Tongjitang Chinese Medicines Company (TCM)

(o) Earnings per share

Basic earnings per share is computed by dividing net income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per ordinary share is required to be presented when potential dilution could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares and is calculated using the treasury stock method for share options and restricted shares. Common equivalent shares for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. 5,200,000 options to purchase ordinary shares were excluded in the computation of 2007 diluted earnings per share as their effects were anti-dilutive.

The Company has one class of ordinary shares. However, during the year ended December 31, 2006, certain shareholders had received a put right whereby these shareholders might require the Company to repurchase their ordinary shares under certain circumstances at a price equal to the subscription price, which might be other than fair value at the date of redemption (see Note 10). Accordingly, the Company has used the “two-class” method of computing and presenting earnings per share. Upon initial public offering, the mezzanine equity was reclassified to Ordinary Shares. Since then, the Company only has one class of shares and stop using the two-class method.

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TONGJITANG CHINESE MEDICINES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands of Renminbi, except share data, per share data and convenience translations)

The calculations of basic earnings per share and diluted earnings per share are computed as follows: