    97,553
    
    
    
    14,299
 8. Property, Plant and Equipment, net
  As of December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$Buildings
    
    
    103,564
    
    
    
    115,715
    
    
    
    16,961Leasehold improvements
    
    
    18,300
    
    
    
    21,057
    
    
    
    3,086Plant and machinery
    
    
    54,963
    
    
    
    59,896
    
    
    
    8,779Office equipment, furniture and fixtures
    
    
    11,610
    
    
    
    12,847
    
    
    
    1,883Motor vehicles
    
    
    11,953
    
    
    
    13,630
    
    
    
    1,998Sub-total
    
    
    200,390
    
    
    
    223,145
    
    
    
    32,707Less: Accumulated depreciation and amortization
    
    
    (57,704
    )
    
    
    (70,896
    )
    
    
    (10,391
    )142,686
    
    
    
    152,249
    
    
    
    22,316Construction in progress
    
    
    13,163
    
    
    
    
    
    
    
    Property, plant and equipment, net
    
    
    155,849
    
    
    
    152,249
    
    
    
    22,316
  F-24




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 8. Property, Plant and Equipment, netcontinued
    9. Goodwill
  QinghaiPulanteRMBBalance as at January 1, 2007 and December 31, 2007
    
    
    Goodwill acquired during the year
    
    
    28,062Impairment loss
    
    
    (28,062
    )Balance as at December 31, 2008
    
    
    
   F-25




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 10. Acquired Intangible assets, net
  As of December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$Cost:Patents
    
    
    57,538
    
    
    
    67,428
    
    
    
    9,883Trademarks
    
    
    27,711
    
    
    
    30,017
    
    
    
    4,399Registered drug formulae
    
    
    5,232
    
    
    
    5,232
    
    
    
    767Distribution network
    
    
    1,319
    
    
    
    5,425
    
    
    
    795Technical know-how
    
    
    10,160
    
    
    
    13,392
    
    
    
    1,963Total
    
    
    101,960
    
    
    
    121,494
    
    
    
    17,807Accumulated amortization:Patents
    
    
    2,293
    
    
    
    8,940
    
    
    
    1,310Trademarks
    
    
    7,557
    
    
    
    10,550
    
    
    
    1,546Registered drug formulae
    
    
    1,063
    
    
    
    1,249
    
    
    
    183Distribution networks
    
    
    696
    
    
    
    1,436
    
    
    
    210Technical know-how
    
    
    333
    
    
    
    1,673
    
    
    
    245Total
    
    
    11,942
    
    
    
    23,848
    
    
    
    3,494Impairment charges:Patents
    
    
    
    
    
    
    54,096
    
    
    
    7,929Trademarks
    
    
    
    
    
    
    15,324
    
    
    
    2,246Distribution networks
    
    
    
    
    
    
    3,490
    
    
    
    512Total
    
    
    
    
    
    
    72,910
    
    
    
    10,687Acquired intangible assets, net
    
    
    90,018
    
    
    
    24,736
    
    
    
    3,626
  F-26




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 10. Acquired Intangible assets, netcontinued
    11. Borrowings
  As of December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$Short-term bank loans
    
    
    
    
    
    
    70,000
    
    
    
    10,260Other borrowings
    
    
    1,100
    
    
    
    1,100
    
    
    
    161Long-term loans, current portion
    
    
    88,000
    
    
    
    14,000
    
    
    
    2,052Short-term borrowings
    
    
    89,100
    
    
    
    85,100
    
    
    
    12,473Long-term loans, non-current portion
    
    
    74,000
    
    
    
    50,000
    
    
    
    7,329Total
    
    
    163,100
    
    
    
    135,100
    
    
    
    19,802
 Other borrowing
   F-27




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 11. Borrowingscontinued
  As of December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$Secured short-term bank loans, carrying interest rates from
7.25% to 7.844%
    
    
    (a
    )
    
    
    
    
    
    
    70,000
    
    
    
    10,260Secured long-term bank loans, carrying interest rate at 6.3 %
    
    
    (b
    )
    
    
    85,000
    
    
    
    12,000
    
    
    
    1,759Unsecured long-term bank loans, carrying interest rates from
7.938 % to 7.956%
    
    
    (c
    )
    
    
    77,000
    
    
    
    52,000
    
    
    
    7,622Total
    
    
    
    
    
    
    162,000
    
    
    
    134,000
    
    
    
    19,641Less: Amounts due within one year
    
    
    
    
    
    
    (88,000
    )
    
    
    (84,000
    )
    
    
    (12,312
    )Amounts due more than one year
    
    
    
    
    
    
    74,000
    
    
    
    50,000
    
    
    
    7,329
 (a)
    
    As of December, 31, 2008, the secured short-term bank loans consisted of three bank loans of
RMB43,000, RMB25,000 and RMB2,000. These bank loans are all repayable in 2009. Each of these
loan were secured by a pledge of certain properties and land use rights. The pledged
properties and land use rights had a carrying value of RMB22,600 (US$3,313) and RMB14,603
(US$2,140) respectively as of December 31, 2008.(b)
    
    The secured long-term bank loans are secured by a pledge of certain of the Companys
properties and land use rights. The pledged properties as of December 31, 2007 and 2008 had a
net book value of RMB23,865 and RMB6,922 (US$1,015), respectively. The pledged land use rights
as of December 31, 2007 and 2008 had a net book value of RMB2,628 and RMB1,154 (US$169),
respectively.As of December 31, 2007, the secured long-term loans consisted of four bank loans of RMB18,000,
RMB25,000, RMB25,000 and RMB17,000. The RMB18,000 loan and the RMB25,000 loan were repayable
in June 2008. The other RMB25,000 loan was repayable in unequal installments through June 2008,
while the RMB17,000 loan was repayable in installments over the following 2 years, of which,
the first installment of RMB5,000 is due in December 2008.As of December 31, 2008, the secured long-term loan consisted of a bank loan RMB12,000, which
is repayable in August 2009.(c)
    
    As of December 31, 2007, the unsecured long-term bank loans consisted of four bank loans
of RMB8,000, RMB15,000, RMB50,000 and RMB4,000. The RMB8,000 loan was repayable in June 2008,
while the RMB15,000 loan was repayable in
installments over the following 3 years, of which, the first installment of RMB6,500 is due in
November 2009. The RMB50,000 loan was repayable in installments over the following 2 years, of
which, the first installment of RMB5,000 is due in September 2008. The RMB4,000 loan was
repayable in installments over the following 2 years, of which, the first installment of
RMB2,000 is due in October 2008.
  F-28




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 11. Borrowingscontinued
   2009
    
    
    14,0002010
    
    
    20,0002011
    
    
    30,000Total (RMB)
    
    
    64,000Less: current portion
    
    
    (14,000
    )Non-current portion (RMB)
    
    
    50,000Current portion (US$)
    
    
    2,052Non-current portion (US$)
    
    
    7,329
 12. Accrued Expenses and Other Current Liabilities
  As of December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$Other taxes payable
    
    
    27,738
    
    
    
    17,196
    
    
    
    2,521Accrued salary and welfare
    
    
    8,256
    
    
    
    8,337
    
    
    
    1,222Accrued operating expenses
    
    
    6,590
    
    
    
    4,623
    
    
    
    678Government grant
    
    
    5,066
    
    
    
    13,304
    
    
    
    1,950Expense reimbursements to employees and marketing agents
    
    
    668
    
    
    
    2,379
    
    
    
    349Payable for the acquisition of a subsidiary
    
    
    
    
    
    
    22,190
    
    
    
    3,252Payable for the acquisition of property, plant and equipment
    
    
    6,683
    
    
    
    6,882
    
    
    
    1,009Advances from customers
    
    
    510
    
    
    
    1,135
    
    
    
    166Advertisement expense payable
    
    
    579
    
    
    
    679
    
    
    
    100Research and development
    
    
    
    
    
    
    1,616
    
    
    
    237Others
    
    
    1,720
    
    
    
    2,789
    
    
    
    40857,810
    
    
    
    81,130
    
    
    
    11,892
  F-29




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 13. Capital Structure
     Mezzanine Equity
    F-30




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 13. Capital Structurecontinued
 Share Repurchase Program
  Share Incentive Plan
  Share options
   Granted on October 24, 2007Average risk-free rate of return
    
    
    3.987
    %Weighted average expected option life
    
    4.9 yearsVolatility rate
    
    
    29.19
    %Dividend yield
    
    
    0
    %
  F-31




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 13. Capital Structurecontinued
 Share Incentive Plancontinued
 Share optionscontinued
   WeightedWeighted
    
    
    Average
    
    
    WeightedAverage
    
    
    Remaining
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Contract
    
    
    Fair ValueOptions
    
    
    Price
    
    
    Life
    
    
    Per OptionGranted on October 24, 2007 and options
outstanding at December 31, 2007
    
    
    5,200,000
    
    
    US$
    2.91
    
    
    9.6 years
    
    
    US$
    0.90Forfeited
    
    
    (400,000
    )
    
    US$
    2.91
    
    
    
    
    
    
    US$
    0.90Outstanding at December 31, 2008
    
    
    4,800,000
    
    
    US$
    2.91
    
    
    8.6 years
    
    
    US$
    0.90Option vested and exercisable at
December 31, 2008
    
    
    3,460,000
    
    
    US$
    2.91
    
    
    8.6 years
    
    
    US$
    0.90Non-vested and expected to vested at
December 31, 2008
    
    
    1,340,000
    
    
    US$
    2.91
    
    
    8.6 years
    
    
    US$
    0.90
   F-32




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 13. Capital Structurecontinued
 Share Incentive Plancontinued
 Share optionscontinued
   Restricted Shares (Non-vested shares)
   Weighted AverageNumber of
    
    
    Market PriceRestricted Shares
    
    
    at Grant DateGranted
    
    
    1,656,714
    
    
    US$
    2.87Vested
    
    
    (891,714
    )
    
    US$
    2.87Unvested at December 31, 2007
    
    
    765,000
    
    
    US$
    2.87Vested
    
    
    (365,000
    )
    
    US$
    2.87Forfeited
    
    
    (140,000
    )
    
    US$
    2.87Unvested at December 31, 2008
    
    
    260,000
    
    
    US$
    2.87
   F-33




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 13. Capital Structurecontinued
 Other share-based payments transaction
 Share-based
compensation
 Share options
    Granted on December 15, 2008Average risk-free rate of return
    
    
    1.727
    %Weighted average expected option life
    
    6.2 yearsVolatility rate
    
    
    36.04
    %Dividend yield
    
    
    0
    %
  WeightedWeighted
    
    
    Average
    
    
    WeightedAverage
    
    
    Remaining
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Contract
    
    
    Fair ValueOptions
    
    
    Price
    
    
    Life
    
    
    Per OptionGranted on December
15, 2008 and
options outstanding
and unvested at
December 31, 2008
    
    
    240,000
    
    
    US$
    1.00
    
    
    6.2 years
    
    
    US$
    0.121
  F-34




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 13. Capital Structurecontinued
 Other share-based payments transactioncontinued
 Share optionscontinued
   Restricted Shares (Non-vested shares)
    Year ended December, 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Share Incentive Plan:Share options
    
    
    
    
    
    
    15,599
    
    
    
    12,945
    
    
    
    1,897Restricted shares
    
    
    
    
    
    
    21,501
    
    
    
    7,479
    
    
    
    1,096Other share-based payments transaction:Share options
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    1Restricted shares
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    3Total share-based compensation expenses
    
    
    
    
    
    
    37,100
    
    
    
    20,446
    
    
    
    2,997
  F-35




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 14. Income Taxes
  Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$PRC
    
    
    157,291
    
    
    
    189,625
    
    
    
    (46,476
    )
    
    
    (6,812
    )Other jurisdictions
    
    
    (6,532
    )
    
    
    (17,283
    )
    
    
    (5,530
    )
    
    
    (810
    )150,759
    
    
    
    172,342
    
    
    
    (52,006
    )
    
    
    (7,622
    )
  Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$PRC Enterprise Income Tax (EIT)Current
    
    
    16,392
    
    
    
    1,036
    
    
    
    8,525
    
    
    
    1,250Deferred taxation current
    
    
    
    
    
    
    (965
    )
    
    
    (8,023
    )
    
    
    (1,176
    ) effect of change in tax rate
    
    
    
    
    
    
    1,129
    
    
    
    
    
    
    
    16,392
    
    
    
    1,200
    
    
    
    502
    
    
    
    74
  Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Deferred Taxation  currentTemporary non-deductible promotion expenses
    
    
    
    
    
    
    
    
    
    
    (1,911
    )
    
    
    (280
    )Tax losses
    
    
    
    
    
    
    1,310
    
    
    
    (1,000
    )
    
    
    (147
    )Valuation allowances
    
    
    
    
    
    
    (1,383
    )
    
    
    4,850
    
    
    
    711Intangible assets
    
    
    
    
    
    
    (325
    )
    
    
    (14,838
    )
    
    
    (2,175
    )Withholding tax on undistributed earnings
    
    
    
    
    
    
    
    
    
    
    5,455
    
    
    
    799Others
    
    
    
    
    
    
    (567
    )
    
    
    (579
    )
    
    
    (84
    )
    
    
    
    (965
    )
    
    
    8,023
    
    
    
    (1,176
    )
  F-36




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 14. Income Taxescontinued
         F-37




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 14. Income Taxescontinued
       F-38




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 14. Income Taxescontinued
  As of December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$Deferred tax assets:Inventory write-down
    
    
    266
    
    
    
    813
    
    
    
    118Doubtful debt allowance
    
    
    2,026
    
    
    
    2,099
    
    
    
    308Temporary non-deductible promotion expenses
    
    
    
    
    
    
    1,911
    
    
    
    280Tax losses
    
    
    2,988
    
    
    
    3,988
    
    
    
    585Property, plant and equipment, net
    
    
    59
    
    
    
    50
    
    
    
    7Land use rights
    
    
    1,089
    
    
    
    1,057
    
    
    
    1556,428
    
    
    
    9,918
    
    
    
    1,453Valuation allowance
    
    
    (3,961
    )
    
    
    (8,811
    )
    
    
    (1,291
    )Total deferred tax assets
    
    
    2,467
    
    
    
    1,107
    
    
    
    162Deferred tax liability:Intangible assets
    
    
    (13,415
    )
    
    
    (1,817
    )
    
    
    (266
    )Withholding tax on undistributed earnings
    
    
    
    
    
    
    (5,455
    )
    
    
    (800
    )(13,415
    )
    
    
    (7,272
    )
    
    
    (1,066
    )Net deferred tax liabilities
    
    
    (10,948
    )
    
    
    (6,165
    )
    
    
    (904
    )Analysis as:Deferred tax assets, non-current portion
    
    
    2,007
    
    
    
    1,107
    
    
    
    162Deferred tax liabilities, non-current portion
    
    
    (12,955
    )
    
    
    (7,272
    )
    
    
    (1,066
    )Total
    
    
    (10,948
    )
    
    
    (6,165
    )
    
    
    (904
    )
  Year ended December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$At the beginning of the year
    
    
    5,344
    
    
    
    3,961
    
    
    
    580Current year
(reduction) addition
    
    
    (1,383
    )
    
    
    4,850
    
    
    
    711At the end of the year
    
    
    3,961
    
    
    
    8,811
    
    
    
    1,291
  F-39




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 14. Income Taxescontinued
   Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Income (loss) before income taxes and minority interest
    
    
    150,759
    
    
    
    172,342
    
    
    
    (52,006
    )
    
    
    (7,622
    )PRC enterprise income tax rate
    
    
    33
    %
    
    
    33
    %
    
    
    25
    %
    
    
    25
    %Income tax at PRC EIT rate on income before income taxes
    
    
    49,750
    
    
    
    56,873
    
    
    
    (13,002
    )
    
    
    (1,906
    )Expenses not deductible for tax purposes:Certain salaries and employees benefits
    
    
    567
    
    
    
    1,093
    
    
    
    257
    
    
    
    38Non-deductible donations
    
    
    492
    
    
    
    697
    
    
    
    47
    
    
    
    7Entertainment expenses
    
    
    
    
    
    
    1,341
    
    
    
    1,118
    
    
    
    164Impairment on accounts receivable
    
    
    
    
    
    
    
    
    
    
    258
    
    
    
    38Other non-deductible expenses
    
    
    83
    
    
    
    455
    
    
    
    867
    
    
    
    127Income not taxable for tax purposes
    
    
    
    
    
    
    
    
    
    
    (5,446
    )
    
    
    (798
    )Effect of tax holidays and tax concessions
    
    
    (52,584
    )
    
    
    (65,570
    )
    
    
    23
    
    
    
    3Changes in valuation allowances
    
    
    (405
    )
    
    
    (1,383
    )
    
    
    4,850
    
    
    
    711Deferred tax liability on withholding tax on
undistributed profits of PRC subsidiaries
    
    
    
    
    
    
    
    
    
    
    5,455
    
    
    
    800Prior year income tax payment required for deferral of
tax holidays
    
    
    16,392
    
    
    
    
    
    
    
    
    
    
    
    Effect of different tax rate of a subsidiary operating
in other jurisdictions
    
    
    2,157
    
    
    
    6,406
    
    
    
    5,827
    
    
    
    854Effect of change in tax rate
    
    
    
    
    
    
    1,129
    
    
    
    
    
    
    
    Others
    
    
    (60
    )
    
    
    159
    
    
    
    248
    
    
    
    36Total income tax expense
    
    
    16,392
    
    
    
    1,200
    
    
    
    502
    
    
    
    74
  F-40




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 14. Income Taxescontinued
  13. Related Party Transactions and Balances
 Related party balances:
  As of December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$Due from related parties:Due from a minority shareholder of a subsidiary
    
    
    535
    
    
    
    
    
    
    
    Due from an affiliate
    
    
    
    
    
    
    8,500
    
    
    
    1,246Due to former shareholders of a subsidiary
    
    
    
    
    
    
    689
    
    
    
    101Total
    
    
    535
    
    
    
    9,189
    
    
    
    1,347Due to related parties:Due to an affiliate
    
    
    432
    
    
    
    432
    
    
    
    63Due to a former equity owner
    
    
    900
    
    
    
    900
    
    
    
    132Due to Mr. Wang
    
    
    561
    
    
    
    
    
    
    
    Due to former shareholders of a subsidiary
    
    
    
    
    
    
    7,385
    
    
    
    1,082Total
    
    
    1,893
    
    
    
    8,717
    
    
    
    1,277
   F-41




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 15. Related Party Transactions and Balancescontinued
 Disposition of subsidiaries and investment in an affiliate:
  Other related party transactions:
       F-42




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 16. Fair value measurements
   Quoted PricesIn Active
    
    
    SignificantMarket for
    
    
    Other
    
    
    Significant
    
    
    BalanceIdentical
    
    
    Observable
    
    
    Unobservable
    
    
    as ofAssets
    
    
    Inputs
    
    
    Inputs
    
    
    December 31,(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBCurrent assetTrading securities
    
    
    792
    
    
    
    
    
    
    
    
    
    
    
    792
    F-43




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 17. Staff Retirement Plan
    18. Commitments
 (a) Lease commitments
   2009
    
    
    1,8952010
    
    
    1,1252011
    
    
    2132012
    
    
    262013
    
    
    232014 and thereafter
    
    
    46Total (RMB)
    
    
    3,328Total (US$)
    
    
    488
 (b) Capital commitments
   F-44




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 18. Commitmentscontinued
 (c) Other commitments
  19. Distribution of Profits
   19. Segment Reporting
   F-45




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 20. Segment Reportingcontinued
  Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Xianling Gubao capsules and tablets
    
    
    374,616
    
    
    
    444,877
    
    
    
    315,537
    
    
    
    46,249Zaoren Anshen capsules
    
    
    11,998
    
    
    
    21,666
    
    
    
    11,439
    
    
    
    1,677Moisturizing and Anti-Itching capsules
    
    
    10,211
    
    
    
    39,977
    
    
    
    41,030
    
    
    
    6,014Dianbaizhu Syrup
    
    
    5,695
    
    
    
    25,940
    
    
    
    785
    
    
    
    115Calcium Supplements
    
    
    37,421
    
    
    
    1
    
    
    
    212
    
    
    
    31Our other medicines
    
    
    26,415
    
    
    
    45,921
    
    
    
    64,940
    
    
    
    9,518Third party medicines
    
    
    18,636
    
    
    
    17,625
    
    
    
    17,089
    
    
    
    2,505484,992
    
    
    
    596,007
    
    
    
    451,032
    
    
    
    66,109
 Major customers
  Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Company A
    
    
    108,918
    
    
    
    
    
    
    
    
    
    
    
    Company B
    
    
    68,098
    
    
    
    
    
    
    
    
    
    
    
    Company C
    
    
    
    
    
    
    69,389
    
    
    
    
    
    
    
    Company D
    
    
    
    
    
    
    
    
    
    
    53,791
    
    
    
    7,884177,016
    
    
    
    69,389
    
    
    
    53,791
    
    
    
    7,884
 Geographic disclosures
   F-46




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##### Table of Contents



TONGJITANG CHINESE MEDICINES COMPANY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 (In thousands of Renminbi and United States Dollars, except share data and per share data)
 21. Restricted net assets
  22. Post balance sheet event
   F-47




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##### Table of Contents



SCHEDULE 1
 TONGJITANG CHINESE MEDICINES COMPANY
 CONDENSED FINANCIAL INFORMATION OF TONGJITANG CHINESE MEDICINES COMPANY
 STATEMENT OF OPERATIONS
 (In thousands of Renminbi and United States Dollars, except share data)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$General and administrative expenses
    
    
    (144
    )
    
    
    (29,909
    )
    
    
    (27,053
    )
    
    
    (3,965
    )Interest income
    
    
    9,275
    
    
    
    30,732
    
    
    
    43,384
    
    
    
    6,359Equity in income (loss) of subsidiaries
    
    
    125,148
    
    
    
    170,370
    
    
    
    (68,631
    )
    
    
    (10,060
    )Net income (loss)
    
    
    134,279
    
    
    
    171,193
    
    
    
    (52,300
    )
    
    
    (7,666
    )
  F-48




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##### Table of Contents



SCHEDULE 1 (continued)
 TONGJITANG CHINESE MEDICINES COMPANY
 CONDENSED FINANCIAL INFORMATION OF TONGJITANG CHINESE MEDICINES COMPANY
 BALANCE SHEETS
(In thousands of Renminbi and United States Dollars, except share data)
 December 31,2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    US$ASSETSCurrent assets:Cash and cash equivalents
    
    
    496,519
    
    
    
    215,266
    
    
    
    31,552Other prepaid expenses and current assets
    
    
    237
    
    
    
    194
    
    
    
    28Total current assets
    
    
    496,756
    
    
    
    215,460
    
    
    
    31,580Amounts due from subsidiaries
    
    
    206,443
    
    
    
    472,922
    
    
    
    69,318Investments in subsidiaries
    
    
    536,487
    
    
    
    448,487
    
    
    
    65,737Total assets
    
    
    1,239,686
    
    
    
    1,136,869
    
    
    
    166,635LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Amounts due to subsidiaries
    
    
    2,264
    
    
    
    1,997
    
    
    
    293Accrued expenses and other current liabilities
    
    
    846
    
    
    
    57
    
    
    
    8Total liabilities
    
    
    3,110
    
    
    
    2,054
    
    
    
    301Shareholders equity:Ordinary shares (US$0.001 par value: 500,000,000
shares authorized and 135,349,722 shares as of
December 31, 2007, and 135,209,722 shares as of
December 31, 2008, respectively, issued and
outstanding)
    
    
    1,071
    
    
    
    1,070
    
    
    
    157Treasury stock (US$0.01 par value: nil shares and
1,763,600 shares as of December 31 2007 and 2008
outstanding respectively)
    
    
    
    
    
    
    (7,159
    )
    
    
    (1,049
    )Additional paid-in capital
    
    
    870,980
    
    
    
    891,427
    
    
    
    130,659Accumulated other comprehensive loss
    
    
    (42,990
    )
    
    
    (88,093
    )
    
    
    (12,912
    )Retained earnings
    
    
    407,515
    
    
    
    337,570
    
    
    
    49,479Total shareholders equity
    
    
    1,236,576
    
    
    
    1,134,815
    
    
    
    166,334Total liabilities and shareholders equity
    
    
    1,239,686
    
    
    
    1,136,869
    
    
    
    166,635
  F-49




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##### Table of Contents



SCHEDULE 1 (continued)
 TONGJITANG CHINESE MEDICINES COMPANY
 CONDENSED FINANCIAL INFORMATION OF TONGJITANG CHINESE MEDICINES COMPANY
 STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 (In thousands of Renminbi and United States Dollars, except share data)
 Additional
    
    
    Accumulated other
    
 
    
    
    

    


    TotalOrdinary share
    
    
    Treasury
    
    
    paid-in
    
    
    comprehensive
    
    
    Retained
    
    
    shareholders
    
    
    Comprehensivecapital
    
    
    stock
    
    
    capital
    
    

losses
    
    
    earnings
    
    
    equity
    
    
    income (loss)Number
    
    
    RMB
    
    
    Number
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMBAs of January 31, 2006
    
    
    90,364,000
    
    
    
    723
    
    
    
    
    
    
    
    
    
    
    
    139,833
    
    
    
    
    
    
    
    102,043
    
    
    
    242,599Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,279
    
    
    
    134,279
    
    
    
    134,279Deemed contribution from a shareholder on disposal of an affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    186As of December 31, 2006
    
    
    90,364,000
    
    
    
    723
    
    
    
    
    
    
    
    
    
    
    
    140,019
    
    
    
    
    
    
    
    236,322
    
    
    
    377,064Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,193
    
    
    
    171,193
    
    
    
    171,193Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,990
    )
    
    
    
    
    
    
    (42,990
    )
    
    
    (42,990
    )Conversion of mezzanine equity
    
    
    9,929,008
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    120,568
    
    
    
    
    
    
    
    
    
    
    
    120,645Issuance of shares upon the initial public offering
    
    
    33,400,000
    
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    645,548
    
    
    
    
    
    
    
    
    
    
    
    645,806Offering expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72,242
    )
    
    
    
    
    
    
    
    
    
    
    (72,242
    )Issuance of restricted shares
    
    
    1,656,714
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,100
    
    
    
    
    
    
    
    
    
    
    
    37,100128,203As of December 31, 2007
    
    
    135,349,722
    
    
    
    1,071
    
    
    
    
    
    
    
    
    
    
    
    870,980
    
    
    
    (42,990
    )
    
    
    407,515
    
    
    
    1,236,576Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,300
    )
    
    
    (52,300
    )
    
    
    (52,300
    )Deemed distribution to a shareholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,645
    )
    
    
    (17,645
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,103
    )
    
    
    
    
    
    
    (45,103
    )
    
    
    (45,103
    )Forfeiture of restricted shares
    
    
    (140,000
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Repurchase of shares
    
    
    
    
    
    
    
    
    
    
    1,763,600
    
    
    
    (7,159
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,159
    )Deemed contribution from a shareholder on share-based compensation to an employee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,424
    
    
    
    
    
    
    
    
    
    
    
    20,424As of December 31, 2008
    
    
    135,209,722
    
    
    
    1,070
    
    
    
    1,763,600
    
    
    
    (7,159
    )
    
    
    891,427
    
    
    
    (88,093
    )
    
    
    337,570
    
    
    
    1,134,815
    
    
    
    (97,403
    )As of December 31, 2008 (US$)
    
    
    
    
    
    
    157
    
    
    
    
    
    
    
    (1,049
    )
    
    
    130,659
    
    
    
    (12,912
    )
    
    
    49,479
    
    
    
    166,334
  F-50




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##### Table of Contents



Schedule 1 (continued)
 TONGJITANG CHINESE MEDICINES COMPANY
 STATEMENTS OF CASH FLOWS
 (In thousands of Renminbi and United States Dollars, except share data)
 Year ended December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    134,279
    
    
    
    171,193
    
    
    
    (52,300
    )
    
    
    (7,666
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Share-based compensation expenses
    
    
    
    
    
    
    30,671
    
    
    
    20,446
    
    
    
    2,997Equity in (income) loss of subsidiaries
    
    
    (125,248
    )
    
    
    (170,370
    )
    
    
    68,631
    
    
    
    10,060Imputed interest on amount due from a subsidiary
    
    
    (9,275
    )
    
    
    (14,129
    )
    
    
    (32,821
    )
    
    
    (4,812
    )Changes in current assets and liabilities(Increase) decrease in other prepaid expenses and current
assets
    
    
    
    
    
    
    (8,453
    )
    
    
    43
    
    
    
    6Increase (decrease) in amounts due to subsidiaries
    
    
    144
    
    
    
    2,264
    
    
    
    (267
    )
    
    
    (39
    )Decrease in accrued expenses and other current liabilities
    
    
    
    
    
    
    
    
    
    
    (790
    )
    
    
    (116
    )Net cash provided by operating activities
    
    
    
    
    
    
    11,176
    
    
    
    2,942
    
    
    
    430Cash used in investing activities:Advance to a subsidiary
    
    
    
    
    
    
    (68,851
    )
    
    
    (255,641
    )
    
    
    (37,470
    )Cash flows from financing activities:Repurchase of share capital
    
    
    
    
    
    
    
    
    
    
    (7,159
    )
    
    
    (1,049
    )Issuance of share capital
    
    
    
    
    
    
    645,806
    
    
    
    
    
    
    
    Direct and incremental offering expenses paid
    
    
    
    
    
    
    (58,193
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    
    
    
    
    587,613
    
    
    
    (7,159
    )
    
    
    (1,049
    )Effect of exchange rate changes
    
    
    
    
    
    
    (33,419
    )
    
    
    (21,395
    )
    
    
    (3,136
    )Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    496,519
    
    
    
    (281,253
    )
    
    
    (41,225
    )Cash and cash equivalents at beginning of the year
    
    
    
    
    
    
    
    
    
    
    496,519
    
    
    
    72,777Cash and cash equivalents at end of the year
    
    
    
    
    
    
    496,519
    
    
    
    215,266
    
    
    
    31,552
  F-51




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##### Table of Contents



Schedule 1 (continued)
 TONGJITANG CHINESE MEDICINES COMPANY
 NOTE TO SCHEDULE 1
  Basis of Presentation
    F-52




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description of Document1.1
    *
    
    Amended and Restated Memorandum and Articles of Association of the
Registrant2.1
    
    
    Form of Registrants American Depositary Receipt (included in Exhibit 2.3)2.2
    
    
    Registrants Specimen Certificate for Ordinary Shares (incorporated by
reference to Exhibit 4.2 from our F-1 registration statement (File
No. 333-140888), as amended, initially filed with the Commission on
February 26, 2007)2.3
    
    
    Form of Deposit Agreement among the Registrant, the Depositary and Holders
of the American Depositary Receipts (incorporated by reference to
Exhibit 4.3 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)2.4
    
    
    Shareholders Agreement dated as of November 8, 2006 among the Registrant
and Shareholders (incorporated by reference to Exhibit 4.4 from our F-1
registration statement (File No. 333-140888), as amended, initially filed
with the Commission on February 26, 2007)2.5
    
    
    Registration Rights Agreement dated as of November 8, 2006 among the
Registrant and certain Shareholders (incorporated by reference to
Exhibit 4.5 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)4.1
    
    
    Form of Indemnification Agreement with the Registrants Directors
(incorporated by reference to Exhibit 10.1 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.2
    
    
    Form of Employment Agreement (incorporated by reference to Exhibit 10.2
from our F-1 registration statement (File No. 333-140888), as amended,
initially filed with the Commission on February 26, 2007)4.3
    
    
    2006 Share Incentive Plan (as amended on October 30, 2008) (incorporated
by reference to Exhibit 99.1 from our Post-Effective Amendment No. 1 to
S-8 registration statement (File No. 333-140888) filed with the Commission
on December 23, 2008)4.4
    
    
    Subscription Agreement dated December 21, 2005 among Samtung Investment
Limited, Unisources Enterprises Limited, Xiaochun Wang and Shaolan Wang
(incorporated by reference to Exhibit 10.4 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.5
    
    
    Sale and Purchase Agreement dated June 15, 2006 among the Registrant,
Unisources Enterprises Limited and shareholders of Unisources Enterprises
Limited (incorporated by reference to Exhibit 10.5 from our F-1
registration statement (File No. 333-140888), as amended, initially filed
with the Commission on February 26, 2007)4.6
    
    
    Share Purchase Agreement dated November 8, 2006 among the Registrant, ML
Global Private Equity Fund, L.P. and Merrill Lynch Ventures L.P. 2001
(incorporated by reference to Exhibit 10.6 from our F-1 registration
statement (File No. 333-140888), as amended, initially filed with the
Commission on February 26, 2007)4.7
    
    
    English Translation of License Agreement dated January 12, 2005 between
Xiaochun Wang and Tongjitang Pharmaceutical (incorporated by reference to
Exhibit 10.7 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)4.8
    
    
    Real Property Lease Agreement dated July 11, 2006 (incorporated by
reference to Exhibit 10.13 from our F-1 registration statement (File
No. 333-140888), as amended, initially filed with the Commission on
February 26, 2007)8.1
    *
    
    Subsidiaries of the Registrant11.1
    
    
    Code of Business Conduct and Ethics (incorporated by reference to
Exhibit 99.1 from our F-1 registration statement (File No. 333-140888), as
amended, initially filed with the Commission on February 26, 2007)12.1
    *
    
    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2
    *
    
    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1
    *
    
    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
    *
    
    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1
    *
    
    Consent of Deloitte Touche Tohmatsu15.2
    *
    
    Consent of Global Law Office
 
 *
    
    Filed with this Annual Report on Form 20-F  89