UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-K







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





For
      the fiscal year ended December 31,
2008





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





For
      the transition period from
                  
      to





Commission
File Number: 000-50029





CHINA HEALTH RESOURCE,
INC.


(Exact
name of Registrant as specified in its Charter)


_____________




Delaware
                
                73-1629948(State
      or Other Jurisdiction of
                  incorporation
      or organization)
                
                (I.R.S.
      Employer
                  Identification
      No.)





343 Sui Zhou Zhong
Road


Suining City, Sichuan
Province, P.R. China


(Address
of Principal Executive Offices)





+(86-825)
239-1788


(Issuer’s
Telephone Number)





Securities
registered pursuant to Section 12(b) of the Act:




Title
      of each class
                
                Name
      of each exchange on which registeredNone
                
                Not
      Applicable




Securities
registered pursuant to Section 12(g) of the Act:


Common
Stock, Class A & Class B, $.01 par value








Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.      Yes   ̈   No  x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange
Act.    Yes   ̈   No  x




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




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





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





Large
      Accelerated Filer   ̈
                  Accelerated
      Filer   ̈Non-Accelerated
      Filer   ̈
                  Smaller
      reporting company  x




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





As of
March 31, 2009, there were 154,894,509 shares of the registrant’s Class A Common
Stock, par value $0.01, issued and outstanding, of which approximately
76,965,906 are held by non-affiliates of the registrant, and none of the
registrant’s Class B Common Stock, par value $0.01, issued and
outstanding.  The aggregate market value of securities held by
non-affiliates is approximately $269,380.67, based upon the registrant’s closing
bid price as quoted on the OTC Bulletin Board on March 31, 2009 of $0.0035 per
share.





Information
related to our company, including certain reports filed with or furnished to the
SEC, are available through our website (www.chriglobal.com).  We
are not including any information on our website as part of, or incorporating it
by reference into, our Form 10-K.





DOCUMENTS
INCORPORATED BY REFERENCE:





Portions
of the registrant’s definitive Information Statement, filed with the SEC on
March 12, 2009, relating to the election of directors and other matters, are
incorporated by reference into Part III herein.









CHINA
HEALTH RESOURCE, INC.


INDEX TO
ANNUAL REPORT ON FORM 10-K


DECEMBER
31, 2008





TABLE
OF CONTENTS





PART
      I
                                                                3Item
      1.  Business
                                                                3Item
      1A.  Risk Factors.
                                                                8Item
      1B.  Unresolved Staff Comments.
                                                                9Item
      2.  Properties.
                                                                9Item
      3.  Legal Proceedings.
                                                                9Item
      4.  Submission of Matters to a Vote of the Security
      Holders.
                                                                9PART
      II
                                                                10Item
      5.  Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities.
                                                                10Item
      6.  Selected Financial Data.
                                                                10Item
      7.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations.
                                                                10Item
      7A.  Quantitative and Qualitative Disclosures About Market
      Risk.
                                                                16Item
      8.  Financial Statements and Supplementary Data.
                                                                16Item
      9.  Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure.
                                                                16Item
      9A(T).  Controls and Procedures.
                                                                16Item
      9B.  Other Information.
                                                                17PART
      III
                                                                17Item
      10.  Directors, Executive Officers and Corporate
      Governance.
                                                                17Item
      11.  Executive Compensation.
                                                                17Item
      12.  Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters.
                                                                17Item
      13.  Certain Relationships and Related Transactions, and
      Director Independence.
                                                                17Item
      14.  Principal Accounting Fees and Services.
                                                                17PART
      IV
                                                                17Item
      15.  Exhibits, Financial Statement Schedules.
                                                                17SIGNATURES
                                                                18





2




CAUTIONARY
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION





Except
for historical information, this report contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended.  Such forward-looking statements involve risks and
uncertainties, including, among other things, statements regarding our business
strategy, future revenues and anticipated costs and expenses.  Such
forward-looking statements include, among others, those statements including the
words “expect,” “anticipate,” “intend,” “believe” and similar
language.  Our actual results may differ significantly from those
projected in the forward-looking statements.  Factors that might cause
or contribute to such differences include, but are not limited to, those
discussed in Item 1. Business and Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations. You are cautioned not to place
undue reliance on the forward-looking statements, which speak only as of the
date of this report.  We undertake no obligation to publicly release
any revisions to the forward-looking statements or reflect events or
circumstances taking place after the date of this document.





Although
we believe that the expectations reflected in these forward-looking statements
are based on reasonable assumptions, there are a number of risks and
uncertainties that could cause actual results to differ materially from such
forward-looking statements.





All
references in this Form 10-K to the “Company,” “CHRI,” the “Registrant,” “we,”
“us” or “our” are to China Health Resource, Inc., a Delaware
corporation.  These terms also refer, where context requires, to our
subsidiary corporation, Suining Shi Yinfa Bai Zhi Chan Ye You Xian Gong Si, a
corporation organized and existing under the laws of the Peoples’ Republic of
China (“Yinfa”), acquired in August 2006.





PART
I





Item
1.  Business





History





We were incorporated in the State of
Delaware on February 26, 2002. In June and July 2002, we acquired approximately
99% of the outstanding shares of Voice Diary Ltd., an Israeli corporation
(“VDL”), through an exchange of shares of the Company with shareholders of VDL.
On June 13, 2006, we, as the acquirer, executed a Plan of Exchange with Yinfa
(acquiree), the shareholders of Yinfa and the Company’s then majority
shareholders, pursuant to which we issued 30,000,000 (pre-forward split) new
shares of our Class A Common Stock to the Yinfa shareholders in a transaction
exempt from the registration requirements of the Securities Act of 1933, as
amended, in reliance upon Regulation S thereunder, in exchange for all of their
shares of registered capital of Yinfa. As a result, Yinfa became our
wholly-owned subsidiary. Yinfa was founded on April 24, 2001, with registered
capital of US $125,500 (RMB 1,000,000) and total assets of US $1,475,795.
Yinfa’s business incorporates a self-owned production base and a network of DAR
(as defined below) associates, farmers and research and development affiliates.
The transaction was treated for accounting purposes as a capital transaction and
recapitalization by the accounting acquirer and as a re-organization by the
accounting acquiree. We disposed of VDL on August 22, 2006 pursuant to the
agreement between the Company, VDL and Arie Hinkis, our former president. On May
21, 2007, we changed our name to China Health Resource, Inc. to more accurately
reflect our business operations.





Our
Business




Since the
completion of the Plan of Exchange with Yinfa, our core business has been in
pharmaceuticals and the continued operations of Yinfa. Yinfa is a Chinese
pharmaceutical company focused on developing and commercializing Dahurian
Angelica Root (“DAR”), a popular traditional Chinese medicine (“TCM”). Our
business plan includes distributing DAR and its related products for the
treatment of pain, swelling and pustule. DAR is a popular herb employed
extensively as an ingredient in food, medicine and cosmetics. The Suining
district in China’s Sichuan Province is the major planting and production area
in China for DAR as a result of the local climate and soil properties. Over 70%
of DAR for general use and 100% of DAR for pharmaceutical use in China is
produced in Suining.




3




In May
2005, we applied for and obtained Good Agricultural Practice of Medical Plants
and Animals (“GAP”) certification for DAR, in cooperation with Sichuan Yinfa
Resource Development Group Co. Ltd., our affiliate (“Yinfa Resource”). The
standards which must be met to obtain certification include the study of our
environment quality, seed quality, minimum pesticides, and fertilizer. These
standards were adopted by the Chinese State Food and Drug Administration (the
“SFDA”). Our GAP project involves approximately 133,334 square meters of
experimental planting fields, and 1,333,340 square meters of fields run by
companies we have hired, all of which passed inspection by the SFDA, on February
26, 2006. The GAP certificate has been issued in name of our partner, Yinfa
Resource. GAP certification means that our planning, quality, and manufacturing
of DAR have met the requisite high and certifiable standard.




In 2007,
Yinfa contracted with the Sichuan Province Suining City DAR Association
(“Association”) and received the exclusive rights to the “Suining Sichuan
Angelic” certified trademark from the Chinese State Administration of Industry
and Commerce through December 13, 2016. As holder of the rights to the
trademark, Yinfa is entitled to receive a management fee of 1RMB (or
approximately US $0.14) per kilogram of DAR (including packaging fees) from any
user of the trademark, of which 60% may be used by Yinfa for further development
and investment of its DAR business and the remaining 40% must be paid to the
Association for related expenses. In addition, Yinfa is entitled to receive 100%
of the revenue stream from the use of the DAR trademark through December 13,
2016 and 95% of the revenue stream thereafter. There are approximately 235
regional certification trademarks in China, including 65 for natural resources,
of which over 20 are for natural herb resources.




In
December 2008, we leased an additional 3,262 acres from Yinfa Resource for
commercial uses, as described below under Item 2. Property.





We
believe our business model will help facilitate the process of growing and
commercializing DAR, research and development, sales and marketing. Our current
DAR-related products include the Bailing Capsule, Yisheng Capsule, Kimchee-Mate
and Fragrant Bag, all of which have been certified by the SFDA and are being
sold into the market via regional distributors throughout China. We will
continue to explore the development and addition of DAR in a range of foods,
medicines and cosmetics. In addition, we continue to consider and explore
opportunities to expand our current asset base and product offerings to increase
our revenues and enhance shareholder value. These opportunities may include, but
are not limited to, acquisitions or in-licensing of additional products and the
combination or merger of Yinfa with other Chinese companies in synergistic or
complementary industries.




Our Market
Opportunity




We
believe that TCM presents a highly attractive opportunity for the following
reasons.





The trend towards organic
materials. Since World War II, traditional agricultural and organic
agriculture, has been subject to extensive application of synthetic chemicals,
such as synthetic fertilizers, pesticides, herbicides, and mass-production
techniques. The advocacy of organic agriculture and the trend for organic
materials is recognized globally and is a strong part of the Chinese culture. In
addition, TCM represents a vast market in China and a growing market
internationally. Different from modern chemical-intensive medication, TCM
consists of various natural herbs. Naturalism is the essence of traditional
Chinese herbal theory and the functions of herbs have been studied and applied
for thousands of years in China.





Substantial markets. As
reported by China Medical
News in 2008, the global trade volume of TCM increased from approximately
$140 billion in 2006 to $154 billion in 2007, with the global export volume
increasing from approximately $110 billion to $118 billion in the same period.
(China Medical News,
Vol. 23, p.2 Market Journal, 2008). Additionally, as governments and world
bodies, such as the World Health Organization, continue to accept TCM, the
number of potential customers continues to grow, as shown by the increasing
trade volume and exports.  We believe that we are in a position to
take advantage of the growing acceptance of TCM through the development of our
products.





Acceptance of GAP standards in
China. Even though Chinese herbal theory has evolved over thousands of
years, China did not play a key role historically in the global herbal
medication market. This was due to a lack of standards with respect to quality
control of Chinese medicinal herbs. This situation has changed since GAP was
adopted by China in 2003. GAP regulates controls at every stage of herb
development from the ecological environment, germplasm and breeding, to
cultivating, raising, collecting, transporting, packaging and quantitative
administration. GAP is the first step to implementing good manufacturing
practice in the TCM industry because quality control begins with the planting of
herbs.




4




The raw herb material is formed through
different growing and production stages. Different germplasm, ecological
environment, culture technology, and harvesting times and processing methods can
all influence the output and quality of the herbs. Therefore, without adequate
quality control, there can be significant risks when buying herbs from different
sources in the market. For example, in the open market, herbs in the same genus
but in different species are often confused and mixed together. Only a specific
species will have the most active ingredients.





Increasing use in combination with
Western medicine.  Social and demographic factors contribute to
the growth in the TCM market and the need for new, natural therapies. TCM is a
supplement for chemical-intensive treatments, such as chemotherapy, due to its
natural features and functions in strengthening the immune system. In addition
to the increased side effects of chemical-intensive treatments, we believe that
standard chemical-intensive treatment regimens have several other limitations,
including multiple daily dosage requirements, lengthy treatment periods, limited
effectiveness and severe side effects, all of which may decrease patient
compliance and, ultimately, therapeutic efficacy.





Our
Proprietary GAP-Certified DAR Products





A GAP
certificate means that the planting, quality and manufacturing of DAR meets a
high and certifiable standard. We are confident in the quality of, and therefore
the market for, our DAR products. Our process in growing DAR is certified
according to GAP. The table below highlights the standards which DAR products
must meet to be GAP-certified.





Ingredients Constituting GAP
DAR (State Food and Drug Administration, “Traditional Chinese Medicine
Production Quality Administration Standard,” No. 32 Order.)


No.
                                                                                                                                                                                        
                                                                                                                                                                                        Ingredient
                                                                                                                                                                                        
                                                                                                                                                                                        GAP
      DAR1
                                                                                                                                                                                        
                                                                                                                                                                                        Water
                                                                                                                                                                                        
                                                                                                                                                                                        ≤12.0%2
                                                                                                                                                                                        
                                                                                                                                                                                        Ash
                                                                                                                                                                                        
                                                                                                                                                                                        ≤6.0%3
                                                                                                                                                                                        
                                                                                                                                                                                        Insoluble
      Acid
                                                                                                                                                                                        
                                                                                                                                                                                        ≤2.0%4
                                                                                                                                                                                        
                                                                                                                                                                                        Heavy
      Metal
                                                                                                                                                                                        Lead
                                                                                                                                                                                        
                                                                                                                                                                                        ≤5.0mg/kgCadmium
                                                                                                                                                                                        
                                                                                                                                                                                        ≤0.3mg/kgMercury
                                                                                                                                                                                        
                                                                                                                                                                                        ≤0.2mg/kgArsenic
                                                                                                                                                                                        
                                                                                                                                                                                        ≤2.0mg/kg5
                                                                                                                                                                                        
                                                                                                                                                                                        Pesticide
      Residue
                                                                                                                                                                                        Benzene
      hexachloride (BHC)
                                                                                                                                                                                        
                                                                                                                                                                                        ≤2‰Gesarex
                                                                                                                                                                                        
                                                                                                                                                                                        ≤2‰Terrachlor
                                                                                                                                                                                        
                                                                                                                                                                                        ≤1‰6
                                                                                                                                                                                        
                                                                                                                                                                                        Microbes
                                                                                                                                                                                        Virus
                                                                                                                                                                                        
                                                                                                                                                                                        ≤30000unit/gMucedine
                                                                                                                                                                                        
                                                                                                                                                                                        ≤100
      unit/gColibacillus
                                                                                                                                                                                        
                                                                                                                                                                                        N/A7
                                                                                                                                                                                        
                                                                                                                                                                                        Extract
                                                                                                                                                                                        
                                                                                                                                                                                        ≥14.0%8
                                                                                                                                                                                        
                                                                                                                                                                                        Imperatorin
      & Alloisoimperatorin
                                                                                                                                                                                        
                                                                                                                                                                                        ≥0.16%9
                                                                                                                                                                                        
                                                                                                                                                                                        Total
      Coumarin
                                                                                                                                                                                        
                                                                                                                                                                                        ≥0.5%




As
mentioned above, the ecological environment is another important factor
affecting the quality of DAR. The suitable environment for DAR is a warm and
moist climate with medium-dry soil. Suining, where Yinfa is based, is located at
the edge of the Si Chuan Basin, southwest China, covered by the subtropical
climate belt. The annual mean temperature in this region is approximately
63.3°F, and annual rainfall is approximately 39.09 inches. In addition, the soil
in this region contains abundant elements, such as potassium, phosphorus, and
others, which is beneficial to the growth of herbs, such as DAR.




5




Marketing
Strategy





We expect
to use our proprietary technology in DAR to develop and commercialize more
efficient, effective and convenient DAR products. To achieve this objective, our
business model incorporates our self-owned production base, DAR associates,
farmers and research and development affiliates. We believe the business model
will facilitate the growing process, research and development, commercializing
DAR, sales and marketing. Currently, our DAR-related products include the
Bailing Capsule, Yisheng Capsule, Kimchee-Mate and Fragrant Bag, which have been
certified by the SFDA and marketed through regional distributors throughout
China. Yinfa continues to explore the application for DAR in a range of food,
medicine and cosmetics.





In
addition, we have adopted the following product development and
commercialization strategies:





Commercialize GAP DAR
products. We plan to develop high quality DAR products certified by GAP,
which may include DAR seeds to pharmaceutical factories as raw material, or
DAR-related products.  Such DAR-related products may include medicines
used for the treatment of tension and cluster headaches, including migraines,
along with other DAR-related products.  We believe that our DAR and
DAR-related products will be competitive in the marketplace due to our GAP
certification and their increased efficacy over competing products.




Develop sales and marketing
functions across multiple DAR products.We have a long-range plan to
build a pharmaceutical company to take advantage of the local resources of DAR
and develop and commercialize DAR and its related products, diversifying our
product lines to better compete in the growing TCM market. We believe that
Yinfa’s commercialization strategy will allow us to fully enhance the value of
its DAR product and retain significant control over its development and
commercial activities. In order to facilitate the sales channel for DAR, we are
considering several sales and marketing strategies, including strengthening our
nation-wide network in China via regional distributors.





We have
also entered into agreements with other pharmaceutical companies which purchase
DAR as raw material. For example, we have an exclusive agreement with Chengdu
Derentang Pharmaceutical Ltd. (“Derentang”), the largest Chinese medicine
distributor in the Sichuan province, which owns approximately 600 medical
franchise stores throughout China, of which 120 stores are in Sichuan. We are
the exclusive supplier of DAR to Derentang in the Sichuan area and our DAR
products are sold in all of Derentang’s medical franchise stores. This agreement
will expire in 2017.





Seek support from local
resources. In order to commercialize TCM products and increase the income
for TCM farmers, the local government of Suining City has
successfully developed grower networks for TCM to facilitate the process
from fields to end users, including planting, production, distribution and
sales. Additionally, we intend to take advantage of the vast TCM resources
available to aid in the development of our products in Sichuan province, which
contains numerous research institutions and universities that focus on research
and development of TCM.





Pursue strategic partners.For certain DAR products, we intend to enter into collaborative
arrangements with third parties in order for us to:




·
            fund
      our research and development
activities;


·
            fund
      manufacturing by third parties;


·
            seek
      and obtain regulatory approvals;
and


·
            successfully
      commercialize our DAR products.





In 2007,
we entered into an exclusive agreement with DongUi Cosmetics Co. (“DongUi”), a
Korean corporation, for the development of our DAR market in South Korea. DongUi
acts as our sole marketing agent in South Korea for DAR. DongUi’s initial order
was approximately 300 tons of DAR raw material and, under the terms of the
agreement, DongUi is obligated to increase their annual DAR order at a rate of
at least 10% per annum. The collaborative agreement will expire in
2017.




6




Competition





The TCM
industry is highly competitive in many areas. Our DAR and DAR-related products
will compete with other available products based primarily on:




·
            efficacy


·
            safety


·
            tolerability


·
            acceptance
      by doctors


·
            patient
      compliance and acceptance


·
            patent
      protection


·
            convenience


·
            price


·
            insurance
      and other reimbursement coverage


·
            distribution


·
            marketing


·
            adaptability to various models of
      dosing





Competitors
include national and regional TCM providers, TCM manufacturers, wholesalers and
chain drug stores.





Many of
our competitors possess greater financial, managerial and technical resources
and have established reputations for successfully developing and marketing TCM,
all of which put us at a competitive disadvantage. Our competitors may be able
to apply their resources and capabilities to develop and commercialize products
that have distinct, enhanced, or perceived advantages over our products. In
addition, our competitors may be in a position to devote greater resources in
the sales, marketing, and distribution of these products and, therefore,
considerably impact our ability to successfully sell, market and distribute our
own products.





Manufacturing





We
currently rely on several third-party contract manufacturers to produce
sufficient quantities of DAR-related products. We believe that our initial focus
on the application for GAP certification for DAR will reduce the risk and time
involved in the development of manufacturing capabilities because production of
DAR-related products involves well-established and well-accepted manufacturing
techniques and processes. We intend to continue to rely upon third-party
contract manufacturers for production of our DAR-related products. The use of
third parties for these activities allows us to minimize our initial capital
investment and reduce the risk that would be associated with the establishment
of our own commercial manufacturing and distribution operations.




Chinese Government
Regulation





We must follow various government
regulations and, in particular, the SFDA regulations. Government regulations may
have material impact on our operations, increase costs and could prevent or
delay our licensing, manufacturing and selling our products. Our research,
development, testing, manufacturing and marketing activities are subject to
various governmental regulations in China, including health and drug
regulations. Government regulations, among other things, cover the inspection of
and controls over testing, manufacturing, safety and environmental
considerations, efficacy, labeling, advertising, promotion, record keeping and
sale and distribution of pharmaceutical products. We will not be able to
license, manufacture, sell and distribute the vast majority of our products
without proper approvals from government agencies and in particular the SFDA.
There is no assurance that we will obtain such approvals.




In
addition, delays or rejections may be encountered based upon additional
government regulation from future legislation, administrative action or changes
in governmental policy and interpretation during the period of product
development and product assessment. Although we have, so far, obtained the
marketing rights for selling some of our products in China, we may not continue
to receive and maintain regulatory approvals for the sales of these products.
Our marketing activities are also subject to government regulations with respect
to the prices that we intend to charge or any other marketing and promotional
related activities. Government regulations may substantially increase our costs
for developing, licensing, manufacturing and selling products, negatively
impacting our operation, revenue, income and cash flow.




7




The manufacture and sale of
pharmaceutical products in the PRC is heavily regulated by many state,
provincial and local authorities. These regulations significantly increase the
difficulty and costs involved in obtaining and maintaining regulatory approvals
for marketing new and existing products. Our future growth and profitability
depend to a large extent on our ability to obtain regulatory
approvals.





Under the
SFDA guidelines for licensing of pharmaceutical products, all pharmaceutical
manufacturers must obtain and maintain Good Manufacturing Practices (“GMP”)
certifications. We are currently in compliance with the SFDA guidelines and
maintain GMP certifications. However, should we fail to receive or maintain the
GMP certifications under the guidelines in the future, our businesses would be
materially and adversely affected.




Moreover,
the laws and regulations regarding acquisitions of the pharmaceutical industry
in the PRC may also change and may significantly impact our ability to grow
through acquisitions.





Employees




As of
December 31, 2008, we had 247 full-time employees, including 126 office
executives and 28 specialists in researching and developing traditional Chinese
medicines. All employees are working in our subsidiary located in
China.





Seasonality




Our
business is subject to seasonal fluctuations. DAR is planted during the winter
months and is suitable for harvest beginning in the summer. The prime season for
harvest and resulting sales is typically from July through October, subject to
climate conditions. As a result, we typically enter into contracts with farmers
during the first quarter of the fiscal year for the purchase of raw DAR. We then
process the harvested DAR and sell products to our customers during the second
half of the fiscal year. Consequently, our revenues are received primarily in
the second half of the fiscal year.





Customers





Our business is not reliant upon one
customer.  Due to our arrangement with the Association, we are the
exclusive distributor of Sichuan DAR.  This exclusive arrangement
provides significant diversification of our customer base and, as such, keeps us
from being reliant on any major revenue-generating customers, the loss of whom
would impact our business.





Research
and Development





Our annual research and development
expenses for the years ending December 31, 2008 and 2007 were approximately $1
million per year.





Environment





As described above, we maintain
certification with GAP standards. Consistent with these standards, we maintain
an environmentally sound production site and utilize products such as organic
fertilizer to ensure that our DAR and DAR-related products maintain a high
quality.  We generally expend 6% of our annual profits to maintain our
production site to ensure compliance with best environmental
practices.





Item
1A.  Risk Factors.





The information to be reported under
this Item is not required of smaller reporting companies.




8




Item
1B.  Unresolved Staff Comments.





The information to be reported under
this Item is not required of smaller reporting companies.





Item
2.  Properties.





There is no private ownership of land
in China; all land ownership is held by the government of China, its agencies
and collectives. Land use rights are obtained from the government for periods
ranging from 50 to 70 years, and are typically renewable. Land use rights can be
transferred upon approval by the land administrative authorities of China (State
Land Administration Bureau) upon payment of the required transfer
fee.





Owned
Property





Our main office is located at 343 Sui
Zhou Zhong Road, Suining, Sichuan Province, People’s Republic of China, which is
owned by us and has a total area of 1,775 square feet. No other businesses
operate from this office.





We also own a five-story building in
the City of Cheng Du, Sichuan Province, China, with a total area of
approximately 13,934 square feet, which contains our sales and research and
development departments. We purchased this building from a related
party.





Leased
Property





We lease our warehouse of approximately
2,600 square feet for approximately $1,478 per year. The initial lease period
expired in 2007, and under the terms of the lease it is renewed every year
automatically unless notice is given by one of the parties. We also leased farm
land of approximately 861,112 square feet from a cooperative of farmers. The
lease expired in March 2008.




Land Use
Rights





On December 19, 2008, the Company and
Mr. Lei Guo, as trustee under a Property Trust Agreement, entered into a
contract for the acquisition of land rights for approximately 3,262 acres
located in Heiwengtang Valley, Xianping Forestry, Pingwu County, Mianyang City,
Sichuan Province, People’s Republic of China (the “Property”). The Company
intends to use the Property for commercial uses in order to expand its business.
The lease period commenced December 30, 2008 and will expire on December 30,
2038. The fixed rent for the full lease period is US$5,775,994, of which
US$5,710,994 is subject to a Convertible Promissory Note. The remaining balance
was paid through the issuance of 43,000,000 shares of our Class A Common Stock
to the trustee on December 30, 2008 in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended, in reliance
upon Regulation S thereunder.





Item
3.  Legal Proceedings.





As of the date of this report, we are
not a party to any pending legal proceeding and are not aware of any threatened
legal proceeding.





Item
4.  Submission of Matters to a Vote of the Security
Holders.





None.




9




PART
II





Item
5.  Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.





Market
Information





Our Class A Common Stock has been
quoted on the Over-the-Counter Bulletin Board (the “OTCBB”) under the symbol
“CHRI” since June 22, 2004.  The range of closing high and low bid
quotations for each quarter of the past two (2) fiscal years is as
follows:





FYE
      2007
                      
                      High
                      
                      
                      Low1/1/07
      – 3/31/07
                      
                      $
                      2.00
                      
                      
                      $
                      0.054/1/07
      – 6/30/07
                      
                      $
                      0.75
                      
                      
                      $
                      0.067/1/07
      – 9/30/07
                      
                      $
                      0.40
                      
                      
                      $
                      0.0910/1/07
      – 12/31/07
                      
                      $
                      0.34
                      
                      
                      $
                      0.021





FYE
      2008
                      
                      High
                      
                      
                      Low1/1/08
      – 3/31/08
                      
                      $
                      0.200
                      
                      
                      $
                      0.0164/1/08
      – 6/30/08
                      
                      $
                      0.024
                      
                      
                      $
                      0.0037/1/08
      – 9/30/08
                      
                      $
                      0.008
                      
                      
                      $
                      0.001210/1/08
      – 12/31/08
                      
                      $
                      0.004
                      
                      
                      $
                      0.001





Holders





As of March 31, 2009, there were
approximately 5,188 holders of record of our Class A Common Stock and
154,894,509 shares issued and outstanding. There were no holders of record of
our Class B Common Stock and no shares issued and outstanding.





Dividends





We have not declared or paid any cash
dividends on either our Class A Common Stock or our Class B Common Stock since
our formation, and do not presently anticipate paying any cash dividends on our
Common Stock in the foreseeable future.  We currently intend to retain
any future earnings to finance the expansion and development of our
business.  The future payment of cash dividends on any class of our
Common Stock will depend on our earnings, capital requirements and financial
position, applicable requirements of the Delaware General Corporation Law,
general economic conditions and other factors considered relevant by our board
of directors.





There are no contractual restrictions
on our ability to declare and pay dividends.





Securities
Authorized for Issuance Under Equity Compensation Plan





The Company has not authorized any
securities for issuance under an equity compensation plan during the period
covered by this report.





Item
6.  Selected Financial Data.





The information to be reported under
this Item is not required of smaller reporting companies.





Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations.





Forward
Looking Statements





Certain
statements in this report, including statements of our expectations, intentions,
plans and beliefs, including those contained in or implied by “Management's
Discussion and Analysis of Financial Condition and Results of Operations” and
the Notes to Consolidated Financial Statements, are “forward-looking
statements”, within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), that are subject to certain events, risks
and uncertainties that may be outside our control. The words “believe”,
“expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. We undertake no obligation to update or revise any
forward-looking statements. These forward-looking statements include statements
of management's plans and objectives for our future operations and statements of
future economic performance, information regarding our expansion and possible
results from expansion, our expected growth, our capital budget and future
capital requirements, the availability of funds and our ability to meet future
capital needs, and the assumptions described in this report underlying such
forward-looking statements. Actual results and developments could differ
materially from those expressed in or implied by such statements due to a number
of factors, including, without limitation, those described in the context of
such forward-looking statements, our expansion and acquisition strategy, our
ability to achieve operating efficiencies, our ability to successfully develop,
manufacture and deliver DAR and related products on a timely basis and in the
prescribed condition, evolving standards in the TCM industry, domestic and
international regulatory matters, general economic and business conditions, the
strength and financial resources of our competitors, our ability to raise
sufficient capital in order to effectuate our business plan, our ability to find
and retain skilled personnel and key executives, the political and economic
climate in which we conduct operations and the risk factors described from time
to time in our other documents and reports filed with the SEC.




10




General





All
references in this Form 10-K to the “Company,” “CHRI,” the “Registrant,” “we,”
“us” or “our” are to China Health Resource, Inc., a Delaware
corporation.  These terms also refer, where context requires, to our
subsidiary corporation, Suining Shi Yinfa Bai Zhi Chan Ye You Xian Gong Si, a
corporation organized and existing under the laws of the Peoples’ Republic of
China (“Yinfa”), acquired in August 2006.





We were incorporated in the State of
Delaware on February 26, 2002. In June and July 2002, we acquired approximately
99% of the outstanding shares of Voice Diary Ltd., an Israeli corporation
(“VDL”), through an exchange of shares of the Company with shareholders of VDL.
On June 13, 2006, we, as the acquirer, executed a Plan of Exchange with Yinfa
(acquiree), the shareholders of Yinfa and the Company’s then majority
shareholders, pursuant to which we issued 30,000,000 (pre-forward split) new
shares of our Class A Common Stock to the Yinfa shareholders in a transaction
exempt from the registration requirements of the Securities Act of 1933, as
amended, in reliance upon Regulation S thereunder, in exchange for all of their
shares of registered capital of Yinfa. As a result, Yinfa became our
wholly-owned subsidiary. Yinfa was founded on April 24, 2001, with registered
capital of US $125,500 (RMB 1,000,000) and total assets of US $1,475,795.
Yinfa’s business incorporates a self-owned production base and a network of DAR
(as defined below) associates, farmers and research and development affiliates.
The transaction was treated for accounting purposes as a capital transaction and
recapitalization by the accounting acquirer and as a re-organization by the
accounting acquiree. We disposed of VDL on August 22, 2006 pursuant to the
agreement between the Company, VDL and Arie Hinkis, our former president. On May
21, 2007, we changed our name to China Health Resource, Inc. to more accurately
reflect our business operations.





Our
Business




Since the
completion of the Plan of Exchange with Yinfa, our core business has been in
pharmaceuticals and the continued operations of Yinfa. Yinfa is a Chinese
pharmaceutical company focused on developing and commercializing Dahurian
Angelica Root (“DAR”), a popular traditional Chinese medicine (“TCM”). Our
business plan includes distributing DAR and its related products for the
treatment of pain, swelling and pustule. DAR is a popular herb employed
extensively as an ingredient in food, medicine and cosmetics. The Suining
district in China’s Sichuan Province is the major planting and production area
in China for DAR as a result of the local climate and soil properties. Over 70%
of DAR for general use and 100% of DAR for pharmaceutical use in China is
produced in Suining.




In May
2005, we applied for and obtained Good Agricultural Practice of Medical Plants
and Animals (“GAP”) certification for DAR, in cooperation with Sichuan Yinfa
Resource Development Group Co. Ltd., our affiliate (“Yinfa Resource”). The
standards which must be met to obtain certification include the study of our
environment quality, seed quality, minimum pesticides, and fertilizer. These
standards were adopted by the Chinese State Food and Drug Administration (the
“SFDA”) . Our GAP project involves approximately 133,334 square meters of
experimental planting fields, and 1,333,340 square meters of fields run by
companies we have hired, all of which passed inspection by the SFDA, on February
26, 2006. The GAP certificate has been issued in name of our partner Yinfa
Resource. GAP certification means that our planning, quality, and manufacturing
of DAR have met the requisite high and certifiable standard.




11




In 2007,
Yinfa contracted with the Sichuan Province Suining City DAR Association
(“Association”) and received the exclusive rights to the “Suining Sichuan
Angelic” certified trademark from the Chinese State Administration of Industry
and Commerce through December 13, 2016. As holder of the rights to the
trademark, Yinfa is entitled to receive a management fee of 1RMB (or
approximately US $0.14) per kilogram of DAR (including packaging fees) from any
user of the trademark, of which 60% may be used by Yinfa for further development
and investment of its DAR business and the remaining 40% must be paid to the
Association for related expenses. In addition, Yinfa is entitled to receive 100%
of the revenue stream from the use of the DAR trademark through December 13,
2016 and 95% of the revenue stream thereafter. There are approximately 235
regional certification trademarks in China, including 65 for natural resources,
of which over 20 are for natural herb resources.




In
December 2008, we leased an additional 3,262 acres from Yinfa Resource for
commercial uses, as described above under Item 2. “Property.”





We
believe our business model will help facilitate the process of growing and
commercializing DAR, research and development, sales and marketing. Our current
DAR-related products include the Bailing Capsule, Yisheng Capsule, Kimchee-Mate
and Fragrant Bag, all of which have been certified by the SFDA and are being
sold into the market via regional distributors throughout China. We will
continue to explore the development and addition of DAR in a range of foods,
medicines and cosmetics. In addition, we continue to consider and explore
opportunities to expand our current asset base and product offerings to increase
our revenues and enhance shareholder value. These opportunities may include, but
are not limited to, acquisitions or in-licensing of additional products and the
combination or merger of Yinfa with other Chinese companies in synergistic or
complementary industries.





Seasonality





Our
business is subject to seasonal fluctuations. DAR is planted during the winter
months and is suitable for harvest beginning in the summer. The prime season for
harvest and resulting sales is typically from July through October, subject to
climate conditions. As a result, we typically enter into contracts with farmers
during the first quarter of the fiscal year for the purchase of raw DAR. We then
process the harvested DAR and sell products to our customers during the second
half of the fiscal year. Consequently, our revenues are received primarily in
the second half of the fiscal year.





Critical
Accounting Policies




Revenue
recognition





Our revenue recognition policies are in
accordance with Staff Accounting Bulletin No. 104. Sales revenue is recognized
when all of the following have occurred: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred or services have been rendered,
(iii) the price is fixed or determinable, and (iv) the ability to collect is
reasonably assured. These criteria are generally satisfied at the time of
shipment when risk of loss and title passes to the customer.





We
recognize revenue when the goods are delivered and title has passed. Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of our products that are sold in the PRC are subject to a Chinese
value-added tax at a rate of 17% of the gross sales price or at a rate approved
by the Chinese local government. This VAT may be offset by the VAT paid by us on
raw materials and other materials included in the cost of producing their
finished product.





Inventory





Inventory includes raw material,
package material, low-value consumables and merchandise. We have adopted a
perpetual inventory system and inventories are recorded at actual cost. Raw
material, package material and merchandise are priced at cost upon acquisition,
and with the weighted average method upon issuance and shipment. Low-value
consumables are amortized at 50% of the amount upon application and amortized an
additional 50% upon obsolescence.




12




Property,
Plant, and Equipment





Property, plant, and equipment are
recorded at cost, less accumulated depreciation and impairment. Repairs and
maintenance expenditures, which are not considered improvements and do not
extend the useful life of property, plant, and equipment, are expensed as
incurred. The cost and related accumulated depreciation, applicable to sold or
no longer in service property, plant, and equipment, are eliminated from the
accounts and any gain or loss is included in the statement of
operations.





Depreciation is calculated to write-off
the cost or basis of the property, plant, and equipment over their estimated
useful lives for the date on which they become fully operational and after
taking into account their estimated residual values (salvage value), using the
straight-line method, at the following rates per year:




Equipment: Straight-line for 5 to
20 years with a 3% salvage value


Building: Straight-line for 20
years with a 5% salvage value





We recognize an impairment loss on
property, plant, and equipment when evidence, such as the sum of expected future
cash flows (undiscounted and without interest charges), indicates that future
operations will not produce sufficient revenue to cover the related future
costs, including depreciation, and when the carrying amount of the asset cannot
be realized through sale. Measurement of the impairment loss is based on the
fair value of the assets.




Results
of Operations for the Years Ended September 30, 2008 and 2007





Highlights





Our total assets at December 31, 2008
were US $8,167,073 compared to US $3,941,487 at December 31, 2007. Total
liabilities increased to US $4,563,476 at December 31, 2008 from US $978,935 at
December 31, 2007, principally due to an increase in accounts payable, the
issuance of a convertible note payable and an increase in taxes payable. As a
result, net assets for the year ended December 31, 2008 have decreased to US
$1,392,603 from US $2,962,552 for the year ended December 31, 2007.




Profit/Loss
                            
                            For the year endedDecember 31, 2008
                            
                            
                            December 31, 2007Operating
      Income (Loss)
                            
                            330,481
                            
                            
                            
                            (400,404
                            )Net
      Income (Loss) Before Tax
                            
                            
                            406,535
                            
                            
                            
                            (170,179
                            )Corp.
      Income Tax
                            
                            (149,635
                            )
                            
                            
                            55,869Net
      Income (Loss)
                            
                            
                            256,900
                            
                            
                            
                            (226,048
                            )





Revenues





Our revenues for the year ended
December 31, 2008 were US $2,646,111, an increase of 265% over revenues of US
$725,529for the
year ended December 31, 2007. The increase in sales revenues was due primarily
to an increase in the volume of sales of DAR received during 2008. Our sales
arrangements are not subject to any warranties.





Cost
of Sales; Gross Profit





Cost of sales includes expenses
directly related to manufacturing and selling our products, including costs of
raw materials purchased from farmers, product delivery and direct labor costs.
Our cost of sales for the year ended December 31, 2008 was US $1,760,035, or
approximately 67% of revenues, compared to US $401,480, or approximately 55% of
revenues, for the year ended December 31, 2007. The increase in costs of sales
is principally due to increased advertising for a new product, Bailing Capsules,
and improvements to the DAR-related products’ packaging.




13




Gross profit for the year ended
December 31, 2008 increased by 173% to US $886,076from US $324,049for the year ended
December 31, 2007. Gross profit margin for the period ended December 31, 2008
was 33% compared to 45% for the year ended December 31, 2007.





Operating
Expenses





Operating expenses for the year ended
December 31, 2008 decreased by 23% to US $555,595 from US $724,453for the year ended
December 31, 2007. The largest component of operating expenses is attributable
to selling, general and administrative (“SG&A”) expense consisting primarily
of administrative expenses (US $505,058). SG&A decreased overall to US
$505,058 for 2008 compared to US $663,448for 2007. The decrease
is primarily due to a significant reduction in fees to consultants in 2008,
which was partially offset by interest expense for 2008 of US
$50,537.





Other
Income/Expense





We benefited from two Suining City
government grants aggregating US $72,857 for the year ended December 31, 2008
relating to Yinfa’s DAR planting projects. We received other income of US $3,197
attributable primarily to rental income on a portion of our office
space.





Impact
of Inflation





We
believe that inflation has had a negligible effect on operations during 2008.
The inflation rate in the Sichuan Province has been lower than the average
national inflation rate for China. However, it is too soon to assess the
potential inflationary effect of the major earthquake and aftershocks in the
Sichuan Province in May 2008. None of our operations were effected by the
earthquake and related aftershocks. We believe that we can offset any
inflationary increases in the cost of sales by continuing to increase our sales
of DAR in response to continued demand and by improving operating
efficiencies.





Taxes





According
to the Corporate Income Tax Law of China, companies without any tax abatement
programs are charged at a 25% income tax rate. As of December 31, 2008, we
accrued income taxes of US $149,635. As of December 31, 2007, we accrued income
taxes of US $55,869.




Net
Income





We had
net income for the year ended December 31, 2008 of US $256,900, or US $0.0018
per share of Common Stock, compared to a net loss for the year ended December
31, 2007 (US $451,460). Comprehensive income for the year ended December 31,
2008 was US $330,306, a 300% improvement from a comprehensive loss of US
$165,223 for the year ended December 31, 2007. The improvement in our operating
results for 2008 is attributable principally to increased sales, lower SG&A
expense, and a foreign currency translation gain between the RMB and U.S. dollar
of US $73,406.





We are
working to strengthen our internal management processes and to grow our sales
revenues, while maintaining an efficient cost structure. However, there can be
no assurance that we will achieve or maintain continuing profitability, or that
revenue growth will continue in the future.





Liquidity
and Capital Resources





Cash
flows provided by operating activities were US $729,918during the year ended
December 31, 2008, compared to cash flows of US $49,131 provided by operating
activities during the year ended December 31, 2007. Improvement in cash flows
from operations in 2008 were due primarily to a reduction of prepaid expenses
for consulting services and improved control over operating
expenses.




14




Cash
flows used in investing activities improved to US $433,424for the year ended
December 31, 2008 from US $567,187for the year ended
December 31, 2007. Cash flows used in investing activities during 2008 is
attributable to the purchase of property, plant and equipment, where as cash
flows used in 2007 related principally to deferred assets.





Cash flows used in financing activities
for the year ended December 31, 2008 increased to US $304,530, due primarily to
the issuance of a convertible note payable valued at $5,775,994 and the issuance
of common stock valued at $65,000 for the purchase of land usage rights and
forestry rights in China.  The annual interest rate applicable to the
note is one and one-half percent (1.5%), with the principal amount and all
accrued but unpaid interest under the note payable in four (4) tranches of our
common stock at fixed prices.  For additional information regarding
the note, see Note M of “Notes to Audited Financial Statements” included in this
Form 10-K.





Cash flows of US $313,490provided by financing
activities during the year ended December 31, 2007 were primarily attributable
to proceeds from the issuance of an unsecured short-term note of $219,040 from
an unrelated party, bearing 10.925% interest due on September 20, 2008, proceeds
from a shareholder loan and the payment of a note from an unrelated party. The
shareholder loan was due primarily to overseas consulting and advising fees,
attorney’s fees, and accounting fees incurred from period to period and paid out
of a shareholder’s personal bank accounts in the United States due to the strict
laws and regulations imposed by the Chinese government on out-going foreign
currency wire transfers. The shareholder loan was not evidenced by a promissory
note, but rather is an oral agreement between the shareholder and
us.





Overall, we have funded our cash needs
from inception through December 31, 2008 with a series of debt and equity
transactions, primarily with related parties. If we are unable to receive
additional cash from our related parties, we may need to rely on financing from
outside sources through debt or equity transactions. Our related parties are
under no legal obligation to provide us with capital infusions. Failure to
obtain such financing could have a material adverse effect on operations and
financial condition.





We had cash of US $101,497 on hand as
of December 31, 2008, an increase of US $65,370from the beginning of
the year and attributable in substantial part to a reduction in cash outflow and
a favorable foreign currency translation. Currently, we have enough cash to fund
our operations for about nine (9) months. This is based on current cash flows
from financing activities and projected revenues. If the projected revenues fall
short of needed capital we may not be able to sustain our capital needs. We will
then need to obtain additional capital through equity or debt financing to
sustain operations for an additional year. Our current level of operations would
require capital of approximately US $100,000 to sustain operations through year
2009 and each year thereafter.





On a long-term basis, our liquidity is
dependent on continuation and expansion of our operations, receipt of revenues,
and additional infusions of capital and debt financing. Our current capital and
revenues are insufficient to fund such expansion. Modifications to our business
plans may require additional capital for us to operate. For example, if we are
unable to raise additional capital in the future we may need to curtail our
number of product offers or limit our marketing efforts to the most profitable
geographical areas. This may result in lower revenues and market share for us.
In addition, there can be no assurance that additional capital will be available
to us when needed or available on terms favorable to us.





Demand for our products and services
will be dependent on, among other things, market acceptance of our products, the
Chinese TCM in general, and general economic conditions, which are cyclical in
nature. Inasmuch as a major portion of our activities is the receipt of revenues
from the sales of our products, our business operations may be adversely
affected by our competitors and prolonged recessionary periods.





Our success will be dependent upon
implementing our plan of operations and the risks associated with our business
plans. We manage the processing and DAR distribution business to retail
consumers and wholesale buyers. We plan to strengthen our position in these
markets and to expand our operations through aggressively marketing our products
and our concept.




15




Off-Balance
Sheet Arrangements





As of
December 31, 2008, we did not have any off-balance sheet
arrangements.





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk.





The information to be reported under
this Item is not required of smaller reporting companies.





Item
8.  Financial Statements and Supplementary Data.





The consolidated financial statements
of the Company and notes thereto are included at the end of Part IV of this
annual report, beginning at page F-1.





Item
9.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.





None.





Item
9A(T).  Controls and Procedures.





We maintain disclosure controls and
procedures designed to ensure that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) is recorded, processed, summarized and reported within the
specified time periods. Our Chief Executive Officer and our Chief Financial
Officer (collectively, the “Certifying Officers”) are responsible for
maintaining our disclosure controls and procedures. The controls and procedures
established by us are designed to provide reasonable assurance that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Commission’s rules and forms.




As of the end of the period covered by
this report, the Certifying Officers evaluated the effectiveness of our
disclosure controls and procedures. Based on the evaluation, the Certifying
Officers concluded that our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
applicable rules and forms, and that it is accumulated and communicated to our
management, including the Certifying Officers, as appropriate to allow timely
decisions regarding required disclosure.




The Certifying Officers have also
concluded, based on our evaluation of our controls and procedures that as of
December 31, 2008, our internal controls over financial reporting are effective
and provide a reasonable assurance of achieving their objective. Due to its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements under all potential conditions. Therefore, effective
internal control over financial reporting provides only reasonable, and not
absolute, assurance that a restatement of our financial statements would be
prevented or detected.





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





Changes in Internal Control Over
Financial Reporting





There were no changes in our internal
control over financial reporting that occurred during the period covered by this
report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.




16




Item
9B.  Other Information.





None.





PART
III





Item
10.  Directors, Executive Officers and Corporate
Governance.





The information required by this Item
10 is incorporated by reference from the sections entitled “Election of
Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of
Ethics,” and “Board Meetings and Committees; Annual Meeting Attendance” in our
definitive Information Statement, filed with the SEC on March 12,
2009.





Item
11.  Executive Compensation.





The
information required by this Item 11 is incorporated by reference from the
section entitled “Executive Compensation” in our definitive Information
Statement, filed with the SEC on March 12, 2009.





Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.





The
information required by this Item 12 is incorporated by reference from the
section entitled “Security Ownership of Certain Beneficial Owners and
Management” in our definitive Information Statement, filed with the SEC on March
12, 2009.





Item
13.  Certain Relationships and Related Transactions, and Director
Independence.





The
information required by this Item 13 is incorporated by reference from the
sections entitled “Transactions with Related Persons, Promoters, and Certain
Control Persons” and “Independent Directors” in our definitive Information
Statement, filed with the SEC on March 12, 2009.





Item
14.  Principal Accounting Fees and Services.





The
information required by this Item 14 is incorporated by reference from the
sections entitled “Fees Billed for Audit and Non-Audit Services,” “Pre-Approval
Policy for Audit and Non-Audit Services” and “Board of Directors Report” in our
definitive Information Statement, filed with the SEC on March 12,
2009.





PART
IV





Item
15.  Exhibits, Financial Statement Schedules.





(a) The
following financial statements of the Company are included following the
signature page, commencing on page F-1:





Report of Independent Registered Public
Accounting Firm


Consolidated Balance Sheets – as of
December 31, 2008 and 2007


Consolidated Statement of Operations –
For years ended December 31, 2008 and 2007


Consolidated Statement of Cash Flows –
For years ended December 31, 2008 and 2007


Consolidated Statement of Equity
(Deficit) – For years ended December 31, 2008 and 2007


Notes to Audited Financial
Statements





(b)
Exhibits: The exhibits listed in the accompanying “Index to Exhibits” are filed
or incorporated by reference as part of this Form 10-K




17




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.





CHINA
HEALTH RESOURCE, INC.








By:
                  /s/ Wang, Jiayin
                  
                  
                  DATE:
      April 13, 2009Wang,
      JiayinPresident





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





Signature
                                
                                Title
                                
                                Date/s/ Chen, Jiang
                                
                                Chief
      Executive Officer and
                                
                                April
      13, 2009Chen,
      Jiang
                                
                                Director(Principal
      Executive Officer)/s/ Zhou, Yi
                                
                                Chief
      Financial Officer and
                                
                                April
      13, 2009Zhou,
      Yi
                                
                                Director(Principal
      Financial Officer)/s/ Wang, Jiayin
                                
                                President
      and Director
                                
                                April
      13, 2009Wang,
      Jiayin/s/ Wang, Bing
                                
                                Director
                                
                                April
      13, 2009Wang,
      Bing/s/ Wang, Geiwi
                                
                                Director
                                
                                April
      13, 2009Wang,
      Geiwi




18




Index to
Exhibits




Exhibit Number
                  
                  Description3.1
                  
                  Certificate
      of Incorporation, as adopted on February 26, 2002 and as amended on May
      14, 2003, October 13, 2006, April 23, 2007 and May 8, 2007.(1)3.2
                  
                  Amended
      and Restated By-laws, as adopted on February 17, 2009.(1)10.1
                  
                  License
      Agreement Relating to the Exclusive Right to Use “Suining Sichuan Angelic”
      Certified Trademark, by and between Sichuan Province Suining City DAR
      Association and Yinfa, dated March 16, 2004.(2)10.2
                  
                  Import-Export
      Agent Executive Agreement, by and between Suining Yinfa DAR Industrial Co.
      and Korean DongUi Cosmetics Co., dated March 5, 2007.(3)10.3
                  
                  Sichuan
      DAR Purchase and Processing Contract, by and between Suining Yinfa DAR
      Industrial Co. and Chengdu Derentang Pharmacy Company Medicine Branch,
      dated April 18, 2007.(4)10.4
                  
                  Debt
      Transfer and Assumption Agreement by and among Yinfa, Suining Yinfa
      Building Construction and Development Co., Ltd., Chengdu Lianqiang
      Investment Co. and Yinfa Resource, dated September 20, 2008.(5)10.5
                  
                  Agreement
      to Cancel the Contract of Lease of Property by and between Mr. Xiao Jian
      Lian and the Company, effective as of December 15, 2008.(6)10.6
                  
                  Property
      Trust Agreement by and between Yinfa Resource and Mr. Lei Guo, dated
      December 16, 2008.(7)10.7
                  
                  Convertible
      Promissory Note to Mr. Lei Guo, as trustee, dated December 30, 2008.(7)10.8
                  
                  Amended
      and Restated Convertible Promissory Note to Mr. Lei Guo, as trustee, dated
      January 21, 2009 and effective as of December 30, 2008.(8)14.1
                  
                  Code
      of Ethics.(9)31.1
                  
                  Rule
      13a-14(a)/15d-14(a) Certifications of Chief Executive Officer.(1)31.2
                  
                  Rule
      13a-14(a)/15d-14(a) Certifications of Chief Financial Officer.(1)32.1
                  
                  Section
      1350 Certifications of Chief Executive Officer.(1)32.2
                  
                  Section
      1350 Certifications of Chief Financial Officer.(1)


_____________________


(1)
            Filed
      herewith.





(2)
            Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended June 30, 2008.





(3)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed with the
      SEC on March 6, 2007.





(4)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed with the
      SEC on April 20, 2007.




19




(5)
            Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2008.





(6)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed with the
      SEC on December 18, 2008.





(7)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed with the
      SEC on December 23, 2008.





(8)
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed with the
      SEC on January 26, 2009.





(9)
            Incorporated
      by reference to the Company’s Annual Report on Form 10-KSB for the year
      ended December 31, 2006.




20




CHINA
HEALTH RESOURCE, INC.





CONSOLIDATED
FINANCIAL STATEMENTS


DECEMBER
31, 2008 AND 2007




Report
      of Independent Registered Public Accounting Firm
                  
                  F-2Financial
      Statements:Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  
                  F-3Consolidated
      Statements of Operations for the years ended December 31, 2008 and
      2007
                  
                  F-4Consolidated
      Statement of Cash Flows for the years ended December 31, 2008 and
      2007
                  
                  F-5Consolidated
      Statement of Equity (Deficit) for the years ended December 31, 2008 and
      2007
                  
                  F-6Notes
      to Consolidated Financial Statements
                  
                  F-7


F-1




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and


Stockholders
of China Health Resource Inc.





We have
audited the accompanying balance sheets of China Health Resource Inc. and
Subsidiary (a Delaware corporation). as of December 31, 2008 and 2007 and
related statements of operations, stockholders’ deficit, and cash flows for the
years ending December 31, 2008 and 2007. These financial statements are the
responsibility of the company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Health Resource Inc. and
Subsidiary. (a Delaware corporation). as of December 31, 2008 and 2007 and the
results of its operations and its cash flows for years ended December 31, 2008
and 2007 in conformity with accounting principles generally accepted in the
United States of America.




The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. The Company has suffered recurring losses and has
yet to generate an internal cash flow that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note I. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.




/s/
Lake & Associates, CPA’s LLC





Lake
& Associates, CPA’s LLC


Boca
Raton, Florida


April 13,
2009




F-2




China
Health Resource, Inc. and Subsidiary


Consolidated
Balance Sheets


As
of December 31, 2008 and 2007




December 31, 2008
                            
                            
                            December 31, 2007ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
                            
                            $
                            101,497
                            
                            
                            $
                            36,127Accounts
      Receivable
                            
                            
                            441,047
                            
                            
                            
                            460,414Note
      Receivable
                            
                            
                            378,054
                            
                            
                            
                            628,390Employee
      Advances
                            
                            
                            3,016
                            
                            
                            
                            7,197Advances
      to Suppliers
                            
                            
                            162,158
                            
                            
                            
                            -Prepaid
      Expenses
                            
                            
                            59,648
                            
                            
                            
                            2,143,827Inventory
                            
                            
                            264,177
                            
                            
                            
                            61,918TOTAL CURRENT
    ASSETS
                            
                            
                            1,409,598
                            
                            
                            
                            3,337,873FIXED
      ASSETSProperty,
      Plant, and Equipment
                            
                            
                            6,912,234
                            
                            
                            
                            717,831Accumulated
      Depreciation
                            
                            
                            (154,759
                            )
                            
                            
                            (114,217
                            )TOTAL NET FIXED
      ASSETS
                            
                            
                            6,757,475
                            
                            
                            
                            603,614TOTAL ASSETS
                            
                            
                            8,167,073
                            
                            
                            
                            3,941,487LIABILITIES
      AND EQUITYCURRENT
      LIABILITIESAccounts
      Payable and Accrued Liabilities
                            
                            
                            238,275
                            
                            
                            
                            207,957Other
      Payables
                            
                            
                            87,678
                            
                            
                            
                            -Note
      Payable-Convertible Debt
                            
                            
                            3,500,000
                            
                            
                            
                            -Due
      to Shareholder
                            
                            
                            83,258
                            
                            
                            
                            83,258Taxes
      Payable
                            
                            
                            241,493
                            
                            
                            
                            98,996Notes
      Payable - Current Portion
                            
                            
                            412,773
                            
                            
                            
                            588,724Long-term
      liabilities within one yearTOTAL CURRENT
      LIABILITIES
                            
                            
                            4,563,476
                            
                            
                            
                            978,935LONG-TERM
      LIABILITIESNotes
      Payable-Convertible Debt
                            
                            
                            2,210,994
                            
                            
                            
                            -TOTAL LONG-TERM
      LIABILITIES
                            
                            
                            2,210,994TOTAL LIABILITIES
                            
                            
                            6,774,470
                            
                            
                            
                            978,935STOCKHOLDERS’
      EQUITY (DEFICIT)Common
      stock Class A ( 500,000,000 shares authorized,99,288,894
      issued and outstanding, par value $0.01)
                            
                            
                            1,422,888
                            
                            
                            
                            992,888Common
      stock Class B ( 8,344 shares authorized,0
      issued and outstanding, par value $0.01)
                            
                            
                            -
                            
                            
                            
                            20Additional
      paid in capital
                            
                            
                            (134,767
                            )
                            
                            
                            2,195,469Accumulated
      other comprehensive income
                            
                            
                            149,523
                            
                            
                            
                            76,117Retained
      earnings (deficit)
                            
                            
                            (45,042
                            )
                            
                            
                            (301,942
                            )TOTAL STOCKHOLDERS’
      EQUITY(DEFICIT)
                            
                            
                            1,392,603
                            
                            
                            
                            2,962,552TOTAL
      LIABILITIES AND EQUITY
                            
                            $
                            8,167,073
                            
                            
                            $
                            3,941,487





The
accompanying notes are an integral part of these financial
statements.




F-3




China
Health Resource, Inc. and Subsidiary


Consolidated
Statement of Operations


For
the years Ended December 31, 2008 and 2007




For the year2008
              
              
              2007REVENUESSales
              
              $
              2,646,111
              
              
              $
              725,529Cost of Sales
              
              
              1,760,035
              
              
              
              401,480GROSS PROFIT
              
              
              886,076
              
              
              
              324,049OPERATING
      EXPENSESSelling, General, and
      Administrative
              
              
              505,058
              
              
              
              663,448Interest Expense
              
              
              50,537
              
              
              
              37,743Distribution
Costs
              
              
              -
              
              
              
              23,262TOTAL OPERATING
      EXPENSES
              
              
              555,595
              
              
              
              724,453OPERATING INCOME
      (LOSS)
              
              
              330,481
              
              
              
              (400,404
              )OTHER
      INCOME / (EXPENSES)Government Grants
              
              
              72,857
              
              
              
              230,225Other
              
              
              3,197
              
              
              
              -TOTAL OTHER INCOME /
      (EXPENSE)
              
              
              76,054
              
              
              
              230,225NET INCOME (LOSS) BEFORE
      TAXES
              
              
              406,535
              
              
              
              (170,179
              )INCOME TAX
EXPENSE
              
              
              149,635
              
              
              
              55,869NET INCOME (LOSS)
              
              
              256,900
              
              
              
              (226,048
              )INCOME FROM DISCONTINUED
      OPERATIONS
              
              
              -
              
              
              
              -OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign Currency Translation
      (Loss) Gain
              
              
              73,406
              
              
              
              60,825COMPREHENSIVE
      INCOME (LOSS)
              
              $
              330,306
              
              
              $
              (165,223
              )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDINGBasic
              
              
              99,523,815
              
              
              
              87,369,637Fully diluted
              
              
              99,523,815
              
              
              
              95,247,029NET
      INCOME (LOSS) PER COMMON SHAREBasic
              
              
              **
              
              
              
              **Fully
      diluted
              
              
              **
              
              
              
              **




** Less
than $.01


The
accompanying notes are an integral part of these financial
statements.




F-4




China
Health Resource, Inc. and Subsidiary


Consolidated
Statement of Cash Flows


For
the years Ended December 31, 2008 and 2007




For the year2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net Income after income
      tax
              
              $
              256,900
              
              
              $
              (226,048
              )Adjustments to reconcile net
      income tonet cash used in operating
      activities:Depreciation
              
              
              48,260
              
              
              
              59,838Common Stock issued for
      Services
              
              
              -
              
              
              
              2,074,346Due from related
      party
              
              
              533,824
              
              
              
              -Cancel Stock issued for lease
      contract
              
              
              (1,965,256
              )
              
              
              -Accounts
    receivable
              
              
              58,360
              
              
              
              (72,335
              )Other Receivable
              
              
              48,814
              
              
              
              -Employee Advances
              
              
              5,347
              
              
              
              (7,197
              )Prepaid Expenses
              
              
              1,641,413
              
              
              
              (1,792,484
              )Inventory
              
              
              (226,448
              )
              
              
              (55,814
              )Accounts payable and accrued
      liabilities
              
              
              116,268
              
              
              
              (14,303
              )Others
              
              
              10,877
              
              
              
              -Other payable
              
              
              38,061
              
              
              
              (12,806
              )Tax payable
              
              
              163,498
              
              
              
              95,934NET CASH PROVIDED BY (USED IN)
      OPERATING ACTIVITIES
              
              
              729,918
              
              
              
              49,131CASH
      FLOWS FROM INVESTING ACTIVITIES:Issuance of Note
      Receivable
              
              
              -
              
              
              
              -Note receivable
              
              
              (432,370
              )
              
              
              (436,297
              )Proceeds from Notes
      Receivable
              
              
              
              
              
              
              433Purchase of property, plant, and
      equipment
              
              
              (1,054
              )
              
              
              (131,323
              )NET CASH PROVIDED BY (USED IN)
      INVESTING ACTIVITIES
              
              
              (433,424
              )
              
              
              (567,187
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of
      short-term note
              
              
              -
              
              
              
              219,040Proceeds from shareholder
      loan
              
              
              -
              
              
              
              83,258Note Payable from unrelated
      Party
              
              
              (304,530
              )
              
              
              11,192NET CASH PROVIDED BY FINANCING
      ACTIVITIES
              
              
              (304,530
              )
              
              
              313,490FOREIGN CURRENCY
      TRANSLATION
              
              
              73,406
              
              
              
              60,825NET INCREASE (DECREASE) IN CASH
      AND CASH EQUIVALENTS
              
              
              65,370
              
              
              
              (143,741
              )CASH
      AND CASH EQUIVALENTS:Beginning of
    period
              
              
              36,127
              
              
              
              179,868End of period
              
              $
              101,497
              
              
              $
              36,127SUPPLEMENTAL
      CASH FLOW INFORMATION:Common stock issued for
      settlement of certain accounts payable
              
              $
              -
              
              
              $
              699,554Common stock issued for
      services
              
              $
              -
              
              
              $
              2,074,346Issuance of Notes Payable for
      purchase of land right
              
              $
              5,710,994
              
              
              $
              -Common stock issued for purchase
      of land right
              
              $
              65,000
              
              
              $
              -





The
accompanying notes are an integral part of these financial
statements.




F-5




China
Health Resource, Inc. and Subsidiary


Consolidated
Statement of Equity (Deficit)


For
the years Ended December 31, 2008 and 2007


Class A Shares
                                          
                                          
                                          CommonStock parvalue 0.01
                                          
                                          
                                          Class BShares
                                          
                                          
                                          par value0.01
                                          
                                          
                                          AdditionalPaid-inCapital
                                          
                                          
                                          RetainedEarnings(Deficit)
                                          
                                          
                                          AccumulatedOtherComprehensiveIncome
                                          
                                          
                                          TotalBalances,
      December 31, 2006
                                          
                                          
                                          63,603,604
                                          
                                          
                                          
                                          636,036
                                          
                                          
                                          
                                          2,000
                                          
                                          
                                          $
                                          20
                                          
                                          
                                          $
                                          (221,578
                                          )
                                          
                                          $
                                          (75,894
                                          )
                                          
                                          $
                                          15,292
                                          
                                          
                                          $
                                          353,875Issuance
      for services rendered
                                          
                                          
                                          13,000,000
                                          
                                          
                                          
                                          130,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          569,554
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          699,554Issuance
      for services rendered
                                          
                                          
                                          2,000,000
                                          
                                          
                                          
                                          20,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          31,225
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          51,225Issuance
      of stock due to conversion
                                          
                                          
                                          20,685,238
                                          
                                          
                                          
                                          206,852
                                          
                                          
                                          
                                          (2,000
                                          )
                                          
                                          $
                                          (20
                                          )
                                          
                                          
                                          (206,832
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Issuance
      for services
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          2,000
                                          
                                          
                                          
                                          20
                                          
                                          
                                          
                                          2,023,101
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          2,023,121Net
      Income(Loss) for the period
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (226,048
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (226,048
                                          )Other
      comprehensive income
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          60,825
                                          
                                          
                                          
                                          60,825Balances,
      December 31, 2007
                                          
                                          
                                          99,288,842
                                          
                                          
                                          $
                                          992,888
                                          
                                          
                                          $
                                          2,000
                                          
                                          
                                          $
                                          20
                                          
                                          
                                          $
                                          2,195,470
                                          
                                          
                                          $
                                          (301,942
                                          )
                                          
                                          $
                                          76,117
                                          
                                          
                                          $
                                          2,962,553Issuance
      for lease of property
                                          
                                          
                                          43,000,000
                                          
                                          
                                          
                                          430,000
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (365,000
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          65,000Cancellation
      of Class B common stock
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (2,000
                                          )
                                          
                                          $
                                          (20
                                          )
                                          
                                          
                                          (1,965,236
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (1,965,256
                                          )Net
      Income(Loss) for the period
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          256,900
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          256,900Other
      comprehensive income
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          73,406
                                          
                                          
                                          
                                          73,406Balances,
      December 31, 2008
                                          
                                          
                                          142,288,842
                                          
                                          
                                          
                                          1,422,888
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          (134,767
                                          )
                                          
                                          $
                                          (45,042
                                          )
                                          
                                          $
                                          149,523
                                          
                                          
                                          $
                                          1,392,603




The
accompanying notes are an integral part of these financial
statements.




F-6




CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007







NOTE A - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





Business
Activity





China
Health Resource Inc., f/k/a Voice Diary Inc. (the “Company” or “CHRI”) was
incorporated in the State of Delaware on February 26, 2002. In June and July
2002, the Company acquired approximately 99% of the outstanding shares of Voice
Diary Ltd., an Israeli corporation (“VDL”), through the exchange of shares of
the Company with former shareholders of the Subsidiary. VDL was disposed of on
August 22, 2006 pursuant to the agreement between the Company, VDL and Arie
Hinkis, the former president of the Company. On May 21, 2007, the Company
changed its name to “China Health Resource Inc.”.





On June
13, 2006, CHRI (“acquiree”) executed a Plan of Exchange with Sui Ning Shi Yin Fa
Bai Zhi Chan Ye You Xian Gong Si, a corporation organized and existing under the
laws of the Peoples’ Republic of China (“Yin Fa” or ‘acquirer”), the
shareholders of Yin Fa (the “Yin Fa Shareholders”) and the Majority Shareholder
of the CHRI, pursuant to which six simultaneous transactions were consummated at
closing, as follows: (1) settlement of the liabilities of CHRI, (2) a deposit of
7,977,023 (pre-split) new shares of Class A Common Stock and 2,000 new shares of
Class B Common Stock via hand delivery by Mr. Hinkis in exchange for a payment
of $264,000 in cash, (3) a deposit of 1,305,000 (pre-split) shares of Class A
Common Stock via hand delivery by Mr. Hinkis in exchange for a payment of
$136,000 in cash, (4) the issuance of  30,000,000 (pre-forward split)
investment shares of Class A Common Stock of the Registrant to the Yin Fa
shareholders pursuant to Regulation S under the Securities Act of 1933, as
amended, in exchange for all of the shares of registered capital of Yin Fa, (5)
vending out the CHRI subsidiary after closing, and (6) retirement of 744 shares
of Class B Common Stock owned Mr. Hinkis at closing against payment of $74,000
and settlement of all unpaid salaries and severance pay to Mr. Hinkis in the
amount of $100,000, of which both amounts were subtracted from the payment made
to CHRI for the issued shares.





The Plan
of Exchange was consummated on August 22, 2006. As a result, Yin Fa became a
wholly-owned subsidiary of CHRI. The transaction was treated for accounting
purposes as a capital transaction and recapitalization by the accounting
acquirer and as a re-organization by the accounting acquiree.





Accordingly,
the consolidated financial statements include the following:




(1)
              The
      balance sheet consists of the net assets of the acquirer at historical
      cost and the net assets of the acquiree at historical
  cost.
 (2)
              The
      statement of operations includes the operations of the acquirer for the
      periods presented and the operations of the acquiree from the date of the
      merger.




Yin Fa
was founded on April 24, 2001 in China.  The main business plan
includes the manufacturing, processing, and sales of Dahurian Angelica Root
(DAR) and its related products.  DAR is one of the major herbs used in
Chinese traditional medicines.  In 2004 and 2005, the company and
Sichuan Yinfa Resource Development Co., Ltd., (Sichuan) began the process of
applying for Good Agricultural Practice of Medical Plants and Animals (GAP) for
DAR. The project passed the inspection of the State Food and Drug Administration
(SFDA), and the SFDA made the final, official announcement on February 26,
2006.





A GAP
certificate means that the planning, quality, and manufacturing of DAR meets a
high and certifiable standard.  The GAP certificate is held in the
name of Sichuan and the company manages the processing and sales of DAR. CHRI
and its wholly owned subsidiary Yin Fa are hereafter referred to as (the
“Company”).





Basis of
Presentation


The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP"). In
the opinion of management, the accompanying balance sheets, and statements of
income, stockholders’ equity and cash flows include all adjustments, consisting
only of normal recurring items, considered necessary to give a fair presentation
of operating results for the periods presented. All material inter-company
transactions and balances have been eliminated in consolidation.




F-7




CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007


Cash and Cash
Equivalents


For
purposes of the Consolidated Statement of Cash Flows, the Company considers
liquid investments with an original maturity of three months or less to be cash
equivalents.





Management’s Use of
Estimates


The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.





Revenue
Recognition


The
Company’s revenue recognition policies are in accordance with Staff Accounting
Bulletin 104. Sales revenue is recognized when all of the following have
occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the price is fixed or
determinable, and (iv) the ability to collect is reasonably assured. These
criteria are generally satisfied at the time of shipment when risk of loss and
title passes to the customer.




The
Company recognizes revenue when the goods are delivered and title has passed.
Sales revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are sold in the PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. This VAT may be offset by the VAT paid
by the Company on raw materials and other materials included in the cost of
producing their finished product.





Comprehensive Income
(Loss)


The
Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards (SFAS) No. 130, “Reporting Comprehensive
Income,” which establishes standards for the reporting and display of
comprehensive income and its components in the consolidated financial
statements.





Foreign
Currencies





The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars (“USD”) as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period to
period are included as a component of stockholders’ equity as “Accumulated other
comprehensive income”. Gains and losses resulting from foreign currency
translations are included in accumulated other comprehensive income. There is no
significant fluctuation in exchange rate for the conversion of RMB to USD after
the balance sheet date.





Company’s Future Operations
Are Dependent on Foreign Operations





The
Company’s future operations and earnings will depend on the results of the
Company’s operations in China. There can be no assurance that the Company will
be able to successfully conduct such operations, and a failure to do so would
have a material adverse effect on the Company’s financial position, results of
operations, and cash flows.





Also, the
success of the Company’s operations will be subject to numerous contingencies,
some of which are beyond management’s control. These contingencies include
general and regional economic conditions, prices for the Company’s products,
competition, and changes in regulation. Since the Company is dependent on
international operations, specifically those in China, the Company will be
subject to various additional political, economic, and other uncertainties.
Among other risks, the Company’s operations will be subject to the risks of
restrictions on transfer of funds; export duties, quotas, and embargoes;
domestic and international customs and tariffs; changing taxation policies;
foreign exchange restrictions; and political conditions and governmental
regulations.




F-8




CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007
 
  Concentration Risks


The
Company's operations are carried out in the People’s Republic of China (“PRC”).
Accordingly, the Company's business, financial condition and results of
operations may be influenced by the political, economic and legal environment in
the PRC, and by the general state of the PRC's economy. The Company's operations
in the PRC are subject to specific considerations and significant risks not
typically associated with companies in North America and Western Europe. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.





Inventory


Inventory
includes raw material, package material, low-value consumables and merchandise.
The Company has adopted perpetual inventory system and inventories are recorded
at actual cost.  Raw material, package material and merchandise are
priced at cost upon acquisition, and with the weighted average method upon
issuance and shipment. Low-value consumables are amortized at 50% of the amount
upon application and amortized an additional 50% upon obsolescence.




Property, Plant, and
Equipment


Property,
plant, and equipment are recorded at cost, less accumulated depreciation and
impairment.  Repairs and maintenance expenditures, which are not
considered improvements and do not extend the useful life of property, plant,
and equipment, are expensed as incurred. The cost and related accumulated
depreciation, applicable to sold or no longer in service property, plant, and
equipment, are eliminated from the accounts and any gain or loss is included in
the statement of operations.





Depreciation
is calculated to write-off the cost or basis of the property, plant, and
equipment over their estimated useful lives for the date on which they become
fully operational and after taking into account their estimated residual values
(salvage value), using the straight-line method, at the following rates per
year:





Equipment                      Straight-line
for 5 to 20 years with a 3% salvage value


Building Straight-line for 20 years
with a 5% salvage value





The
Company recognizes an impairment loss on property, plant, and equipment when
evidence, such as the sum of expected future cash flows (undiscounted and
without interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including depreciation,
and when the carrying amount of the asset cannot be realized through
sale.  Measurement of the impairment loss is based on the fair value
of the assets.





Income
Taxes





Income
taxes are provided in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, “Accounting for Income
Taxes.”A deferred tax asset or liability is recorded for all
temporary differences between financial and tax reporting and net operating loss
carry forwards.





Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that, and some portion or the entire
deferred tax asset will not be realized.  Deferred tax assets and
liabilities are adjusted for the effect of changes in tax laws and rates on the
date of enactment.





Fair Value of Financial
Instruments





The
Company values its financial instruments as required by SFAS No. 157, “Disclosures about Fair Value of
Financial Instruments”.  The estimated fair value amounts have
been determined by the Company, using available market information and
appropriate valuation methodologies.  The estimates presented herein
are not necessarily indicative of amounts that the Company could realize in a
current market exchange.




F-9


CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007


The
Company’s financial instruments primarily include cash and cash equivalents,
accounts receivable, advance to a third party, inventories, VAT and income tax
recoverable, accounts payable, other payables and accrued
liabilities.





As of the
balance sheet date, the estimated fair values of financial instruments were not
materially different from their carrying values as presented due to short
maturities of these instruments.





Accounts
Receivable


Accounts
receivable are stated at estimated net realizable value.  Accounts
receivable are comprised of balances due from customers net of estimated
allowances for uncollectible accounts.  In determining the
collectablility of the account, historical trends are evaluated and specific
customer issues are reviewed to arrive at appropriate allowances.





Impairment of Long-Lived
Assets


In
accordance with SFAS No.144, “Accounting for the Impairment or Disposal of
Long-lived Assets”, the Company assesses long-lived assets, such as property and
equipment and intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be fully recoverable. Recoverability
of asset groups to be held and used is measured by a comparison of the carrying
amount of an asset group to estimated undiscounted future cash flows expected to
be generated by the asset group.  If the carrying amount exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of an asset group exceeds the fair value of the asset
group. The Company evaluated its long-lived assets and no impairment charges
were recorded for any of the periods presented.





Stock-Based
Compensation


Employee
stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) and the FASB interpretations thereof. Pursuant to
those accounting pronouncements, compensation is recorded for share options
granted to employees at the date of grant based on the difference between the
exercise price of the options and the market value of the underlying shares at
that date. Due to the terms of the grants, the fair value of the compensation in
accordance with SFAS No. 123R, "Accounting for Stock-Based
Compensation" approximates the values computed in accordance with APB No.
25. Stock-based compensation to non-employees is accounted for in accordance
with SFAS No. 123R. Under both accounting pronouncements, as part of the
necessary computations, management is required to estimate the fair value of the
underlying shares. Fair value has generally been determined by management, as
the price at which the Company's shares were issued at the most recent prior
placement of the Company's Common Stock. Since the Company was approved for
listing on the Over the Counter Bulletin Board - fair value is determined
according to stock market price. The timing of the grant and measurement of
stock-based awards will not have a material effect on the Company's results of
operations and financial position, since no stock-based awards
exist.





Recently Issued Accounting
Pronouncements


In
December 2007, the Financial Accounting Standards Board ("FASB") issued two new
statements: (a.) SFAS No. 141(revised 2007), “Business Combinations”, and (b.)
No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. These statements are
effective for fiscal years beginning after December 15, 2008 and the application
of these standards will improve, simplify and converge internationally the
accounting for business combinations and the reporting of noncontrolling
interests in consolidated financial statements.  The Company is in the
process of evaluating the impact, if any, on SFAS 141 (R) and SFAS 160 and does
not anticipate that the adoption of these standards will have any impact on its
consolidated financial statements.





(a.)  SFAS
No. 141 (R) requires an acquiring entity in a business combination to: (i)
recognize all (and only) the assets acquired and the liabilities assumed in the
transaction, (ii) establish an acquisition-date fair value as the measurement
objective for all assets acquired and the liabilities assumed, and (iii)
disclose to investors and other users all of the information they will need to
evaluate and understand the nature of, and the financial effect of, the business
combination, and, (iv) recognize and measure the goodwill acquired in the
business combination or a gain from a bargain purchase.




F-10


CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007


(b.) SFAS
No. 160 will improve the relevance, comparability and transparency of financial
information provided to investors by requiring all entities to: (i) report
noncontrolling (minority) interests in subsidiaries in the same manner, as
equity but separate from the parent’s equity, in consolidated financial
statements, (ii) net income attributable to the parent and to the
non-controlling interest must be clearly identified and presented on the face of
the consolidated statement of income, and (iii) any changes in the parent’s
ownership interest while the parent retains the controlling financial interest
in its subsidiary be accounted for consistently.





In
February 2008, the FASB issued Financial Staff Positions (“FSP”) FAS 157-2,
“Effective Date of FASB Statement No. 157”(“FSP FAS 157-2”),
which delays the effective date of SFAS No. 157, “Fair Value
Measurement”(“SFAS 157”), for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). SFAS 157 establishes a framework for measuring fair
value and expands disclosures about fair value measurements. FSP FAS 157-2
partially defers the effective date of SFAS 157 to fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years for
items within the scope of this FSP. FSP FAS 157-2 is effective for us beginning
January 1, 2009. The Company is currently evaluating the potential impact
of the adoption of those provisions of SFAS 157, for which the effectiveness was
delayed by FSP SFAS 157-2, on the Company’s consolidated financial position and
results of operations.





In March
2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No.
161, "Disclosures about Derivative Instruments and Hedging Activities", an
amendment of FASB Statement No. 133 ("SFAS No. 161"). The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity's financial position, financial
performance and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. The Company
does not believe that SFAS No. 161 will have a material impact on its
consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 requires companies with
derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133 "Accounting for Derivative Instruments and
Hedging Activities" and how derivative instruments and related hedged items
affect a company's financial position, financial performance and cash flows.
SFAS No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of this
statement is not expected to have a material effect on the Company's future
financial position or results of operations.





In
May 2008, the FASB released SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.”   SFAS No. 162 identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that
presented in conformity with generally accepted accounting principles in the
United States of America. SFAS No. 162 will be effective 60 days following the
SEC’s approval of the PCAOB amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting
Principles”.  The FASB has stated that it does not expect SFAS No. 162 will
result in a change in current practice. The Company does not believe the
application of SFAS 162 will have a significant impact, if any, on the Company’s
consolidated financial statements.





May 2008,
the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance
Contracts—an interpretation of FASB Statement No. 60" ("SFAS No. 163"). SFAS No.
163 interprets Statement 60 and amends existing accounting pronouncements to
clarify their application to the financial guarantee insurance contracts
included within the scope of that Statement. SFAS No. 163 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and all interim periods within those fiscal years. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS No.
163 on its financial statements but does not expect it to have an effect on the
Company's financial position, results of operations or cash flows.




F-11


CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007


In May
2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments
that may be Settled in Cash upon Conversion (Including Partial Cash Settlement)"
("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt securities that,
upon conversion, may be settled by the issuer fully or partially in cash. FSP
APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the
entity's nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years after December 15, 2008, and must be applied on a
retrospective basis. Early adoption is not permitted. The Company is assessing
the potential impact of this FSP on the convertible debt
issuances.





In June
2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting, and therefore need to be included in the earnings
allocation in computing earnings per share under the two-class method as
described in SFAS No. 128, Earnings per Share. Under the guidance of FSP EITF
03-6-1, unvested share-based payment awards that contain nonforfeitable rights
to dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings-per-share
pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and all
prior-period earnings per share data presented shall be adjusted
retrospectively. Early application is not permitted. The Company is assessing
the potential impact of this FSP on the earnings per share
calculation.





In June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an
Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5
provides that an entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions. EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early application is not permitted. The
Company is assessing the potential impact of this EITF 07-5 on the financial
condition and results of operations.





In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active” (FSP 157-3), which clarifies the
application of SFAS 157 when the market for a financial asset is inactive.
Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions
should be considered in measuring fair value when observable data are not
present, (2) observable market information from an inactive market should be
taken into account, and (3) the use of broker quotes or pricing services should
be considered in assessing the relevance of observable and unobservable data to
measure fair value. The Company adopted the provisions of FSP 157-3, which did
not impact the Company’s financial position or results of
operations.





In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. FSP FAS 140-4 and FIN
46(R)-8 did not have any impact on the Company's financial
statements.





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets”. FSP EITF 99-20-1 changes the impairment model
included within EITF 99-20 to be more consistent with the impairment model of
SFAS 115. FSP EITF 99-20-1 achieves this by amending the impairment model in
EITF 99-20 to remove its exclusive reliance on “market participant” estimates of
future cash flows used in determining fair value. Changing the cash flows used
to analyze other-than-temporary impairment from the “market participant” view to
a holder’s estimate of whether there has been a “probable” adverse change in
estimated cash flows allows companies to apply reasonable judgment in assessing
whether an other-than-temporary impairment has occurred. The adoption of FSP
EITF 99-20-1, which is effective for annual reporting periods ending after
December 15, 2008, did not have a material impact on our consolidated financial
statements.




F-12


CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007


NOTE B - SUPPLEMENTAL CASH
FLOW INFORMATION





Supplemental
disclosures of cash flow information for the period ended December 31, 2008 and
2007 is summarized as follows:





Cash paid
during the period ended December 31, 2008 and 2007 for interest and income
taxes:




2008
                    
                    
                    2007Income
      Taxes
                    
                    $
                    -0-
                    
                    
                    
                    -0-Interest
                    
                    $
                    50,537
                    
                    
                    
                    37,743




NOTE C - SEGMENT
REPORTING





In June
1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information.” This statement requires companies to
report information about operating segments in interim and annual consolidated
financial statements.  It also requires segment disclosures about
products and services, geographic areas, and major customers.  The
Company determined that it did not have any separately reportable operating
segments as of December 31, 2008 and 2007.





NOTE D - NOTE
RECEIVABLE





As of
December 31, 2007, the company has a note receivable from a related-party with a
total balance due of $191,660. The note is due on May 29, 2007 with interest at
6.12%.





As of
December 31, 2007, the company has a note receivable from a related-party with a
total balance due of $436,730. The note is due on December 31,
2008.





As of
December 31, 2008, the company has a note receivable from a unrelated-party with
a total balance due of $378,054.  The note is due on December 30, 2009
with interest payable quarterly at 10.395%





NOTE E - NOTES PAYABLE -
CURRENT AND LONG-TERM





As of
December 31, 2008 and 2007, notes payable consist of the following:




2008
                                        
                                        
                                        2007Secured
      note payable from an unrelated party.Bearing
      6.3 % interest Principal payments due12/31/2008
      one payment of $ 198,270
                                        
                                        $
                                        -0-
                                        
                                        
                                        
                                        198,270Secured
      note payable from an unrelated partyBearing
      8.6625% interest Principal payment andInterest
      Due 10/21/2009
                                        
                                        
                                        234,103
                                        
                                        
                                        
                                        -0-Unsecured
      note payable –unrelated partyBearing
      10.925 % interest Principal payment due09/20/2008
                                        
                                        $
                                        -0-
                                        
                                        
                                        
                                        219,040Unsecured
      note payable –unrelated partyBearing
      2.4 % interest Principal payments due

                                            10/31/2009
                                        
                                        $
                                        178,670
                                        
                                        
                                        
                                        171,414TOTAL
                                        
                                        $
                                        412,773
                                        
                                        
                                        
                                        588,724Future
      payments on note due as follows:Before
      December 31, 2009
                                        
                                        
                                        412,773
                                        
                                        
                                        
                                        588,724TOTAL
                                        
                                        $
                                        412,773
                                        
                                        
                                        $
                                        588,724




F-13


CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007


NOTE F -
COMMITMENTS





The
Company leased a warehouse for approximately $1,478 per year, which expired on
March 14, 2008. Total rent paid was $1,478.





During
2008 the company leased a warehouse for $2,043 per year, which expires on March
14, 2009 and the lease is expected to be renewed on similar terms





The
Company leased farm land of approximately 861,000 sq feet from a cooperative of
farmers.  The lease expired in March 2008. Total Rent Expense for
December 31, 2008 and 2007 respectively was $1,615 and
$6,455.  The company has no future commitment.




The
Company leases its office space of approximately 3,600 sq feet for sales and
marketing.  The lease commences in July 2007 and expires in June 2027.
Total Rent Expense for the year ended December 31, 2007
was $34,719.  On December 15, 2008 the lease contract was
cancelled





NOTE G - RELATED-PARTY
TRANSACTIONS





The
former shareholders of the Company were Sichuan Suining Yinfa Resource
Development Group Co., Ltd., Suining Yinfa Construction Materials Company Ltd,
and Sichuan Yinfa Resource Development Co., Ltd. (the Yinfa group). According to
the Temporary Resolution of the Shareholders' Meeting of the Company held on
January 20, 2006, the company has had a capital restructuring as mentioned in
Note L.  Related-party transactions between the Company and Yinfa
group from 2004 to January 20, 2006 are listed below:





The GAP
certificate is owned by the Yinfa Group, namely Sichuan Yinfa Resource
Development Co., Ltd. GAP is a quality standard for agricultural products such
as DAR.  The GAP certificate means that the company’s DAR meets a high
and certifiable standard. The Company is the virtual manufacturer and seller of
DAR.





The
Company trademark for its “Bailing Capsules” is “Zhiwang” which Sichuan owns and
has applied for registration.  Sichuan is waiting for approval by
State Industrial and Commercial Administration General Bureau Trademark
Bureau.





As of
December 31, 2007, the company has a note receivable from a related-party with a
total balance due of $191,660. The note is due on May 29, 2007 with interest at
6.12%.





As of
December 31, 2007, the company has a note receivable from a related-party with a
total balance due of $436,730. The note is due on December 31, 2008. The balance
was paid during 2008.





On August
15, 2007, the Company's Board of Directors authorized the payment of the total
rent of a 20-year lease through the issuance of 2,000 shares of Class B Common
Stock to Lian, Xiao Jian, the owner of the property. Pursuant to the terms and
conditions of the Contract of Lease Property, dated June 29, 2007, the total
payment of the rent over the leasing period is $2,023,121. The lease commenced
in July 2007 and expires in June 2027. Total rent expense for the year ended
December 31, 2007 was $23,146.  On December 15, 2008 the lease
contract and the issuance of the 2,000 shares of Class B Common Stock was
cancelled.




F-14


CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007


NOTE H -COMPREHENSIVE
INCOME





Statement
of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive
Income,” establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during a period from non-owner sources.
Accumulated comprehensive income, as presented in the accompanying statement of
changes in stockholders’ equity consists of changes in unrealized gains and
losses on foreign currency translation. This comprehensive income is not
included in the computation of income tax expense or benefit. For the years
ended December 31, 2008 and 2007, total comprehensive income was $149,523 and
$76,117 respectively.





NOTE I - GOING
CONCERN





As shown
in the accompanying audited financial statements, the Company has a deficit book
value and a negative cash flow from operations that have placed substantial
doubt as to whether the Company can continue as a going concern. The ability of
the Company to continue as a going concern is dependent on developing
operations, increasing revenues, and obtaining new capital. Management has
enacted a plan to raise capital and increase sales.





NOTE J - INCOME
TAXES





The
Company conducts all its operating business through its subsidiary in China. The
subsidiary is governed by the income tax laws of the PRC and do not have any
deferred tax assets or deferred tax liabilities under the income tax laws of the
PRC because there are no temporary differences between financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
Company by itself does not have any business operating activities in the United
States and is therefore not subject to United States income tax.




The
Company’s subsidiaries are governed by the Income Tax Law of the People’s
Republic of China (“PRC”) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the “Income Tax Laws”).
 Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law has
replaced the previous laws for Domestic Enterprises (“DEs”) and Foreign Invested
Enterprises (“FIEs”). The new standard EIT rate of 25% has replaced the 33% rate
previously applicable to both DEs and FIEs.




Prior to
2008, under the Chinese Income Tax Laws, FIEs generally were subject to an
income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income as reported in their statutory financial statements
after appropriate tax adjustments unless the enterprise was located in specially
designated regions for which more favorable effective tax rates
apply.  Beginning January 1, 2008, China has unified the corporate
income tax rate on foreign invested enterprises and domestic enterprises. The
unified corporate income tax rate is 25%.




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amount used for federal and state income tax purposes.





The
Company’s deferred tax asset at December 31, 2007 consisted of net operating
loss carry-forward calculated using prevailing PRC tax rates equating to
approximately $85,000 less a valuation allowance in the amount of $85,000.
Because of the Company’s lack of earnings history, the deferred tax asset has
been fully offset by a valuation allowance. The valuation allowance increased
(decreased) by approximately $85,000 compared to the same period in
2006





Utilization
of the net operating losses may be subject to certain annual limitations due to
changes in control. This may result in the expiration of net operating losses
before full utilization.




F-15


CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007


The
Company’s total deferred tax asset as of December 31, 2008 is as
follows:




2008
                    
                    
                    2007Net
      operating loss carry-forwards
                    
                    $
                    -0-
                    
                    
                    $
                    85,000Valuation
      Allowance
                    
                    
                    (-0-
                    )
                    
                    
                    (85,000
                    )$
                    -0-
                    
                    
                    $
                    -0-Prevailing
      PRC tax rate
                    
                    
                    25
                    %
                    
                    
                    15
                    %




The
Company is subject to income taxes on an entity basis, on income arising in, or
derived from the tax jurisdiction in which it is domiciled and operates. The
corporate accrued income taxes as of December 31, 2007 were
$55,869.





The
Company is subject to income taxes on an entity basis, on income arising in, or
derived from the tax jurisdiction in which it is domiciled and operates. The
corporate income taxes accrued as of December 31, 2008 were
$149,635.





The
following table reconciles the U.S. statutory rate to the Company’s effective
tax rate:




Year Ended December 312008
                
                
                2007U.S.
      Statutory rate
                
                
                34
                %
                
                
                34
                %Foreign
      income not recognized in USA
                
                
                (34
                )
                
                
                (34
                )China
      income taxes
                
                
                25
                
                
                
                33Total
      provision for income taxes
                
                
                25
                %
                
                
                16
                %





The
Company applies SFAS 109, “Accounting for Income Taxes”, which requires
recognition of deferred income tax liabilities and assets for the expected
future tax consequences of temporary differences between the income tax basis
and financial reporting basis of assets and liabilities. The provision for
income taxes consist of taxes currently due plus deferred taxes. Because the
Company has no operations within the United States, there is no provision for US
income taxes and there are no deferred tax amounts as of December 31, 2008 and
2007.





The
charge for taxation is based on the results for the year as adjusted for items
that are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet date. Deferred
taxes are accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit.  In principle,
deferred tax liabilities are recognized for all taxable temporary differences,
and deferred tax assets are recognized to the extent that it is probable that
taxable profit will be available against which deductible temporary differences
can be utilized.




Deferred
taxes are calculated at the tax rates that are expected to apply to the period
when the asset is realized or the liability is settled.  Deferred
taxes are charged or credited in the income statement, except when they relate
to items credited or charged directly to equity, in which case the deferred
taxes are also recorded in equity. Deferred tax assets and liabilities are
offset when they relate to income taxes levied by the same taxation authority
and the Company intends to settle its current tax assets and liabilities on a
net basis.




The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The adoption of FIN 48
had no affect on the Company’s financial statements.




F-16


CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007


Value added tax
(“VAT”)





Enterprises
or individuals who sell commodities, engage in repair and maintenance or import
or export goods in the PRC are subject to a value added tax in accordance with
the PRC laws. The value added tax standard rate is 17% of the gross sales price.
A credit is available whereby VAT paid on the purchases of semi-finished
products or raw materials used in the production of the Company’s products can
be used to offset the VAT due on the sales of the products.





NOTE K -PLANT AND EQUIPMENT,
NET




Plant and
equipment, net as of December 31, 2008 and 2007 consists of the
following:





2008
                      
                      
                      2007Building
                      
                      $
                      6,564,133
                      
                      
                      $
                      400,995Furniture,
      fixture and equipment
                      
                      
                      348,101
                      
                      
                      
                      316,8366,912,234
                      
                      
                      
                      717,831Less:
      accumulated depreciation
                      
                      
                      (154,759
                      )
                      
                      
                      (114,217
                      )Plant
      and equipment, net
                      
                      $
                      6,757,475
                      
                      
                      $
                      603,614





Depreciation
expense for the year ended December 31, 2008 and 2007 respectively was $48,260
and $59,838.





NOTE L -EQUITY
TRANSACTIONS




On
January 10, 2007, the Company issued 6,500,000 shares (pre-forward split) of
Class A Common stock for payment of consulting services to several companies and
individuals. The fair value of this stock issuance was determined using the fair
value of the Company’s common stock on the grant date or the specific terms of
the applicable consulting agreements and booked pro rata due to the service
periods. The Company calculated a stock-based compensation cost of total
$699,554 and recognized $212,896 for the year ended December 31, 2007 and
$84,024 for the year ended December 31, 2008. As of December 31, 2008, the
balance of $59,647 is to be amortized on the straight-line method over the
remaining contract periods of seven months.





On
February 2, 2007, the Company issued 1,000,000 shares (pre-forward
split) of Class A Common stock for payment of consulting services to
Greentree Financial Group, Inc. for services in connection with general
management consulting and advisory services. The fair value of this stock
issuance was determined using the fair value of the Company’s common stock on
the grant date or the specific terms of the applicable consulting agreements and
booked pro rata due to the service periods. The Company calculated a stock-based
compensation cost of total $51,225 and recognized $51,225 for the year ended
December 31, 2007.





On June
8, 2007, Deng Shu Lan, the former president of Yin Fa, resigned from all
positions in Yin Fa. Pursuant to an oral termination agreement, Deng Shu
Lan transferred Zheng Zhimin, the new Vice President of Yin Fa, 2,000 shares of
Class B Common stock of the Company, which were converted into 10,342,593
(pre-forward split) Class A Common Stock on July 9, 2007.




F-17


CHINA
HEALTH RESOURCE, INC. AND SUBSIDIARY
 NOTES TO
AUDITED FINANCIAL STATEMENTS
 For the
Years Ended December 31, 2008 and 2007


On July
23, 2007, the Company effected a forward stock split of the Company's Class A
Common Stock, pursuant to the Delaware General Corporation Law, exchanging one
(1) existing share of Class A Common Stock for two (2) shares of post-forward
split Class A Common Stock. The number of outstanding shares of the Company’s
Class A common stock was increased from 49,644,447 to 99,288,894 shares and par
value of its Class A common stock was unchanged at $0.01.





On August
15, 2007, the Company's Board of Directors authorized the payment of the total
rent of a 20-year leasing property by the issuance of 2,000 shares of Class B
Common Stock to Lian, Xiao Jian, the owner of a property. Pursuant to the terms
and conditions of the Contract of Lease Property, dated June 29, 2007, the total
payment of the rent for 20 years leasing period is $2,023,121 and the leasing
property is approximately 3,600 square feet. The lease commences in July 2007
and expires in June 2027. Total rent expense for the year ended December 31,
2007 was $23,146.





On
December 15, 2008 the 2000 shares of Class B Common Stock shares were returned
to the company and the above lease contract was cancelled.





On
December 30, 2008 43,000,000 shares of Class A Common Stock shares were issued
as a partial payment for land usage rights and forestry rights (see note M) the
shares were valued at $65,000





NOTE M –NOTE
PAYABLE-CONVERTIBLE DEBT





On
December 30, 2008 the Company issued a convertible note to an un-related party
for the purchase of land usage rights and forestry rights to 3,261.79 acres
valued at $5,775,994. The Note has a stated simple interest rate of 1.5% per
year.  Interest is payable upon conversion dates.  The note
has fixed conversion dates, share prices as follows:





On March
30, 2009 the company will issue 12,500,000 shares valued at $.20 per share total
$2,500,000





On
December 30, 2009 the company will issue 2,500,000 shares valued at $.40 per
share total $1,000,000





On March
30, 2010 the company will issue 1,000,000 shares valued at $1.00 per share total
$1,000,000





On
December 30, 2010 the company will issue 807,329 shares valued at $1.50 per
share total $1,210,994




Current
      portion of Note
                    
                    $
                    3,500,000Non
      Current portion of Note
                    
                    
                    2,210,994Total
      Note Payable
                    
                    $
                    5,710,994





NOTE N –SUBSEQUENT
EVENT





On March
30, 2009 the company issued 12,605,615 shares valued at $.20 per share total
$2,521,123.





F-18