Our Group's principal market is the PRC which generated approximately 93.1% of our Group's total sales in FY2003. We also sell active ingredients overseas, mainly to North America and Western Europe. Export sales constituted approximately 6.9% of our Group sales for FY2003.
A majority of our sales in the PRC are made through our distribution network to hospitals and drug retail outlets. We have an extensive distribution network covering 30 provinces, municipals and autonomous regions in the PRC. As at 31 December 2003, we supply to approximately 1,300 hospitals mainly through approximately 250 distributors. We also supply directly to these hospitals. As at 31 December 2003, approximately 98.1% and 1.9% of our pharmaceutical drugs are sold to hospitals and drug retail outlets respectively.
We currently have 35 sales support offices supporting, managing and monitoring our distribution network. These sales support offices also help to control the way our products are handled along the distribution channels until they reach the customers. A simple illustration to show the distribution channel
through which we distribute our products is as follows:

Our products are supplied mainly to distributors who distribute our products within designated regions in a province, the province itself or more than one province, depending on their financial strength and track record. Most of them have been with us for a number of years and were selected based on whether they
satisfy the national GSP requirements, have sufficient financial resources, comprehensive distribution network and transport facilities. We have entered into formal annual distribution and sales agreements with all our distributors. We review the performance of these distributors annually and may discontinue
and substitute non-performing distributors. We also monitor the prices along the distributorship channel to hospitals and drug retail outlets.
Our subsidiary, Luye Drugs Trading, undertakes the business of distributing other pharmaceutical products in the PRC, mainly in Yantai, Shandong.
Our distributors for domestic sales are appointed on a non-exclusive basis on the following terms and
conditions:

(a) the term of appointment is for a calendar year;
(b) the distributors undertake to place a certain amount of orders per year; and
(c) a percentage of payments received by the distributors will be retained in payment of the distributorship services. This percentage is in accordance with the guidelines from the relevant PRC government. In addition, if the distributor is able to receive payment for the drugs sold within a certain time frame and forward the payment to us, we will pay a small percentage of this forwarded payment as additional incentive.

With respect to the sale of active ingredients overseas, contracts are entered into with our distributors for a period of between one to five years. There are two methods through which active ingredients may be sold overseas. One is where the distributor provides us with the contact details of the ultimate customer.
In this case, we will receive orders and bill the customer directly. The distributor will be paid a commission based on a certain percentage of the sale amount. Alternatively, we may sell the active ingredients to the distributor for his own sale overseas. No commission will be paid in such a situation. We are not dependent on any major distributors.

Our Sales and Marketing Team

Our marketing activities are led by our Executive Officer, Mr Diao Hai Peng, who reports to our Executive Chairman, Mr Liu Dianbo. 60% of our sales and marketing team have a tertiary education and the relevant medical background. As at 31 December 2003, our marketing team comprises 245 personnel (including 32 sales and marketing personnel employed by Luye Drugs Trading) and is divided into the
following departments:

(a) Marketing Department

Our marketing department is responsible for the promotion of our products and company image. It conducts market surveys and analysis of competitors, formulates our sales and marketing strategies and oversees their implementation. Our marketing department is also responsible for the training of our sales and marketing personnel to enhance their effectiveness and professionalism. As at 31 December 2003, there are six personnel in this department.

(b) Prescription Drugs Sales Department

The prescription drugs sales department is in charge of providing technical support to hospitals to ensure proper use of our products, as well as smooth delivery of our prescription drugs to our distributors. This department comprises 131 personnel as at 31 December 2003.

(c) Non-prescription Drug Sales Department

This department is in charge of despatching our OTC products, comprising mainly Olai (Compound Sodium Aescinate Gel) , to drug retail outlets. As at 31
December 2003, there are 68 personnel in this department of whom 35 are responsible for OTC sales in hospitals, 17 for OTC sales in drug retail outlets and another 16 for OTC sales in Guangdong.

(d) Commerce Department

Our commerce department, which comprises four personnel as at 31 December 2003, is mainly responsible for the preparation of tender documents, delivery and maintaining records of contracts entered into with distributors of our products.

(e) International Business Department
Our four personnel in this department are responsible for marketing our products overseas and for all aspects of overseas sales, from the execution of contracts to shipment and payment collection. Our marketing activities are targeted at providing an understanding of the characteristics and applications of our products. Due to government prohibitions against advertisements, we market
our products in the following manner:

• participation in academic seminars organised at state, provincial and local levels as well as
  hospitals;
• co-operation with Zhonghua Medical Association , China Pharmaceutical
  Association , Zhonghua Orthopaedics Magazine and Zhonghua Medical Information News to develop further specialised education programmes for doctors and pharmacists;
• personal visits to hospitals to gather any feedback on our products as well as to solve any problems encountered in the administration of our drugs;
• participation in state and local exhibitions such as the Pharmaceutical Trade Fair held in Chengdu in 2003; and
• limited advertisements on our web-site and media targeted at professionals such as the China Nursing Magazine , the China Orthopaedic Magazine
  and the China Jizhu Jisui Magazine .