**U.S.
        SECURITIES AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
  
 
 FORM
        10-KSB
  
  (Mark
        One)
 
 x
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
  For
        the
        Year Ended December 31, 2007
  o
              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 000-51379
 
 **China
        Medicine Corporation**
 (Name
        of
        small business issuer in its charter)
  Delaware
              
              51-0539830(State
                  or other jurisdiction of
              
              (IRS.
                  Employerincorporation
                  or organization)
              
              Identification
                  No.)Room
                  702, Guangri Mansion
                No.
                  9 Siyou Nan Road, Alley 1, 1st
                  Street
                Wuyang
                  Xincheng
                Guangzhou,
                  China
                  510600(Address
                  of principal executive offices)
  Issuer’s
        telephone number, including area code (8620)
        8739-1718 and (8620)
        8737-8212
  Securities
        registered pursuant to Section 12(b) of the Act:  None.
  Securities
        registered pursuant to Section 12(g) of the Act:  Common
        Stock $.0001 par value. ****
  Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 Yes  ̈ No þ
  Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act.
 Yes  ̈ No þ
  Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during the preceding 12 months (or for such shorter period that the
        registrant was required to file such reports), and (2) has been subject to
        such filing requirements for the past 90 days. Yes þ No  ̈
  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 registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB. þ
  The
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates of the registrant (11,979,045 shares) based on the
        closing price of the registrant’s common stock as quoted on the FINRA
        Over-the-Counter Bulletin Board on March 25, 2008 of $2.10, was $17,379,404.70.
        For purposes of this computation, all officers, directors, and 10% beneficial
        owners of the registrant are deemed to be affiliates. Such determination
        should
        not be deemed to be an admission that such officers, directors, or 10%
        beneficial owners are, in fact, affiliates of the registrant.
  As
        of
        March 25, 2008, there were outstanding 15,164,887 shares of the
        registrant’s common stock, par value $.0001 per share, and 60,000 shares of the
        registrant’s Series A preferred stock, par value $.0001 per share.
  Documents
        incorporated by reference: None.
 
 Transitional
        Small Business Disclosure Format (check one):
 
 Yes o No: x
  
  **China
        Medicine Corporation**
  Form
        10-KSB
  Table
        of Contents
  PagePART
                  IItem
                  1.
              
              Description
                  of Business
              
              3Item
                1A.
              
              Risk
                  Factors
              
              14Item
                  2.
              
              Description
                  of Property
              
              31Item
                  3.
              
              Legal
                  Proceedings
              
              32Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              32PART
                  IIItem
                  5.
              
              Market
                  for Common Equity, Related Stockholder Matters
              
              32Item
                  6.
              
              Management's
                  Discussion and Analysis or Plan of Operation
              
              37Item
                  7.
              
              Financial
                  Statements
              
              44Item
                  8.
              
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              
              45Item
                  8A.
              
              Controls
                  and Procedures
              
              45Item
                  8B.
              
              Other
                  Information
              
              47PART
                  IIIItem
                  9.
              
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance,
                  Compliance With Section 16(a) of the Exchange Act
              
              47Item
                  10.
              
              Executive
                  Compensation
              
              49Item
                  11.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              51Item
                  12.
              
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              52Item
                  13.
              
              Exhibits
              
              53Item
                  14.
              
              Principal
                  Accountant Fees and Services
              
              54Signatures
              
              
              
              55Financial
                  Statements
              
              F-1
  1
  **PREDICTIVE
        STATEMENTS AND ASSOCIATED RISK**
 
 Certain
        statements in this Report, and the documents incorporated by reference herein,
        constitute predictive statements. Such predictive statements involve known
        and
        unknown risks, uncertainties and other factors which may cause deviations
        in
        actual results, performance or achievements to be materially different from
        any
        future results, performance or achievements expressed or implied. Such factors
        include, but are not limited to: market and customer acceptance and demand
        for
        our products; our ability to market our products; the impact of competitive
        products and pricing; the ability to develop and launch new products on a
        timely
        basis; the regulatory environment, including government regulation in the
        PRC;
        our ability to obtain the requisite regulatory approvals to commercialize
        our
        products; fluctuations in operating results, including spending for research
        and
        development and sales and marketing activities; and other risks detailed
        from
        time-to-time in our filings with the Securities and Exchange
        Commission.
 
 The
        words
        "believe, expect, anticipate, intend and plan" and similar expressions identify
        predictive statements. These statements are subject to risks and uncertainties
        that cannot be known or quantified and, consequently, actual results may
        differ
        materially from those expressed or implied by such predictive statements.
        Readers are cautioned not to place undue reliance on these predictive
        statements, which speak only as of the date they are made.
 
 Unless
        otherwise noted, all currency figures in this filing are in U.S. dollars.
        References to "yuan" or "RMB" are to the Chinese yuan (also known as the
        renminbi). According to the currency exchange website www.xe.com, as of March
        25, 2008, US $1.00 = 7.0625 yuan.
  2
  **PART
        I**
  **ITEM
        1.**  **BUSINESS**
 
 Through
        Guangzhou Konzern Medicine Co., Ltd. (“Konzern”), our wholly-owned subsidiary
        organized under the laws of the PRC, we distribute approximately 2,200
        pharmaceutical products in China. The products include prescription and
        over-the-counter drugs, Chinese herbs, traditional Chinese medicines made
        from
        Chinese herbs, nutritional supplements, dietary supplements and medical
        instruments. We also sell improved drug formulas after purchasing the rights
        to
        drug formulas at an early stage of development and improving those formulas
        through our own research.
  **History
        of the Company**
  We
        are a
        Delaware corporation incorporated on February 10, 2005, under the name
        Lounsberry Holdings III, Inc. for the purpose of acquiring or merging with
        an
        operating business. We were a shell company as that term is defined in Rule
        12b-2 under the Securities Act, and started our operating business in February
        2006.
  ***Acquisition
        of Operating Company***
  On
        February 8, 2006, we acquired an operating business and ceased to be a shell
        company by entering into a reverse merger transaction under the terms of
        a share
        exchange agreement (the “Exchange Agreement”) with the stockholders of Guangzhou
        Konzern Medicine Co., Ltd. (“Konzern”). In the reverse merger, we acquired all
        of the equity of Konzern, which is a distributor of pharmaceutical products
        in
        the PRC organized under the laws of the PRC, in exchange for issuing 6,530,000
        shares of common stock, representing approximately 88.5% of our outstanding
        common stock, to the owners of Konzern.
  As
        a
        result of the reverse merger, beginning February 8, 2006, we have been engaged,
        through our wholly-owned subsidiary Konzern, in pharmaceutical distribution
        in
        the PRC. We serve as a holding company for Konzern and have no operations
        other
        than the operations of Konzern.
  Also
        on
        February 8, 2006, we raised $3.9 million through the issuance and sale of
        (i)
        3,120,000 shares of Series A Preferred Stock and (ii) warrants to purchase
        7,389,476 shares of our common stock (the “Investor Warrants”). Each share of
        our Series A preferred stock is convertible into one share of common stock
        subject to adjustments. The transaction was executed under a preferred stock
        purchase agreement with Barron Partners L.P., Ray and Amy Rivers (as joint
        tenants with right of survivorship), Steve Mazur and William Denkin
        (collectively, the “Preferred Investors”). On the same date, we entered into a
        stock redemption agreement with Capital Markets Advisory Group, LLC ("Capital
        Markets"), which was then our principal stockholder, pursuant to which we
        purchased 928,000 shares of common stock from Capital Markets for $167,602
        and
        repaid $32,398 of debt to Capital Markets, using the proceeds from the sale
        of
        the Series A preferred stock.
  On
        May
        10, 2006, we changed our name to China Medicine Corporation.
  ***History
        and Operations of Konzern Before the Reverse
        Acquisition***
  Prior
        to
        July 25, 2000, Konzern was a state-owned medicine distribution company located
        in the City of Guangzhou, China. On July 25, 2000, Konzern was privatized
        through a sale of all of its capital stock by a PRC government-owned holding
        company, Huadu Pharmaceutical Holding Company (Guangdong), Ltd., to Mr. Senshan
        Yang, Ms. Minhua Liu, and Mr. Junhua Liu, our current CEO, Executive Vice
        President, and stockholder (the “Konzern Shareholders”) for a purchase price of
        one million RMB, or approximately $135,000.
  3
 
 For
        fiscal 2004, Konzern made distributions in the amount of $2.6 million to
        its
        three stockholders, Mr. Senshan Yang, Ms. Minhua Liu and Mr. Junhua Liu.
        In
        2006, prior to the reverse merger on February 8, Konzern made distributions
        to
        its stockholders in the amount of approximately $3.1 million, consisting
        of $1.9
        million in cash and $1.2 million in inventory. These distributions were
        allocated to the stockholders in proportion to their interest in Konzern:
        50% to
        Mr. Senshan Yang, 40% to Ms. Minhua Liu and 10% to Mr. Junhua Liu. Konzern
        made
        part of the distribution in inventory in order to preserve its cash position.
        We
        have no agreement or understanding with the former stockholders of Konzern
        with
        respect to the inventory.
  Until
        2004, Konzern’s operations consisted solely of distribution activities, and did
        not include any research and development activities. On October 8, 2003,
        Konzern
        committed to jointly establish a research and development center at Nanhua
        University in Hengyang City, Hunan Province, China, together with the
        Pharmaceutical Research Institute of Nanhua University. Under the agreement
        governing the creation of the center, Konzern contributes funds in return
        for
        ownership of the new medicines developed by the center.
  ***After
        the Reverse Acquisition***
  On
        July
        7, 2006, we formed a PRC joint-venture company with Guangzhou Ji'nan Science
        & Technology Industrial Group ("JSIG") and Mr. Dongsheng Yao, to develop
        applications for aflatoxin-detoxifizyme, or ADTZ. The new company, called
        “Co-Win,” is still in development and has not undertaken significant operating
        activities as of December 31, 2007.
  In
        November 2006, we obtained approval from local government authorities for
        the
        distribution of medical supplies and devices throughout Guangdong Province.
        We
        began to sell and distribute medical supplies such as bandages and cotton
        swabs
        in the first quarter of 2007. We began selling medical supplies in 2007 and
        generated $331,610.
  ***Recent
        Developments***
  Beginning
        in 2007, in an effort to help consolidate the provincial medicine acquisition
        market and promote a transparent bidding process, the provincial government
        of
        Guangdong Province established an on-line bidding system called the “Guangdong
        Sunshine Medicine Public Internet Bidding System.” We believe the new system
        provides us with greater opportunities to compete for distribution rights
        in
        Guangdong Province. As of the date of this report, we have obtained the rights
        to sell and distribute a total of 774 new products through the new system.
        We
        expect the revenue from the sale of these products to increase significantly,
        and represent an important growth driver for us in 2008. We also expect to
        obtain distribution rights for additional products through the bidding system
        in
        2008.
  **Locations**
  Our
        executive offices and Konzern’s executive offices are located at Room 702,
        Guangri Mansion, No. 9 Siyou Nan Road, Alley 1, 1st Street, Wuyang Xincheng.,
        Guangzhou, China 510600, and the telephone numbers are (8620) 8739-1718 and
        (8620) 8737-8212. Konzern’s website is located at www.konzern.com.cn.
        Information contained on Konzern’s website, or any other website, is not part of
        this annual report on Form 10-KSB.
  **Our
        Business**
  We
        are a
        distributor of pharmaceutical and medical products in the PRC, including
        prescription and over-the-counter drugs, Chinese herbs, traditional Chinese
        medicines made from Chinese herbs, nutritional supplements, dietary supplements,
        and medical instruments. We are also engaged in proprietary research and
        development with the aim of creating new pharmaceutical products and
        intellectual property that we may sell in the future. In 2007, 93.2% of our
        total revenues of approximately $39 million came from product sales and 6.8%
        came from sales of intellectual property.
  4
  ***Distribution***
  Products
        We Distribute
  As
        of
        December 31, 2007, we distributed approximately 2,200 pharmaceutical and
        medical
        products, including (i) prescription and over the counter medicines, (ii)
        traditional Chinese medicines, and (iii) herbs and nutritional supplements.
        In
        2007, prescription and over the counter medicines accounted for $19,535,935,
        or
        46.4%, of total revenues, approximately 80% of which came from sales of our
        five
        highest-selling medicines. Traditional Chinese medicines accounted for 45.2%
        of
        total revenues in 2007, and herbs and nutritional supplements accounted for
        0.3%.
  We
        have
        exclusive rights to nationwide distribution of seven products made by our
        suppliers, which accounted for approximately 21.1% of our sales in fiscal
        year
        2007 and 28.3% of our sales in fiscal year 2006. The most significant of
        these
        products are Iopamidol Injection 370 and 300, prescription medicines that
        are
        used for angiography and CT scanning. For the years ended December 31, 2007
        and
        2006, our total revenue from these products amounted to $4,983,684 and
        $4,002,739, respectively, which were 11.84% and 16.68% of our annual sales
        for
        the years ended December 31, 2007 and 2006, respectively.
  We
        also
        have exclusive rights to distribution throughout Guangdong Province of 170
        products made by our suppliers, which accounted for approximately 43.8% of
        our
        sales in fiscal year 2007. We did not have any exclusive rights to distribute
        throughout Guangdong Province in 2006.
 
 Although
        we face competition from large state-owned medicine distributors that are
        better
        capitalized than we are, we believe that our unique competitive advantages
        include our ownership of high-quality research and development facilities,
        our
        after-sale customer service, and our sole nationwide or region-wide distribution
        rights to certain medical products. Our competitive pricing and our ability
        to
        provide timely delivery are also important competitive features that we use
        to
        attract and retain customers.
 
 *Prescription
        and Over the Counter Medicines.* Prescription and over the counter medicines account for most of our sales,
        representing sales of approximately $19.54 million, or 46.4%, of our revenues
        for the year ended December 30, 2007; $15.32 million, or 63.2%, of our revenues
        for the fiscal year ended December 31, 2006, and $10.1 million, or 68%, of
        our
        revenues for the fiscal year ended December 31, 2005.
 
 Our
        prescription and over the counter medicines are approved by the PRC State
        Food
        and Drug Administration Bureau for treatment of various conditions and
        illnesses. Our five best-selling traditional pharmaceutical medicines for
        the
        year ended December 31, 2007, together with the sales volume for the period,
        are:
 
 ·
              Iopamidol
                  Injection 370, a liquid preparation used for stomach radiography,
                  which
                  accounted for sales of approximately
                  $2,713,697.
 
 ·
              Iopamidol
                  Injection 300, a liquid preparation used for stomach radiography,
                  which
                  accounted for sales of approximately
                  $2,269,987.
 
 ·
              Levocarnitine,
                  an injectable liquid used in the treatment of cardiac muscle disease,
                  bone
                  dysfunction, and high cholesterol, which accounted for sales of
                  approximately $1,253,185.
 
 ·
              Fengduoxin
                  Cefamandolenafate Injection, an injectable antibiotic, which accounted
                  for
                  sales of approximately $732,135.
 
 ·
              SonoVue,
                  a topical gel used in ultrasound radiography, which accounted for
                  sales of
                  $538,384.
 
 Our
        five
        best-selling traditional pharmaceutical medicines for the year ended December
        31, 2006, together with the sales volume for the period, are:
 
 ·
              Iopamidol,
                  which accounted for sales of approximately
                  $4,002,739.
  5
 ·
              SonoVue,
                  which accounted for sales of approximately
                  $1,311,509.
 
 ·
              Cinepazide
                  maleate injection, which accounted for sales of approximately
                  $1,028,357.
 
 ·
              Fengduoxin
                  Cefamandolenafate, which accounted for sales of approximately
                  $735,700.
 
 ·
              Levocarnitine,
                  which accounted for sales of approximately
                  $674,850.
 
 *Traditional
        Chinese Medicines.* Our five
        best-selling traditional Chinese medicines for the year ended December 31,
        2007,
        together with the sales volume for the period, were:
 
 ·
              Hongjin
                  Xiaojie Capsule, which is used for the treatment of coughs, accounted
                  for
                  approximately $2,404,292 in sales.
 
 ·
              Xiasang
                  Ju Granules, which are used for treatment of flu and various ailments,
                  accounted for approximately $7,701,423 in
                  sales.
 
 ·
              Chuanbei
                  Piba Gao (Milian), which is used for treatment of coughs, accounted
                  for
                  approximately $436,890 in sales.
 
 ·
              Tianhuang
                  Houzao Powder, which is used for the treatment of strokes, accounted
                  for
                  approximately $386,568 in sales.
 
 ·
              Chuanbei
                  Piba Gao (Shedan), which is used for treatment of coughs, accounted
                  for
                  approximately $374,884 in sales.
 
 Our
        five
        best-selling traditional Chinese medicines for the fiscal year ended December
        31, 2006, together with the sales volume for the period, were:
 
 ·
              Xue
                  Shuan Tong, which is used for the treatment of strokes, accounted
                  for
                  approximately $654,588 in sales.
 
 ·
              Chuanbei
                  Piba Gao (Shedan), which is used for treatment of coughs, accounted
                  for
                  approximately $610,520 in sales;
 
 ·
              Chuanbei
                  Piba Gao (Milian), which is used for treatment of coughs, accounted
                  for
                  approximately $417,396 in sales;
 
 ·
              Wuji
                  Baifeng Pill, which is used to treat gynecological conditions,
                  accounted
                  for approximately $295,629 in sales;
                  and
 
 ·
              Qianbai
                  Biyan Tablet, which is used to treat rhinitis and accounted for
                  approximately $251,907 in sales.
 
 *Herbs
        and Nutritional Supplements.* We also
        sell dietary supplements, which accounted for approximately $131,586 in sales
        for the year ended December 31, 2007
  6
 
 Process
        of Distribution
 
 Within
        our home province of Guangzhou, we distribute products primarily using our
        own
        trucks and other vehicles. Outside of Guangzhou, we distribute primarily
        through
        delivery companies with whom we contract. The terms of our agreements with
        delivery companies include storage temperature, insurance provisions, and
        indemnification for loss among other provisions.
 
 Principal
        Suppliers
 
 We
        purchase most of the products we distribute from five PRC drug manufacturers.
        These suppliers accounted for approximately 56.2% of our purchases for the
        year
        ended December 31, 2007, and 60% and 74% of our purchases for the years ended
        December 31, 2006 and 2005, respectively. In 2007, our five largest suppliers
        were Shanghai Bracco Sino Pharmaceutical Corporation, Guangdong Hualiwangte
        Pharmaceutical Limited, Guangzhou Pharmaceutical Holdings Limited, Guangzhou
        Tianshili Pharmaceutical Limited, and the Guangdong office of Guangdong
        Jiuzhoutong Pharmaceutical Limited, which accounted for 16.6%, 14.3%, 13.0%,
        8.9% and 3.4% of our purchases during 2007, respectively. Our agreements
        with
        our suppliers generally have a term of one year and provide that the suppliers
        will provide us such amounts of products as we may order.
 
 Neither
        we nor Konzern have experienced any supply disruptions in the past. We believe
        that we will be able to procure supplies for each of our major products from
        alternative suppliers in the event that procurement from our regular suppliers
        becomes unavailable. However, there is no guarantee that this will be the
        case.
 
 Principal
        Customers
 
 We
        have
        approximately 800 customers. Our customers are primarily pharmaceutical product
        wholesalers, hospitals and retail drug stores. Our five largest customers
        accounted for approximately 39.5% of our revenues for the year ended December
        31, 2007; 58.6% of our revenues for the year ended December 31, 2006; and
        74% of
        our revenues for the year ended December 31, 2005.
  We
        generally sell our products pursuant to one-year contracts, which do not
        include
        any minimum purchase requirements. During fiscal 2007 **** and
        2006,
        we sold 65.7% and 52.2% of our products to hospitals, and 34.3% and 34.8%
        to
        retail drug stores, respectively. Although hospitals tend to consume a large
        portion of the products we distribute, they are not the focus of our most
        intensive marketing efforts because they usually require that their payment
        obligation begin six months after delivery, which is longer than our other
        customers require and leaves us with a long collection period that affects
        our
        accounts receivable, cash flows, and financial condition generally. Instead,
        we
        focus our efforts on large pharmaceutical wholesalers from whom we can collect
        our accounts in a far shorter period of time.
 
 Marketing
 
 We
        have a
        staff of approximately 70 marketing and sales employees. We do not sell to
        individual patients or consumers, and we do not advertise our products. We
        generate business by marketing directly to wholesale pharmaceutical product
        companies, hospitals and retail drug stores, which constitute substantially
        all
        of our customers. Konzern had a distribution network in place when it was
        privatized in 2000, and we used this network as the basis of our current
        distribution network. We also market our products to drug wholesalers and
        retail
        drug stores at two national medicine trade shows. The marketing activities
        of
        our marketing personnel consist primarily of phone calls, the creation and
        distribution of promotional materials, and visits to customer locations.
        During
        2007, we spent approximately $787,126 on marketing, primarily as bidding
        expenses for regional distribution rights in the Guangdong Province. During
        2006
        we spent only approximately $160,000 on marketing.
  7
 
 We
        focus
        our marketing and sales efforts on large pharmaceutical wholesalers from
        whom we
        can collect our cash soon after delivery. We do not focus those efforts on
        hospitals because of the long collection cycle they require, as previously
        described.
 
 After
        Sales Service Network
 
 We
        contact individual patients and consumers directly to collect their feedback
        on
        the quality of our products and distribution services. All of our 70 sales
        and
        marketing personnel are responsible for providing after-sale services, including
        on-site visits to the hospitals and follow up with customers. In addition,
        our
        on-staff physician communicates with hospitals regarding dosages, side-effects
        and patients’ feedback on particular products.
  Seasonality
        of Business
 
 Sales
        are
        usually highest during the last three months of each calendar year because
        most
        of the pharmaceutical companies and hospitals do more buying at this time.
        Sales
        in the first three months of the calendar year are usually the lowest due
        to the
        occurrence of the Chinese New Year holiday, when only patients with very
        serious
        conditions tend to seek treatment. Our revenue and operating results have
        fluctuated from quarter to quarter significantly in the past. For example,
        in
        2007, total revenue for the quarter ended March 31, approximately $5.1 million,
        was less than one-third the size of total revenue for the quarter ended December
        31, approximately $16.2 million.
 
 Competition
 
 Competition
        for the sale of pharmaceutical products by distributors in the PRC is intense
        because there are a large number of licensed distributors. We believe that
        our
        major competitors are large, state-owned medicine distributors, such as
        Guangzhou Medicine Company, Guangzhou Medicine Import and Export Corporation
        and
        Guangdong Pharmaceutical Co., Ltd. These companies tend to be better
        capitalized, which allows them to seek hospital customers that have a six-month
        payment cycle. However, such state-owned companies do not have their own
        research and development facilities, as Konzern does, and most of them do
        not
        provide after-sale customer services. We believe these two aspects of our
        business are competitive advantages.
 
 We
        have
        the sole distribution rights to at least one medical product sold by each
        of our
        five largest suppliers, which we believe assists us in marketing our products.
        However, since other distributors offer comparable products, our ability
        to
        compete successfully is also dependent upon other factors, such as price,
        service and the ability to provide timely delivery. We believe that our ability
        to develop proprietary products through our current research and development
        efforts may provide further competitive advantages.
  ***Product
        Development and Technology Transfers***
 
 In
        addition to the sale and distribution of our medical products, we engage
        in the
        development of intellectual property relating to new pharmaceutical products
        which we may use ourselves (which we refer to as product development) or
        may
        sell to other pharmaceutical companies (which we refer to as technology
        transfers). We generated approximately $2.9 million in sales from our technology
        transfers in the year ended December 31, 2007.
  Product
        Development
 
 On
        October 8, 2003, we entered into an agreement (the “Agreement”) to establish a
        cooperative relationship with the Pharmaceutical Research Institute of Nanhua
        University. Under the Agreement, Konzern and Nanhua Univeristy jointly set
        up a
        new pharmaceutical research facility, the New Medicine Research Center of
        Konzern and Nanhua University (the “Center”). Konzern contributes the expenses
        for research and development for new pharmaceutical products, including the
        salaries of the research personnel who are principally professors at Nanhua
        University, and, in return, we own the rights to any pharmaceutical products
        that are developed. The Center has developed three products:
 
 ·
              Yutian
                  Capsule for treatment of chronic obstructive pulmonary disease,
  8
 ·
              Yutian
                  frozen dry powder for treatment of lung
                  cancer,
 
 ·
              A
                  multi-functional peptide derivative for treatment of intestinal
                  cancers.
  On
        July
        7, 2006, we created a PRC joint-venture with Guangzhou Ji'nan Science &
Technology Industrial Group ("JSIG") and Mr. Dongsheng Yao. The purpose of
        the
        new company, Guangzhou Co-win Bioengineering Co., Ltd. (“Co-Win”), is to develop
        applications for aflatoxin-detoxifizyme, or ADTZ, an enzyme that can eliminate
        aflatoxin from food and animal feed. Aflatoxin, a toxic substance that causes
        liver, stomach and lung cancers in animals and humans, is produced by the
        common
        aspergillus fungus and frequently affects cereal grains, oilseeds, spices,
        peanuts and acorns. Mr. Yao owns intellectual property rights, holding four
        patents in the PRC, and JSIG is an agent for the entity that holds those
        patents, Ji'nan University. Konzern owns a 70% equity interest in Co-Win,
        and
        each of JSIG and Mr. Yao has a 15% equity interest. The agreement with JSIG
        and
        Mr. Yao governing the creation of Co-Win, which was signed as of July 7,
        2006,
        provides that (i) Konzern is to invest a total of approximately $2.2 million,
        of
        which we have paid $840,000 and are scheduled to pay the balance by July
        6,
        2008, and (ii) Co-Win will own the intellectual property rights to any products
        developed by the joint venture pursuant to the agreement. The formation of
        Co-win was approved and licensed by the Guangzhou Industrial and Commerce
        Bureau
        on October 27, 2006. Co-win is still in the development stage and no major
        activity has yet occurred.
 
 Technology
        Transfers
 
 Technology
        transfers generated approximately $2.9 million, or 6.8%, of total sales for
        the
        year ended December 31, 2007, and approximately $3.2 million, or 13.4% of
        our
        total revenues for the year ended December 31, 2006. Our customers for
        technology transfers are pharmaceutical manufacturers, research centers and
        medicine distribution companies. We anticipate that our technology transfers,
        which we began in 2003, will continue to be a significant segment of our
        business in the foreseeable future.
 
 ***Intellectual
        Property***
 
 *Patents*
 
 We
        have
        obtained patents for the production methods we have developed or control
        for the
        following four products. Patent certificates were issued on May 9, 2007 with
        patents rights for 20 years from the issuance date:
 
 ·
              Xiao
                  Shu Oral Liquid, an oral medication designed to reduce the effects
                  of heat
                  exhaustion;
 
 ·
              Jian
                  Pi Xiao Ji Oral Liquid, an oral medication to treat
                  indigestion;
 
 ·
              An
                  unnamed oral medicine treatment for symptoms related to computer
                  over-use;
                  and
 
 ·
              An
                  unnamed method of improving the effectiveness of oral
                  medicines;
 
 The
        table
        below sets forth information relating to these four patents.
  9
  **Name**
              
              **Inventor**
              
              **Application
                  No.**
              
              **Filing
                  date**
              
              **Publication
                  date**
              
              **Patent
                  No.**
              
              **Authorization
                  date**1
              
              Xiao
                  Shu Oral Liquid
              
              Jinkun
                  Xie,
                Minhua
                  Liu
              
              20041005239600
              
              2004.11.26
              
              2005.8.10
              
              ZL200410052396.0
              
              2007.5.92
              
              Jian
                  Pi Xiao Ji Oral Liquid
              
              Jinkun
                  Xie,
                Minhua
                  Liu
              
              200410052398
              
              2004.11.26
              
              2005.8.10
              
              ZL200410052398.X
              
              2007.5.93
              
              An
                  oral medicine treatment for symptoms associated with over-use of
                  computers
              
              Jinkun
                  Xie,
                Minhua
                  Liu
              
              200510032608.3
              
              2005.1.5
              
              2005.10.12
              
              ZL12005132607.9
              
              2007.10.034
              
              A
                  method of improving oral medicines
              
              Jinkun
                  Xie,
                Minhua
                  Liu
              
              200510032607.9
              
              2005.1.5
              
              2005.10.12
              
              ZL200510032608.3
              
              2007.10.03
 
 10
 We
        have
        patents pending for the production methods we have developed or control for
        seven medicines. These patent applications have been approved by the PRC
        State
        Health Department, and approvals by the PRC National Intellectual Property
        Bureau are pending. We do not currently manufacture or sell any of these
        seven
        medicines. Information relating to the products and the pending patent
        applications is set forth below.
 
 **Name**
              
              **Inventor**
              
              **Application
                  No.**
              
              **Filing
                  date**
              
              **Publication
                  date**
              
              **Patent
                  No.**
              
              **Authorization
                  date**1
              
              Qu
                  shi qing chang oral liquid, an oral medication to treat constipation
              
              Jinkun
                  Xie,
                Minhua
                  Liu
              
              2004.10052397.5
              
              2004.11.26
              
              2005.8.10
              
              —
              
              —2
              
              Radiation
                  protection chewing gum, designed to reduce the effects of radiation
                  emitted by computer monitors and relieve tired and strained
                  eyes
              
              Jinkun
                  Xie,
                Minhua
                  Liu
              
              200510035432.7
              
              2005.6.27
              
              —
              
              —
              
              —3
              
              Slug
                  PE-4glycoprotein and its production formula
              
              Jinkun
                  Xie
              
              200510101458.7
              
              2005.11.25
              
              2006.10.23
              
              —
              
              —4
              
              Slug
                  amylase and its production formula
              
              Jinkun
                  Xie,
                Minhua
                  Liu
              
              200610035202.5
              
              2006.4.27
              
              —
              
              —
              
              —5
              
              Sihuan
                  jiangzhi jianfei ji and its production formula
              
              Jinkun
                  Xie,
                Minhua
                  Liu
              
              200610036736.X
              
              2006.7.28
              
              2007.6.6
              
              —
              
              —6
              
              PCT
                  international application of slug amylase and its production
                  method
              
              Jinkun
                  Xie
              
              PCT╱CN2006╱002813
              
              2006.10.23
              
              
              
              —
              
              —7
              
              A
                  kind of glycoprotein used to treat chronic lung disease
              
              Jinkun
                  Xie
              
              2007100267510
              
              2007.02
                  07
              
              2007.8.8
              
              —
              
              —
 
 *Trademarks*
 
 Konzern
        is the holder of the trademark “Konzem,” which was registered with the PRC
        Trademark Office of the National Industrial and Commercial Administrative
        Bureau
        (the “PRC Trademark Offices”). The discrepancy between the registered trademark
“Konzem” and the Company’s name resulted from a spelling error by the trademark
        agent. Until the error is corrected, we may not be able to enforce any trademark
        rights with respect to our company name. Konzern is also the holder of the
        trademark (kefei)
        for nutritional supplements (product category 30 of the PRC Trademark Offices)
        and medicine for external use (product category 3 of the PRC Trademark Offices).
  11
 
 Trademarks
        issued in the PRC have a term of 10 years; the term of our trademarks expires
        on
        December 13, 2011. The registered scope of use of the trademark is for
        pharmaceutical products, nutritional liquids, dietary supplements, original
        materials, bio-chemical medicines, medicinal oils, medicines treating dandruff,
        medicinal roots and vitamins. The PRC Trademark law, adopted in 1982 and
        revised
        in 2001, protects registered trademarks. A registered trademark is protected
        for
        a term of 10 years, renewable for another term of 10 years, so long as an
        application for renewal is submitted to the PRC Trademark Offices within
        six
        months prior to the expiration of the initial term.
 
 Below
        is
        a schedule of the trademarks held by Konzern and their effective
        periods.
 
 **No.**
              
              **Name**
              
              **Application
                  No.**
              
              **Status**
              
              **Effective
                  period**1
              
              Konzern
              
              1680414
              
              received
              
              2001.12.14
                  - 2011.12.133
              
              kefei
              
              3564022
              
              received
              
              2005.09.28
                  - 2015.09.276
              
              kefei
              
              3564020
              
              received
              
              2005.03.07
                  - 2015.03.0615
              
              runxia
              
              4411469
              
              received
              
              2007.06.14
                  - 2017.06.1320
              
              buzhong
              
              4411468
              
              received
              
              2007.06.21
                  - 2017.06.2023
              
              qingshangqing
              
              4411471
              
              received
              
              2007.06.14
                  - 2017.06.1328
              
              wangyou
              
              4519748
              
              received
              
              2007.10.07
                  - 2017.10.06
  In
        addition, Konzern has applied for the registration of the following trademarks,
        for which we are awaiting a disposition from the PRC Trademark Offices:
 
 **Trademark
                  applied for**
              
              **Application
                  date**
              
              **Process
                  acceptance date**(shangqing)
              
              12/01/2004
              
              02/23/2005(buzhongbao)
              
              12/01/2004
              
              02/23/2005(erxianbaochun)
              
              12/01/2004
              
              02/23/2005(wangzeyou)
              
              03/02/1005
              
              05/25/2005(yutian)
              
              03/15/2005
              
              05/25/2005(qinghe)
              
              07/18/2005
              
              09/27/2005Co-win
              
              05/28/2006
              
              09/18/2006mushenghuo
              
              2006
              
              2006mushengtu
              
              2006
              
              2006jinshengshui
              
              2006
              
              2006tushengjin
              
              2006
              
              2006
 
 ***Government
        Regulation***
 
 The
        operation of any business in the PRC, including the manufacture or distribution
        of pharmaceutical products, is subject to government regulations. These
        regulations cover a wide range of products, from Chinese herbal products
        sold
        over-the-counter to pharmaceutical products which require a
        prescription.
 
 The
        manufacture and sale of pharmaceutical products in the PRC is governed by
        the
        PRC Drug Administration Law. As of the date of this report, we do not
        manufacture any products. Instead, all of the products we distribute are
        manufactured at a facility which has received a permit to operate as a drug
        manufacturing facility. As a distributor of pharmaceutical products, we are
        required to obtain a permit from the drug regulatory department of the
        government of the province, autonomous region or municipality directly under
        the
        PRC Central Government, where we are located. We have obtained a permit to
        operate as a distributor, a Certificate for Drug Distribution, from the
        Guangdong Food and Drug Administration in the Province of Guangdong, China,
        with
        a five-year term from December 28, 2004 to December 27, 2009. The certificate
        allows for the purchase of raw materials; wholesaling of traditional Chinese
        medicines, chemical medicines and the related medicines, antibiotics and
        related
        medicines. In addition, we have a Certificate for Health issued by Guangzhou
        Health Bureau with a term of four years, commencing on July 19, 2005, which
        grants us the right to engage in wholesale marketing and distribution of
        nutritional supplements. In the event that we expand our business scope to
        manufacture our proprietary pharmaceutical products, we will require a
        certificate for the manufacture of such products.
  12
 
 The
        Drug
        Administration Law also governs other aspects of the drug manufacturing and
        distribution business, including packaging, labeling, advertising and pricing.
        The PRC Drug Administration Law and Pricing Law provide for the government
        to
        determine and adjust prices of pharmaceutical products in order to ensure
        that
        price is commensurate with quality, to eliminate excessively high prices,
        and
        protect the legitimate interests of users. In general, the prices of our
        products are determined by us and our customers through negotiation. We are
        required to operate in accordance with Good Supply Practice (or “GSP”) for
        Pharmaceutical Products, and we are subject to inspections organized by the
        local drug regulatory department of the government of Guangdong Province.
        We
        received a GSP Certificate from the Guangdong Province Administration Bureau
        for
        Drugs with a term of five years beginning on November 19, 2003.
 
 The
        Drug
        Administration Law provides for penalties for manufacturing or distributing
        drugs without obtaining the necessary certificate. If a distributor distributes
        drugs without the certificate, the distributor is banned from the industry.
        If
        drugs are illegally produced or sold, all related illegal gains may be
        confiscated, and the distributor may be fined not less than two times but
        not
        more than five times the value of the drugs purchased or sold.
 
 Before
        any new pharmaceutical product can be marketed it must undergo testing. The
        research and development of a new pharmaceutical product, including the
        manufacturing process, quality specifications, results of pharmacological
        and
        toxicological study and related data, as well as samples, must be submitted
        to
        the drug regulatory department under the PRC State Council for approval in
        accordance with the regulations of such department before clinical trials
        can be
        conducted. Measures for verifying the qualifications of clinical study
        institutions for pharmaceutical products are formulated jointly by the drug
        regulatory department and the administrative department for health under
        the PRC
        State Council. When a new pharmaceutical product has gone through clinical
        trials and passed the evaluation, a New Drug Certificate is issued upon approval
        by the drug regulatory department under the PRC State Council.
 
 In
        order
        to market a new pharmaceutical product, we must first obtain government approval
        for the clinical trial, as described in the preceding paragraph. The government
        authority issues a list of hospitals which are qualified to conduct the clinical
        trial, and we select one or more hospitals from such list. If the results
        of the
        test are accepted by the PRC State Food and Drug Administration, we must
        then
        apply for a production license so that the drug can be produced at a licensed
        manufacturing facility. In accordance with relevant laws and regulations,
        the
        Drug Certificate may be revoked if the pharmaceutical product is found to
        cause
        adverse pharmacological effects or is found to be harmful to patients’ health,
        or if it is found that other activities engaged in with respect to manufacturing
        and marketing the drug are in violation of the laws. The Drug Certificate
        sets
        forth the approved use of the pharmaceutical product. Four new products are
        currently being developed by the research-center venture with Nanhua University.
        After completion of laboratory testing, those products are subject to the
        clinical trial process described above.
  A
        typical
        schedule for obtaining approval to manufacture or sell a new drug would require
        one to one-and-a-half years for approval of clinical trials, an additional
        one
        to three years for the completion of clinical trials, and an additional one
        to
        one-and-a-half years for the issuance of a new medicine certificate and
        production certificate.
 
 The
        effects on the Company of operating within the regulatory framework described
        above are significant and comprehensive. We must employ medicine quality
        controllers, managers, inspectors, receivers, verifiers, and warehouse managers,
        all of whom must be appropriately trained and experienced and whose
        qualifications are overseen by the SFDA; we must maintain a specialized
        warehouse in compliance with regulatory standards, and we must maintain the
        licenses and certificates described above. The direct costs of compliance
        with
        these regulations during fiscal 2007 exceeded $250,000.
  13
 
 Employees
 
 As
        of
        December 31, 2007, we had 105 employees, of whom 25 are executive and
        administrative personnel, 10 are research and development staff and 70 are
        marketing and sales personnel. ****
  Risk
        of Loss and Liability
 
 The
        standard contracts between Konzern and its customers do not specify risk
        of loss
        allocation; however, the transportation company is generally responsible
        for
        losses and damage which occur during transportation. In the event that a
        product
        recall becomes necessary, any liability associated with the recall or use
        of the
        product will be apportioned among the various parties involved in the production
        and distribution of the product. Manufacturers are typically responsible
        for
        problems arising from the quality of medicines, and distributors such as
        China
        Medicine are typically responsible for problems related to incorrect packaging.
        We mitigate these risks by providing for transportation insurance in our
        typical
        delivery contracts with transportation companies.
 
 Konzern
        does not carry any product liability or other similar insurance. While product
        liability lawsuits in the PRC are rare and we have never experienced significant
        problems with any of our products, there can be no assurance that we would
        not
        face liability in the event that any of our products is found to be ineffective,
        harmful, unsafe, defective or tainted.
 
 **ITEM
        1A.**  **RISK
        FACTORS**
 
 An
        investment in our common stock involves a high degree of risk. You should
        carefully consider all of the risks described below, together with the other
        information contained in this report, before making a decision to purchase
        our
        common stock. You should only purchase our common stock if you can afford
        to
        lose your entire investment.
  **Risks
        Associated with Our Business**
  ***Supply
        interruptions could damage our core business.***
  Many
        of
        the products we distribute are derived from plant products, whose availability
        and price could be affected by any of the factors that affect crop growth
        and
        availability, including weather, fire, insects, and disease. Most of the
        products we distribute are produced through complex manufacturing processes
        that
        must be designed and executed with precision. If our suppliers are not able
        to
        acquire the investories or complete the manufacturing process needed to
        produce the products that we purchase from them, our business will suffer.
        In
        addition, we purchase most of our inventories from a small number of
        suppliers. In 2007, our five largest suppliers accounted for approximately
        56.2%
        of our purchases. If any of these suppliers were to become unable or unwilling
        to supply our inventories at reasonable prices, we would be forced to look
        to other suppliers to meet our demand for materials. Although we believe
        that
        alternative suppliers are available for each of the ingredients in our major
        products, there is no guarantee that all of these ingredients are or will
        continue to be available in the future, or that they will be available at
        prices
        similar to those we are accustomed to paying. Although we have not experienced
        any supply disruptions in the past, there is no guarantee they will not occur
        in
        the future. As a result, the loss of a supplier could impair our ability
        to
        operate profitably.
  ***Interruptions
        of deliveries to customers could damage our core business.***
  We
        generate most of our revenues by delivering products to our customers. Our
        performance therefore depends on the smooth and reliable functioning of all
        aspects of the delivery process, including vehicles (primarily trucks),
        availability of gas at historically typical prices, and infrastructure,
        especially roads, bridges and tunnels. If we are not able to secure trucks
        and
        delivery services at the rates to which we are accustomed; if gas prices
        rise
        significantly; or if roads are damaged by weather or earthquakes or other
        extraordinary events or are not repaired after ordinary wear, our ability
        to
        make deliveries would suffer, and therefore our ability to generate revenue,
        our
        financial results, and our competitive position would all suffer.
  14
  ***Because
        a significant portion of our revenue comes from a small number of customers,
        the
        failure of one of our customers could damage our financial
        condition.***
  Our
        five
        largest customers accounted for 39.5% of our revenue for 2007, and 58.6%
        of our
        revenue for 2006. Our customers are not required to make minimum purchases
        from
        us or to refrain from purchasing competing products from other
        companies.
  Because
        a
        substantial portion of our sales are made to a small number of customers,
        our
        accounts receivable from a small number of customers may represent a large
        percentage of our accounts receivable and assets. Our largest account receivable
        at December 31, 2007 was $2,366,321, representing 7.2% of our total assets
        and
        8.3% of our working capital, and accounts receivable from our five largest
        customers at that time totaled approximately $3.2 million, representing 9.9%
        of
        our total assets and 11.3% of our working capital. This concentration of
        accounts receivable represents a significant credit risk. The failure of
        one or
        more of these customers to pay their obligations to us in a timely manner
        could
        damage our liquidity and cash flows and could impair our ability to continue
        to
        operate profitably or at all.
  ***If
        the medicines we distribute are found to cause severe side effects or other
        harm, or the drug formulas we own or develop are found to be defective, we
        could
        suffer serious consequences.***
  The
        products we distribute may be dangerous if taken in the wrong doses, if subject
        to manufacturing process defects or tampering, or if badly designed or
        inadequately tested prior to their release. As the distributor of drugs and
        other medical products, we may bae subject to liability in the event that
        claims
        of harm resulting from the use of our products are made. In the case of drugs
        that we are developing, we could face liability not only as a distributor
        but
        also as the designer and formula owner of the drugs. Such a claim could lead
        to:
  ·
              a
                  withdrawal or modification of government approvals of such medicines;
  ·
              a
                  government requirement that we recall or participate in the recall
                  of one
                  or more of our medicines;
  ·
              a
                  decline or cessation of sales of the medicine;
  ·
              damage
                  to our reputation and competitive position, and reduced success
                  in
                  securing distribution rights from
                  manufacturers;
  ·
              claims
                  against us by persons or entities claiming harm, including lawsuits
                  against us by persons who may have experienced severe side effects
                  or
                  other harm; claims from customers that we have failed to fill orders
                  to
                  specifications; claims from purchasers of our formulas that we
                  have failed
                  to deliver the formulas as promised; and claims
  ·
              the
                  need for us to devote significant resources to improve a defective
                  formula
                  or create a new formula for an affected medicine, to change the
                  way we
                  market a formula or medicine, to conduct additional clinical trials
                  or
                  demand that they be conducted by a manufacturer, or to change the
                  labeling
                  of a medicine or demand that labeling be changed by a manufacturer;
                  and
  15
  ·
              the
                  total or partial loss of the value of an affected formula;
  The
        occurrence of any of these events would harm our sales of the affected medicines
        and substantially increase the costs of marketing these medicines, and could
        cause serious harm to our revenues, profitability, and competitive position.
  ***We
        have significant financial commitments to certain research and development
        projects with no assurance that the projects will ever be
        profitable.***
  We
        have
        funding obligations with respect to the following projects that our management
        has identified as potential sources of substantial future profits, but which
        may
        never generate any profits at all:
  ·
              a
                  joint-venture company called “Co-Win,” which we formed in 2006 together
                  with Guangzhou Ji'nan Science & Technology Industrial Group (JSIG) and
                  Mr. Dongsheng Yao, with the purpose of developing applications
                  for
                  aflatoxin-detoxifizyme, or ADTZ, an enzyme that can eliminate aflatoxin
                  from food and animal feed. We have a total commitment to Co-Win
                  of
                  approximately $2.2 million, of which $840,000 has been paid and
                  the
                  balance is payable in June 2008.
  ·
              a
                  research and development center at Nanhua University in Hengyang
                  City,
                  Hunan Province, China, which we established together with the
                  Pharmaceutical Research Institute of Nanhua University in 2003.
                  Under the
                  agreement governing the creation of the center, Konzern contributed
                  approximately $380,000, $270,000,and $100,000 in 2005, 2006 and
                  2007, in
                  order to fund the center’s budget, including the salaries of research
                  personnel, in return for ownership of the new medicines developed
                  by the
                  center. The center has developed four products, one of which is
                  under
                  review by the PRC State Food and Drug Administration. None of the
                  products
                  have yet been sold.
  ·
              a
                  funding project with Guangzhou Laitai Pharmaceutical Co., Ltd.
                  (“Laitai”),
                  in which we fund research in exchange for distribution rights for
                  any
                  developed medicines. In 2007, we provided $133,470 and in 2006
                  we provided
                  $168,540 to Laitai.
  There
        is
        no guarantee that any of these ventures will develop a marketable or profitable
        product or intellectual property with a value equal to or greater than our
        investment. We may enter into other research and development agreements in
        the
        future in which we undertake funding obligations with no assurance that a
        profitable product will be developed. There is no guarantee that future research
        and development ventures pursued by management will succeed. Poor performance
        of
        any of these ventures would limit our growth and could harm our profitability
        and competitive position.
  ***The
        increased expenses resulting from our status as a public company may impair
        our
        ability to operate profitably.***
  Our
        status as a public company comes with obligations to file disclosure reports
        with the SEC. As a result, our ongoing expenses have increased significantly.
        Our increased expenses include (a) ongoing public company expenses such as
        (i)
        increased legal and accounting expenses relating to our new reporting
        requirements and our agreement with the initial investors that we would register
        the shares of common stock issued or issuable to them upon conversion of
        Series
        A preferred stock and exercise of the warrants, (ii) increased expenses relating
        to investor relations activities, including activities to increase investors’
awareness of our common stock; (iii) expenses incurred in complying with
        the
        internal-control requirements of the Sarbanes-Oxley Act, and (iv) obligations
        incurred in connection with the reverse acquisition; (b) expenses related
        to
        increased compensation to our officers as appropriate to the greater
        responsibilities of managing a public company; and (c) additional expenses
        relating to the hiring of a chief financial officer who is familiar with
        United
        States GAAP. There is no guarantee that we will succeed in generating sufficient
        income to grow or remain profitable given these increased expenses.
 
 16
  ***Because
        we are dependent on our management, the loss of key executive officers or
        a key
        consultant and the failure to hire additional qualified key personnel could
        harm
        our business.***
  Our
        business is largely dependent upon the continued efforts of our chief executive
        officer, Senshan Yang, and our executive vice president, Minhua Liu, whose
        managerial expertise would be difficult or impossible to replace. Both Mr.
        Yang
        and Ms. Liu are also directors. We do not have a long-term contract with
        any of
        our officers except other than Ms. Liu, whose employment agreement was renewed
        at the end of December, 2007. The loss of either of these individuals could
        have
        a material adverse effect upon our ability to operate profitably.
  ***We
        must make significant cash payments for our product supplies long before
        we
        generate revenue from sales of those products. We may therefore require cash
        from outside sources to purchase supplies and run our business, even if our
        sales increase.***
  Our
        suppliers require us to comply with strict payment terms that are written
        into
        our supply contracts. The collection periods for our accounts receivable
        typically range from three months to one year; we are required to pay our
        suppliers in advance for a significant portion of the purchase price; and
        we
        must maintain deposits with some of our suppliers. It generally takes our
        supplies one to two months to deliver products once we place a purchase order.
        In addition, some of our customers, especially hospitals, require payment
        terms
        that allow them to pay for our deliveries months after they have been made.
        As a
        result, we spend large amounts of cash for the products we distribute long
        before we generate revenue from sales of those products. Our business is
        therefore cash-intensive. We do not have an accounts-receivable or
        inventory-based credit facility in place to provide liquidity when it is
        needed.
        Therefore, sales of our products may not generate sufficient cash to enable
        us
        to pay our suppliers while awaiting payment on our receivables, and we may
        be
        forced to seek outside financing to continue operations. There is no guarantee
        that we will obtain financing when needed, on beneficial terms or on any
        terms
        at all. If we cannot obtain financing on reasonable terms to provide needed
        liquidity, we may be forced to limit or halt operations, which could severely
        damage our business, competitive position, and financial results.
  ***The
        terms on which we may raise additional capital may result in significant
        dilution and may impair our stock price.***
  Because
        of the limited extent of the public market for our common stock, the terms
        of
        our recent private placement, the number of outstanding warrants, and the
        exercise price and other terms on which we may issue common stock upon exercise
        of the warrants, it may be difficult for us to raise additional capital if
        required for our present business and for any planned expansion. We cannot
        assure you that we will be able to get additional financing on any terms,
        and,
        if we are able to raise funds, it may be necessary for us to sell our securities
        at a price which is at a significant discount from the market price and on
        other
        terms which may be disadvantageous to us. In connection with any such financing,
        we may be required to provide registration rights to investors and pay damages
        in the event that a registration statement is not filed or declared effective
        by
        specified dates. The price and terms of any financing which would be available
        to us could result in both the issuance of a significant number of shares
        and
        significant downward pressure on our stock price and could result in a reduction
        of the conversion price of the Series A preferred stock and exercise price
        of
        the warrants held by the investors in our February 2006 private placement,
        under
        the terms of the warrants and the preferred stock purchase agreement. Under
        those terms, if we issue common stock at a price which is less than the
        conversion price of the Series A preferred stock (initially $1.25 and currently
        $1.21) or the exercise price of the warrants (currently $1.70 for Series
        A
        Warrants and $2.43 for Series B Warrants), the conversion and exercise prices
        are to be proportionately reduced, which could result in the holders of our
        preferred stock and warrants receiving substantially more shares of our stock
        than initially anticipated.
  17
  ***Lack
        of cash may prevent us from making identified acquisitions, and the financing
        of
        successful acquisitions may have negative consequences.***
  An
        important part of our growth strategy is to seek expansion by making strategic
        acquisitions. If we have insufficient cash, due to our long collection cycle
        for
        accounts receivable or for other reasons, and if we are unable to raise
        financing on reasonable terms, we may miss opportunities to make acquisitions
        that would benefit the Company. The loss of such opportunities could limit
        our
        future growth, and the opportunities could be seized by our competitors to
        make
        acquisitions and improve their competitive position relative to us. In the
        case
        where we are able to make a desired acquisition by borrowing funds or issuing
        equity securities, there is no guarantee that the terms of the borrowing
        or
        issuance will be justified by the ultimate value of the acquisition to the
        Company. Any issuance of equity would result in dilution to our stockholders.
        As
        of December 31, 2007, we do not have any agreement or understanding, either
        formal or informal, as to any potential acquisition.
  ***Acquisitions
        may disrupt our operations.***
  If
        we
        make acquisitions, we could have difficulties integrating the acquired
        companies' personnel and operations with our own, including:
  ·
              difficulties
                  integrating acquired products, services, operations and rights
                  into our
                  existing business;
  ·
              potential
                  disruption of the ongoing businesses and distraction of our management
                  and
                  the management of acquired
                  companies;
  ·
              difficulties
                  in disposing of the excess or idle facilities of an acquired company
                  or
                  business and expenses in maintaining such
                  facilities;
  ·
              difficulties
                  in maintaining uniform standards, controls, procedures and
                  policies;
  ·
              potential
                  impairment of relationships with employees and customers as a result
                  of
                  any integration of new management
                  personnel;
  ·
              potential
                  inability or failure to achieve additional sales and enhance our
                  customer
                     base through cross-marketing of the products to new and existing
                  customers;
  ·
              the
                  effects of any government regulations which relate to the acquired
                  business;
  ·
              potential
                  unknown liabilities associated with acquired businesses or product
                  lines,
                  or the need to spend significant amounts to retool, reposition
                  or modify
                  the marketing and sales of acquired products or the defense of
                  any
                  litigation, whether of not successful, resulting from actions of
                  the
                  acquired company prior to our acquisition.
  Our
        business could be severely impaired if and to the extent that we are unable
        to
        succeed in addressing any of these risks or other problems encountered in
        connection with these acquisitions, many of which cannot be presently
        identified. These risks and problems could disrupt our ongoing business,
        distract our management and employees, increase our expenses and adversely
        affect our results of operations. Even if we manage these difficulties, there
        is
        no guarantee that the increased revenue resulting from the acquisition will
        outweigh the costs of the acquisition, the integration and the continuing
        operations of our larger, consolidated company.
  18
  ***Our
        operating results in future periods may vary from quarter to quarter and,
        as a
        result, we may fail to meet the expectations of our investors and analysts,
        which may cause our stock price to fluctuate or
        decline.***
  Our
        revenue and operating results have fluctuated from quarter to quarter
        significantly in the past. For example, in 2007, total revenue for the quarter
        ended December 31 was approximately $16.2 million, more than three times
        total
        revenue for the quarter ended March 31 of approximately $5.1 million. We
        expect
        that fluctuations in both revenue and net income will continue due to a variety
        of factors, many of which are outside of our control, including the needs
        of our
        customers, competitive products offered by others, consumer preferences,
        the
        extent of our research and development activities, and seasonal purchasing
        patterns of our customers. Due to such risks, you should not rely on
        period-to-period financial comparisons as an indication of future
        performance.
  ***A
        few of our stockholders control most of our common
        stock.***
  The
        majority of our outstanding common stock is owned by the former owners of
        Konzern, Senshan Yang, our chief executive officer and a director, Minhua
        Liu, our executive vice president and a director, and Junhua Liu, the
        brother of Minhua Liu. They presently have the voting power to elect all
        of the
        directors and approve any transaction requiring stockholder approval and
        can
        take action by stockholder consent without a stockholders' meeting. There
        is no
        guarantee that their judgment will be the same as yours on important matters
        affecting the Company, including whether to make acquisitions, be acquired
        by
        another company, authorize new shares of stock, and maintain or dismiss members
        of management.
  ***Efforts
        to comply with recently enacted changes in securities laws and regulations
        will
        increase our costs and require additional management resources, and we may
        fail
        to comply in spite of those efforts.***
  As
        directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted
        rules
        requiring public companies to include a report of management on the company's
        internal controls over financial reporting in their annual reports on Form
        10-KSB. In addition, the public accounting firm auditing the company's financial
        statements must attest to and report on management's assessment of the
        effectiveness of the company's internal controls over financial reporting.
        These
        requirements will first apply to our annual report on Form 10-K for the year
        ending December 31, 2008 with respect to the filing of an auditor’s report. If
        and when these regulations become applicable to us, and if we are unable
        to
        conclude that we have effective internal controls over financial reporting
        or if
        our independent auditors are unable to provide us with an unqualified report
        as
        to the effectiveness of our internal controls over financial reporting as
        required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could
        lose
        confidence in the reliability of our financial statements, which could result
        in
        a decrease in the value of our securities.
  ***We
        may be required to pay liquidated damages if we do not satisfy our contractual
        obligations to achieve and maintain the effectiveness of one or more
        registration statements relating to the resale of some of our common stock
        by
        private investors, and to maintain a board consisting of a majority of
        independent directors.***
  The
        registration rights agreement which we executed in connection with our February
        2006 private sale of securities required us to file a registration statement
        by
        April 10, 2006 and to have the registration statement declared effective
        by the
        SEC by August 8, 2006. Under the terms of the agreement, our failure to meet
        either deadline obligates us to issue to the investors, as liquidated damages,
        1,025 shares of Series A preferred stock for each day that we fail to meet
        either of the scheduled dates or if we fail to keep the registration statement
        effective thereafter, although no liquidated damages are payable if we fail
        to
        meet the required filing date but meet the required effective date. We filed
        the
        initial registration statement three days late. Thus, the terms of the
        registration rights agreement would require us to issue 3,075 shares of Series
        A
        preferred stock for our failure to file the registration statement by April
        10,
        2006 plus an additional 1,025 shares of Series A preferred stock for each
        of the
        68 days between August 8, 2006 and October 17, 2006, the date on which the
        registration statement was declared effective by the SEC. At that time, the
        total number of shares to be issued as liquidated damages under the registration
        rights agreement was 72,775.
 
 19
  We
        may
        also be deemed to owe such liquidated damages for failure to maintain the
        effectiveness of the registration statement from December 1, 2007 until our
        amended registration statement was declared effective by the SEC on January
        15,
        2008. In connection with that period, we may be deemed to have an obligation
        to
        issue up to approximately 25,000 shares of Series A preferred stock to the
        investors. The investors have not requested that we issue any shares as
        liquidated damages under the registration rights agreement, and we have not
        issued any such shares.
  The
        purchase agreement relating to the February 2006 private placement also requires
        us to maintain a board of directors on which a majority of directors are
        independent directors and an audit committee composed solely of independent
        directors and the compensation committee with a majority of independent
        directors. Our failure to continue to meet these requirements could result
        in
        our payment of liquidated damages that could be payable in cash or by the
        issuance of additional shares of Series A preferred stock, as the investors
        shall determine.
  **Risks
        Associated with Doing Business in the PRC**
 
 ***Changes
        in the policies of the PRC government could have a significant impact upon
        the
        business we may be able to conduct in the PRC and the profitability of that
        business.***
 
 The
        PRC's
        economy is in transition from a planned economy to a market oriented economy
        subject to five-year and annual plans adopted by the government that set
        national economic development goals. Policies of the PRC government can have
        significant effects on the economic conditions of the PRC. The PRC government
        has confirmed that economic development will follow the model of a market
        economy. Under this direction, we believe that the PRC will continue to
        strengthen its economic and trading relationships with foreign countries
        and
        business development in the PRC will follow market forces. While we believe
        that
        this trend will continue, there can be no assurance that this will be the
        case.
 
 A
        change
        in policies by the PRC government could adversely affect our interests by,
        among
        other factors: changes in laws, regulations or the interpretation thereof,
        confiscatory taxation, restrictions on currency conversion, imports or sources
        of supplies, or the expropriation or nationalization of private enterprises.
        Although the PRC government has been pursuing economic reform policies for
        several decades, there can be no assurance that the government will continue
        to
        pursue such policies or that such policies may not be significantly altered,
        especially in the event of a change in leadership, social or political
        disruption, or other circumstances affecting the political, economic and
        social
        situation of the PRC.
  ***The
        laws and regulations of the PRC that govern our current business operations
        are
        sometimes vague and uncertain. Any changes in such PRC laws and regulations
        may
        harm our business.***
 
 The
        PRC
        laws and regulations governing our current business operations are sometimes
        vague and uncertain. There are substantial uncertainties regarding the
        interpretation and application of PRC laws and regulations, including the
        laws
        and regulations governing our business, or the enforcement and performance
        of
        our arrangements with customers in the event of the imposition of statutory
        liens, death, bankruptcy and criminal proceedings. We and any future
        subsidiaries are considered foreign persons or foreign funded enterprises
        under
        PRC laws, and as a result, we are required to comply with certain PRC laws
        and
        regulations. These laws and regulations are sometimes vague and may be subject
        to future changes, and their official interpretation and enforcement involves
        substantial uncertainty.  New laws and regulations that affect existing and
        proposed future businesses may also be applied retroactively. We cannot predict
        what effect the interpretation of existing or new PRC laws or regulations
        may
        have on our businesses.
  20
 
 At
        the
        end of 2007, a comprehensive reform of China’s healthcare system was underway.
        In March 2008, the National People’s Congress of the PRC and other legislative
        entities began the initiative to draft a series of policies to broaden the
        healthcare coverage for the population in the rural regions. Although the
        details of the reform are still unclear, it is certain that the reform will
        result in increased healthcare spending for the rural population and low
        income
        families.
 
 As
        a
        result of this healthcare reform, government may either subsidize hospitals
        or
        healthcare institutions in rural areas, or subsidize drug manufacturers or
        distributors if they can distribute their products to rural areas with fixed
        profit margins. The management cannot guarantee that these new policies will
        benefit the company or help to increase company’s revenues. The management
        cannot guarantee that the company will be able to achieve the targeted profits
        or maintain the current profit margin going forward.
 
 ***We
        could be affected by recent and continuing events affecting the drug industry
        in
        the PRC.***
 
 In
        July
        2007, representatives of the PRC’s leading food and drug regulatory bodies held
        a joint news conference to emphasize their determination to crack down on
        the
        production and export of fake and counterfeit food and medicine in China.
        During
        the preceding several months, China’s food, drug, chemical and other industries
        were the subject of many stories in the international press regarding the
        export
        of dangerous and uncertified products from China, including industrial chemicals
        found in pet food in the U.S., a toxic chemical substituted for glycerin
        in cold
        medicine sold in Panama, and lead paint found in toys made in China and sold
        in
        the U.S and Europe.
 
 Also
        in
        July 2007, the PRC government executed the former head of the State Food
        and
        Drug Administration (the “SFDA”) for accepting bribes and failing to police the
        marketplace. The new administrators of SFDA have emphasized the need to impose
        stricter controls in pharmaceutical manufacturing and food processing in
        order
        to regain public confidence in China-made food and medicines. While we cannot
        know what further steps the government will take to police the pharmaceutical
        market in China, those steps could include harsher sanctions for smaller
        violations of law, regulation, or policy, reductions in the opportunities
        available to companies to defend against accusations of violations, forced
        closure of companies, and broad changes to the regulatory system in which
        companies in the industry operate. Any such steps could have a significant
        impact on our profitability or our ability to continue operations, which
        impact
        cannot currently be predicted or quantified.
 
 ***The
        pharmaceutical distribution industry consolidation may impact our profitability
        and operations.***
 
 The
        pharmaceutical distribution industry in China is highly fragmented. The current
        pharmaceutical distribution industry in China lacks the regulatory oversight.
        The government has become more aware of the issue and started to tighten
        its
        regulatory supervision over the pharmaceutical distribution
        industry.
 
 As
        the
        industry consolidates, we need to distinguish ourselves with better products
        and
        services. We intend to achieve this goal by focusing on distributing higher
        quality pharmaceutical products with better efficacies and greater market
        demand. In addition, we need to increase our efficiencies in product
        distribution. We cannot guarantee that we will be able to meet this goal.
        However, the, successful implementation of this strategy will provide upside
        potential to our profitability.
 
 ***Konzern
        is subject to restrictions on paying dividends and making other payments
        to us.***
  We
        are a
        holding company incorporated in the State of Delaware and do not have any
        assets
        or conduct any business operations other than our investments in our
        subsidiaries. As a result of our holding company structure, we rely primarily
        on
        dividends payments from Konzern, our subsidiary in China. However, PRC
        regulations currently permit payment of dividends only out of accumulated
        profits, as determined in accordance with PRC accounting standards and
        regulations. Konzern is also required to set aside a portion of its after-tax
        profits according to PRC accounting standards and regulations to fund certain
        reserve funds. The PRC government also imposes controls on the conversion
        of RMB
        into foreign currencies and the remittance of currencies out of China. We
        may
        experience difficulties in completing the administrative procedures necessary
        to
        obtain and remit foreign currency. See “ *Government
        control of currency conversion may affect the value of your
        investment* .”
        Furthermore, if Konzern incurs debt on its own in the future, the instruments
        governing the debt may restrict its ability to pay dividends or make other
        payments. If we or Konzern are unable to receive all of the revenues from
        our
        operations through these contractual or dividend arrangements, we may be
        unable
        to pay dividends on our common stock.
  21




***Governmental
      control of currency conversion may affect the value of your
      investment.***





The
      PRC
      government imposes controls on the convertibility of Renminbi into foreign
      currencies and, in certain cases, the remittance of currency out of the PRC.
      We
      receive substantially all of our revenues in Renminbi, which is currently not
      a
      freely convertible currency. Shortages in the availability of foreign currency
      may restrict our ability to remit sufficient foreign currency to pay dividends,
      or otherwise satisfy foreign currency dominated obligations. Under existing
      PRC
      foreign exchange regulations, payments of current account items, including
      profit distributions, interest payments and expenditures from the transaction,
      can be made in foreign currencies without prior approval from the PRC State
      Administration of Foreign Exchange by complying with certain procedural
      requirements. However, approval from appropriate governmental authorities is
      required where Renminbi is to be converted into foreign currency and remitted
      out of China to pay capital expenses such as the repayment of bank loans
      denominated in foreign currencies.





The
      PRC
      government may also in the future restrict access to foreign currencies for
      current account transactions. If the foreign exchange control system prevents
      us
      from obtaining sufficient foreign currency to satisfy our currency demands,
      we
      may not be able to pay certain of our expenses as they come due.





***The
      fluctuation of the Renminbi may harm your investment.***





The
      value
      of the Renminbi against the U.S. dollar and other currencies may fluctuate
      and
      is affected by, among other things, changes in the PRC's political and economic
      conditions. As we rely entirely on revenues earned in the PRC, any significant
      revaluation of the Renminbi may materially and adversely affect our cash flows,
      revenues and financial condition. For example, to the extent that we need to
      convert U.S. dollars we receive from an offering of our securities into Renminbi
      for our operations, appreciation of the Renminbi against the U.S. dollar would
      diminish the value of the proceeds of the offering and thereby diminish the
      usefulness of the offering to us. Conversely, if we decide to convert our
      Renminbi into U.S. dollars for the purpose of making payments for dividends
      on
      our common shares or for other business purposes and the U.S. dollar appreciates
      against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert
      would be reduced. In addition, the depreciation of significant U.S. dollar
      denominated assets could result in a charge to our income statement and a
      reduction in the value of these assets.





On
      July
      21, 2005, the PRC government changed its decade-old policy of pegging the value
      of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is
      permitted to fluctuate within a narrow and managed band against a basket of
      certain foreign currencies. This change in policy has resulted in significant
      appreciation of the Renminbi against the U.S. dollar. While the international
      reaction to the Renminbi revaluation has generally been positive, there remains
      significant international pressure on the PRC government to adopt an even
      more flexible currency policy, which could result in a further and more
      significant appreciation of the Renminbi against the U.S. dollar.




***PRC
      regulations regarding offshore financing activities by PRC residents may
      increase our administrative burdens and hinder the implementation of our
      acquisition strategy, and a failure by our shareholders who are PRC residents
      to
      make filings required by such regulations could make us ineligible to distribute
      profits and could expose us and our PRC-resident shareholders to liability
      under
      PRC law.***





The
      PRC’s
      State Administration of Foreign Exchange (“SAFE”), through its Notice 75, which
      became effective November 1, 2005, requires registration with SAFE by the
      PRC-resident shareholders of any foreign holding company (such as China
      Medicine) that owns a PRC entity (such as Konzern). Without registration, the
      PRC company cannot remit any profits out of the PRC as dividends or otherwise.
      Our shareholders who are PRC residents must comply with the registration and
      disclosure requirements provided in SAFE Notice 75. Mr. Senshan Yang, our
      President and Chief Executive Officer and a PRC-resident shareholder of the
      Company, has completed registration with SAFE and was issued a SAFE certificate
      on January 28, 2006. We are in the process of determining whether there are
      additional shareholders who are subject to SAFE Notice 75 and whose compliance
      status will have a material effect on our ability to remit any of our profits
      out of the PRC as dividends or otherwise.




22





In
      the
      event that the proper procedures are not followed under SAFE Notice 75, we
      could
      lose the ability to remit funds outside of the PRC and would therefore be unable
      to pay dividends or make other distributions. Our PRC-resident shareholders
      could be subject to fines, other sanctions and even criminal liabilities under
      the PRC Foreign Exchange Administrative Regulations promulgated January 29,
      1996, as amended.





***The
      PRC’s legal and judicial system may not adequately protect our business and
      operations and the rights of foreign investors.***





The
      PRC
      legal and judicial system may negatively impact foreign investors. In 1982,
      the
      National People's Congress amended the Constitution of China to authorize
      foreign investment and guarantee the "lawful rights and interests" of foreign
      investors in the PRC. However, the PRC's system of laws is not yet
      comprehensive. The legal and judicial systems in the PRC are still rudimentary,
      and enforcement of existing laws is inconsistent. Many judges in the PRC lack
      the depth of legal training and experience that would be expected of a judge
      in
      a more developed country. Because the PRC judiciary is relatively inexperienced
      in enforcing the laws that do exist, anticipation of judicial decision-making
      is
      more uncertain than would be expected in a more developed country. It may be
      impossible to obtain swift and equitable enforcement of laws that do exist,
      or
      to obtain enforcement of the judgment of one court by a court of another
      jurisdiction. The PRC's legal system is based on written statutes; a decision
      by
      one judge does not set a legal precedent that judges in other cases are required
      to follow. In addition, the interpretation of Chinese laws may be varied to
      reflect domestic political changes.




The
      promulgation of new laws, changes to existing laws and the pre-emption of local
      regulations by national laws may adversely affect foreign investors. However,
      the trend of legislation over the last 20 years has significantly enhanced
      the
      protection of foreign investment and allowed for more control by foreign parties
      of their investments in Chinese enterprises. There can be no assurance that
      a
      change in leadership, social or political disruption, or unforeseen
      circumstances affecting the PRC's political, economic or social life will not
      affect the ability of the PRC government to continue to support and pursue
      these
      reforms. Such a shift could have a material adverse effect on our business
      and
      prospects.





***A
      slowdown or other adverse developments in the PRC economy may harm our
      customers, demand for our services and our
      business.***





All
      of
      our operations are conducted in the PRC and all of our revenues are generated
      from sales in the PRC. Although the PRC economy has grown significantly in
      recent years, we cannot assure you that this growth will continue. We do not
      know how sensitive we are to a slowdown in economic growth or other adverse
      changes in the PRC economy which may affect demand for natural gas or gas
      distribution systems from industrial or domestic users. A slowdown in
      overall economic growth, an economic downturn, a recession or other adverse
      economic developments in the PRC could significantly reduce the demand for
      our
      products and harm our business.





***Inflation
      in the PRC could negatively affect our profitability and
      growth*** **.**





While
      the
      PRC economy has experienced rapid growth, such growth has been uneven among
      various sectors of the economy and in different geographical areas of the
      country. Rapid economic growth could lead to growth in the money supply and
      rising inflation. If prices for our products rise at a rate that is insufficient
      to compensate for the rise in the costs of supplies, it may harm our
      profitability. In order to control inflation in the past, the PRC government
      has
      imposed controls on bank credit, limits on loans for fixed assets and
      restrictions on state bank lending. Such an austerity policy can lead to a
      slowing of economic growth. In October 2004, the People’s Bank of China, the
      PRC’s central bank, began to raise interest rates for the first time in nearly
      a
      decade and indicated in a statement that the measure was prompted by
      inflationary concerns in the Chinese economy. The central bank has also raised
      the portion of deposits that PRC banks are required to maintain in available
      cash, or the reserve rate.




23





***Because
      our principal assets are located outside of the United States and nearly all
      of
      our directors and officers reside outside of the United States, it may be
      difficult for you to enforce your rights based on U.S. Federal Securities Laws
      against us and our officers and some directors in the U.S. or to enforce a
      U.S. court judgment against us or them in the PRC.***




Four
      of
      our five directors and all of our officers reside outside of the United States.
      In addition, our operating subsidiaries are located in the PRC and substantially
      all of our assets are located outside of the United States. It may therefore
      be
      difficult for investors in the United States to enforce their legal rights
      based
      on the civil liability provisions of the U.S. Federal securities laws against
      us
      in the courts of either the U.S. or the PRC and, even if civil judgments are
      obtained in U.S. courts, to enforce such judgments in PRC courts. Further,
      it is
      unclear if extradition treaties now in effect between the United States and
      the
      PRC would permit effective enforcement against us or our officers and directors
      of criminal penalties, under the U.S. Federal securities laws or
      otherwise.




***Because
      the scope of our business license is limited, we may need government approval
      to
      expand our business.***




We
      are a
      wholly-owned foreign enterprise, commonly known as a WOFE. The scope of our
      business is narrowly defined for all businesses in China and the WOFE can only
      conduct business within its approved business scope, which ultimately appears
      on
      the business license. Our license permits us to operate as a distributor of
      drugs. Any amendment to the scope of our business requires further application
      and government approval. Inevitably, there is a negotiation with the authorities
      to approve as broad a business scope as is permitted, and we cannot assure
      you
      that we will be able to obtain the necessary government approval for any change
      or expansion of our business.




If
      we
      were to seek to manufacture certain higher-value pharmaceutical products in
      the
      future, we would need to have our manufacturing facilities certified with
      certain licenses. For example, GMP, or Good Manufacturing Permit from the SFDA,
      is mandatory for any facility to manufacture pharmaceutical products in China.
      We may be unable to obtain this permit due to our limited qualifications and
      experiences in this scope.





***If
      we are not able to protect our intellectual property rights, our business may
      be
      impaired.***




We
      have
      developed proprietary products, which are based on formulation and know-how
      developed by us, either by ourselves or pursuant to agreements with others.
      The
      protection of intellectual property in the PRC remains weak, and we cannot
      give
      any assurance that we will be able to protect our intellectual property rights
      effectively. All of our products are manufactured by others. Manufacturers
      and
      competitors could potentially copy or simulate our formulations if their
      inherent complexity does not make such copying unlikely. If we are not able
      to
      protect our intellectual property rights, the value of our intellectual
      property, and our ability to generate revenue from it, would be severely
      impaired.





***If
      the PRC enacts regulations which forbid or restrict foreign investment, our
      ability to grow may be severely impaired.***




We
      intend
      to expand our business both by increasing our product range and making
      acquisitions of companies primarily in the pharmaceutical and related
      industries. In addition, we may seek to manufacture our own products. Many
      of
      the rules and regulations that we would face are not explicitly communicated,
      and we may be subject to rules that would affect our ability to grow, either
      internally or through acquisition of other Chinese or foreign companies. There
      are also substantial uncertainties regarding the proper interpretation of
      current laws and regulations of the PRC. New laws or regulations that forbid
      foreign investment could severely impair our businesses and prospects.
      Additionally, if the relevant authorities find us in violation of PRC laws
      or
      regulations, they would have broad discretion in dealing with such a violation,
      including, without limitation:




·
            levying
                fines;




24




·
            revoking
                our business and other licenses;




·
            requiring
                that we restructure our ownership or operations;
                and




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




***Any
      deterioration of political relations between the United States and the PRC
      could
      impair our operations.***




The
      relationship between the United States and the PRC is subject to sudden
      fluctuation and periodic tension. Changes in political conditions in the PRC
      and
      changes in the state of Sino-U.S. relations are difficult to predict and could
      adversely affect our operations or cause potential acquisition candidates or
      their goods and services to become less attractive. Such a change could lead
      to
      a decline in our profitability. Any weakening of relations between the United
      States and the PRC could have a material adverse effect on our
      operations.




***Our
      operations and assets in the PRC are subject to significant political and
      economic uncertainties.***




Although
      the government of the PRC has been pursuing economic reform policies, government
      policies are subject to rapid change and the government may adopt policies
      which
      have the effect of hindering private economic activity and greater economic
      decentralization. There is no assurance that the government of the PRC will
      not
      significantly alter its policies from time to time without notice in a manner
      with reduces or eliminates any benefits from its present policies of economic
      reform. In addition, a substantial portion of productive assets in the PRC
      remains government-owned. For instance, all lands are state owned and leased
      to
      business entities or individuals through governmental granting of State-owned
      Land Use Rights. The granting process is typically based on government policies
      at the time of granting, which could be lengthy and complex. This process may
      adversely affect our future expansion, especially if we seek to commence
      manufacturing operations. The government of the PRC also exercises significant
      control over China's economic growth through the allocation of resources,
      controlling payment of foreign currency and providing preferential treatment
      to
      particular industries or companies. Uncertainties may arise with changing of
      governmental policies and measures. In addition, changes in laws and
      regulations, or their interpretation, or the imposition of confiscatory
      taxation, restrictions on currency conversion, imports and sources of supply,
      devaluations of currency or the nationalization or other expropriation of
      private enterprises could have a material adverse effect on our business,
      results of operations and financial condition.




***Price
      controls may affect both our revenues and net income.***




The
      laws
      of the PRC provide for the government to fix and adjust prices. For example,
      in
      2006, some of our products became subject to price controls which subsequently
      affected our gross profit, gross margin and net income. In the future, it is
      possible that additional products may be subject to price control, especially
      products tailored to the rural and low-income population. The government may
      use
      price controls to encourage greater sales of these products in these
      populations.




25





To
      the
      extent that we are subject to price control, our revenue, gross profit, gross
      margin and net income will be affected since the revenue we derive from our
      sales will be limited and we may face no limitation on our costs. Further,
      if
      price controls affect both our revenue and our costs, our ability to be
      profitable and the extent of our profitability will be effectively subject
      to
      determination by the applicable regulatory authorities in the PRC.




***Our
      operations may not develop in the same way or at the same rate as might be
      expected if the PRC economy were similar to the market-oriented economies of
      OECD member countries.***




The
      economy of the PRC has historically been a nationalistic, "planned economy,"
      meaning it functions and produces according to governmental plans and pre-set
      targets or quotas and price controls. We cannot predict the future direction
      of
      these economic reforms or the effects these measures may have. The economy
      of
      the PRC also differs from the economies of most countries belonging to the
      Organization for Economic Cooperation and Development, an international group
      of
      member countries sharing a commitment to democratic government and market
      economy. For instance:




·
            the
                level of state-owned enterprises in the PRC, as well as the level
                of
                governmental control over the allocation of resources is greater
                than in
                most of the countries belonging to the
                OECD;




·
            the
                level of capital reinvestment is lower in the PRC than in other countries
                that are members of the OECD;




·
            the
                government of the PRC has a greater involvement in general in the
                economy
                and the economic structure of industries within the PRC than other
                countries belonging to the OECD;




·
            the
                government of the PRC imposes price controls on certain products
                and our
                products may become subject to additional price controls;
                and




·
            the
                PRC has various impediments in place that make it difficult for foreign
                firms to obtain local currency, as opposed to other countries belonging
                to
                the OECD where exchange of currencies is generally free from
                restriction.




As
      a
      result of these differences, our business may not develop in the same way or
      at
      the same rate as might be expected if the economy of the PRC were similar to
      those of the OECD member countries.




***We
      may have limited legal recourse under Chinese law if disputes arise under
      contracts with third parties.***




Almost
      all of our agreements with our employees and third parties, including our
      supplier and customers, are governed by the laws of the PRC. The legal system
      in
      the PRC is a civil law system based on written statutes. Unlike common law
      systems, such as we have in the United States, it is a system in which decided
      legal cases have little precedential value. The government of the PRC has
      enacted some laws and regulations dealing with matters such as corporate
      organization and governance, foreign investment, commerce, taxation and trade.
      However, their experience in implementing, interpreting and enforcing these
      laws
      and regulations is limited, and our ability to enforce commercial claims or
      to
      resolve commercial disputes is unpredictable. The resolution of these matters
      may be subject to the exercise of considerable discretion by agencies of the
      PRC, and forces unrelated to the legal merits of a particular matter or dispute
      may influence their determination. Any rights we may have to specific
      performance or to seek an injunction under Chinese law are severely limited,
      and
      without a means of recourse by virtue of the Chinese legal system, we may be
      unable to prevent these situations from occurring. The occurrence of any such
      events could have a material adverse effect on our business, financial condition
      and results of operations.




26




***Because
      we may not be able to obtain business insurance in the PRC, we may not be
      protected from risks that are customarily covered by insurance in the United
      States.***




Business
      insurance is not readily available in the PRC, especially for intangible assets
      such as intellectual property. To the extent that we suffer a loss of a type
      which would normally be covered by insurance in the United States, such as
      product liability and general liability insurance, we would incur significant
      expenses in both defending any action and in paying any claims that result
      from
      a settlement or judgment. Since our products are taken as medicine, any damages
      which we sustain could be material to our assets and earnings. If the nature
      or
      amount of any uninsured loss is significant, we may be unable to continue in
      business.




***Because
      our funds are held in banks which do not provide insurance, the failure of
      any
      bank in which we deposit our funds could affect our ability to continue in
      business.***




Banks
      and
      other financial institutions in the PRC do not provide insurance for funds
      held
      on deposit. As a result, in the event of a bank failure, we may not have access
      to funds on deposit. Depending upon the amount of money we maintain in a bank
      that fails, our inability to have access to our cash could impair our
      operations, and, if we are not able to access funds to pay our suppliers,
      employees and other creditors, we may be unable to continue in
      business.




***Failure
      to comply with the United States Foreign Corrupt Practices Act could subject
      us
      to penalties and other adverse consequences.***




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




***If
      the United States imposes trade sanctions on the PRC due to its current
      currency, export or other policies, our ability to succeed in the international
      markets may be diminished.***




The
      PRC
      currently "pegs" its currency to a basket of currencies, including U.S. dollar.
      This means that each unit of Chinese currency has a set ratio for which it
      may
      be exchanged for United States currency, as opposed to having a floating value
      like other countries' currencies. This policy is currently under review by
      policy makers in the United States. Trade groups in the United States have
      blamed the cheap value of the Chinese currency for causing job losses in
      American factories, giving exporters an unfair advantage and making its imports
      expensive. There is increasing pressure for the PRC to change its currency
      policies to provide for its currency to float freely on international markets.
      As a result, Congress is considering the enacting legislation which could result
      in the imposition of quotas and tariffs. If the PRC changes its existing
      currency policies or if the United States or other countries enact laws to
      penalize the PRC for its existing currency policies, our business may be
      adversely affected, even though we do not sell outside of the PRC. Further,
      we
      cannot predict what action the PRC may take in the event that the United States
      imposes tariffs, quotas or other sanctions on Chinese products. Even though
      we
      do not sell products into the United States market, it is possible that such
      action by the PRC may nonetheless affect our business since we are a United
      States company, although we cannot predict the nature or extent
      thereof.




***Any
      recurrence of a widespread public health problem, such as bird flu, could
      adversely affect our business.***




Any
      widespread public health problem, including bird
      flu, in China, where all of our revenues are derived, could have a negative
      effect on both our revenues and our operations. We will be able to increase
      our
      revenue going forward due to the expected increase in public healthcare
      spending. However, this increase in revenue may result in a lower profit margin
      since over-the-counter products, which have lower profit margin, make up a
      higher percentage of these sales




27




Our
      operations may be impacted by a number of health-related factors, including
      the
      following:




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




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




·
            a
                general slowdown in the economy of the
                PRC.




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




***If
      certain tax exemptions within the PRC regarding withholding taxes are removed,
      we may be required to deduct corporate withholding taxes from any dividends
      we
      may pay in the future.***




Under
      the
      PRC's current tax laws, regulations and rulings, companies are exempt from
      paying withholding taxes with respect dividends paid to stockholders outside
      of
      the PRC. However, if the foregoing exemption is removed, we may be required
      to
      deduct certain amounts from any dividends we pay to our
      stockholders.




**Risks
      Associated with Our Common Stock**




***There
      is a limited trading market for our common stock.***




Although
      our common stock is registered with the SEC pursuant to the Securities Exchange
      Act of 1934, there is a limited market for our common stock, which developed
      after the commencement of this offering. There is no guarantee that there will
      ever be a broader market for our common stock or that if such a market develops,
      that it will continue. Our stock price may fluctuate dramatically in the future
      in response to any of the following factors, some of which are beyond our
      control:




·
            variations
                in our quarterly operating results;




·
            announcements
                that our revenue or income are below analysts'
                expectations;




·
            general
                economic slowdowns;




·
            matters
                affecting the economy of the PRC and the relationship between the
                United
                States and the PRC;




·
            changes
                in market valuations of both similar companies and companies whose
                business is primarily or exclusively in the
                PRC;




·
            sales
                of large blocks of our common
                stock;




·
            announcements
                by us or our competitors of significant contracts, acquisitions,
                strategic
                partnerships, joint ventures or capital
                commitments;




28




·
              fluctuations
                  in stock market prices and volumes, which are particularly common
                  among
                  highly volatile securities of internationally-based
                  companies.
  ·
              concern
                  by potential investors that the large number of shares of common
                  stock may
                  have a downward effect upon the market price of the
                  stock.




***The
      rights of the holders of common stock may be impaired by the potential issuance
      of preferred stock.***




Our
      certificate of incorporation gives our board of directors the right to create
      new series of preferred stock. As a result, the board of directors has and
      in
      the future may, without stockholder approval, issue preferred stock with voting,
      dividend, conversion, liquidation or other rights which could adversely affect
      the voting power and equity interest of the holders of common stock. Preferred
      stock, which could be issued with the right to more than one vote per share,
      could be utilized as a method of discouraging, delaying or preventing a change
      of control. The possible impact on takeover attempts could adversely affect
      the
      price of our common stock. Although we have no present intention to issue any
      additional shares of preferred stock or to create any new series of preferred
      stock and the certificate of designation relating to the Series A restricts
      our
      ability to issue additional series of preferred stock, we may issue such shares
      in the future.




***Shares
      may be issued pursuant to our stock plans which may affect the market price
      of
      our common stock.***




We
      may
      issue stock upon the exercise of options or pursuant to stock grants covering
      a
      total of 1,575,000 shares of common stock pursuant to our 2006 long-term
      incentive plan, under which options to purchase 1,105,000 shares of common
      stock
      at $1.25 per share are outstanding. The exercise of these options and the sale
      of the underlying shares of common stock and the sale of stock issued pursuant
      to stock grants may have an adverse effect upon the price of our stock. If
      we
      issue all of the shares of common stock issuable pursuant to the plan, these
      shares will represent approximately 8.5% of the outstanding common stock, based
      on the presently outstanding shares of common stock and approximately 7.9%
      of
      the outstanding common stock, based on the presently outstanding common stock
      plus the shares issuable upon conversion of the Series A preferred stock, with
      a
      related dilution to the other holders of our common stock.




***Because
      we are not subject to compliance with rules requiring the adoption of certain
      corporate governance measures, our stockholders have limited protections against
      interested director transactions, conflicts of interest and similar
      matters.***




The
      Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by
      the
      SEC, the New York and American Stock Exchanges and the Nasdaq Stock Market
      as a
      result of Sarbanes-Oxley require the implementation of various measures relating
      to corporate governance. These measures are designed to enhance the integrity
      of
      corporate management and the securities markets and apply to securities which
      are listed on those exchanges or the Nasdaq Stock Market. Because we are not
      presently required to comply with many of the corporate governance provisions
      and because we chose to avoid incurring the substantial additional costs
      associated with such compliance any sooner than necessary, we have not yet
      adopted all of these measures. We also are not in compliance with requirements
      relating to the distribution of annual and interim reports, the holding of
      stockholders meetings and solicitation of proxies for such meeting and
      requirements for stockholder approval for certain corporate actions. Until
      we
      comply with such corporate governance measures, regardless of whether such
      compliance is required, the absence of such standards of corporate governance
      may leave our stockholders without protections against interested director
      transactions, conflicts of interest and similar matters and investors may be
      reluctant to provide us with funds necessary to expand our
      operations.




29




***Failure
      to achieve and maintain effective internal controls in accordance with Section
      404 of the Sarbanes-Oxley Act could have a material adverse effect on our
      business and operating results and stockholders could lose confidence in our
      financial reporting.***




Effective
      internal controls are necessary for us to provide reliable financial reports
      and
      effectively prevent fraud. If we cannot provide reliable financial reports
      or
      prevent fraud, our operating results could be harmed. We may be required to
      document and test our internal control procedures in order to satisfy the
      requirements of Section 404 of the Sarbanes-Oxley Act, which requires increased
      control over financial reporting requirements, including attestation by the
      company’s registered public accounting firm regarding internal control over
      financial reporting. We do not have to comply with this regulation until our
      December 31, 2008 annual report. Failure to achieve and maintain an effective
      internal control environment, regardless of whether we are required to maintain
      such controls, could also cause investors to lose confidence in our reported
      financial information, which could have a material adverse effect on our stock
      price.




***Because
      of our cash requirements and restrictions in our preferred stock purchase
      agreement we may be unable to pay dividends.***




We
      expect
      to retain any earnings to finance the growth of our business. Further, we are
      prohibited from paying dividends on our common stock while the Series A
      preferred stock is outstanding.




***Because
      we may be subject to the "penny stock" rules, you may have difficulty in selling
      our common stock.***




If
      a
      public market develops for our common stock and if our stock price is less
      than
      $5.00 per share, our stock may be subject to the SEC's penny stock rules, which
      impose additional sales practice requirements and restrictions on broker-dealers
      that sell our stock to persons other than established customers and
      institutional accredited investors. The application of these rules may affect
      the ability of broker-dealers to sell our common stock and may affect your
      ability to sell any common stock you may own.




According
      to the SEC, the market for penny stocks has suffered in recent years from
      patterns of fraud and abuse. Such patterns include:




·
            Control
                of the market for the security by one or a few broker-dealers that
                are
                often related to the promoter or
                issuer;




·
            Manipulation
                of prices through prearranged matching of purchases and sales and
                false
                and misleading press releases;




·
            "Boiler
                room" practices involving high pressure sales tactics and unrealistic
                price projections by inexperienced sales
                persons;




·
            Excessive
                and undisclosed bid-ask differentials and markups by selling
                broker-dealers; and




·
            The
                wholesale dumping of the same securities by promoters and broker-dealers
                after prices have been manipulated to a desired level, along with
                the
                inevitable collapse of those prices with consequent investor
                losses.




***As
      an issuer of "penny stock," we lack protections provided by federal securities
      laws relating to forward-looking statements.***


Although
        the federal securities law provide a safe harbor for forward-looking statements
        made by a public company that files reports under the federal securities
        laws,
        this safe harbor is not available to issuers of penny stocks. As a result,
        if
        our common stock is a “penny stock,” we will not have the benefit of this safe
        harbor protection in the event of any claim based upon the material provided
        by
        us contained a material misstatement of fact or was misleading in any material
        respect because of our failure to include any statements necessary to make
        the
        statements not misleading.




30





***We
      cannot predict when or whether an active market for our common stock will
      develop.***




In
      the
      absence of an active trading market, you may have difficulty buying and selling
      or obtaining market quotations; the market visibility for our stock may be
      limited, and the lack of visibility for our common stock may have a depressive
      effect on the market price for our common stock.




***The
      registration and potential sale by our stockholders of a significant number
      of
      shares could encourage short sales by third parties.***




Because
      there is no public market for our stock, there may be significant downward
      pressure on our stock price caused by the sale or potential sale of a
      significant number of shares, which could allow short sellers of our stock
      an
      opportunity to take advantage of any decrease in the value of our stock. The
      presence of short sellers in our common stock may further depress the price
      of
      our common stock.




If
      the
      selling stockholders sell a significant number of shares of common stock, the
      market price of our common stock may decline. Furthermore, the sale or potential
      sale the offered shares and the depressive effect of such sales or potential
      sales could make it difficult for us to raise funds from other
      sources.




***Because
      the purchasers of our Series A preferred stock have a right of first refusal
      for
      future offering of our stock, we may have difficulty in raising additional
      funds
      if required for our business.***




The
      selling stockholders who purchased their securities in our February 2006 private
      placement, have the right to participate in any future funding. These provisions
      may prevent us from raising additional funds.




***Because
      the holders of our warrants have cashless exercise rights, we may not receive
      proceeds from the exercise of the outstanding warrants if the underlying shares
      are not registered.***




The
      holders of our warrants have cashless exercise rights, which provide them with
      the ability to receive common stock with a value equal to the appreciation
      in
      the stock price over the exercise price of the warrants being exercised. This
      right is not exercisable during the first twelve months that the warrants are
      outstanding and thereafter if the underlying shares are subject to an effective
      registration statement. To the extent that the holders of the warrants exercise
      this right, we will not receive proceeds from such exercise.




***The
      issuance and sale of the registered common stock could result in a change of
      control.***




If
      we
      issue all of the 10,609,476 shares issuable upon conversion of the Series A
      preferred stock and exercise of the warrants, the 10,609,476 shares of common
      stock offered by the selling stockholders would constitute 57% of our then
      outstanding common stock. The percentage would increase to the extent that
      we
      are required to issue any additional shares of common stock pursuant to the
      anti-dilution and adjustment provisions of the Series A preferred stock. Any
      sale of all or a significant percentage of those shares to a person or group
      could result in a change of control.




**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY**





We
      renewed our lease of approximately 4,500 square feet of office space at Room
      702
      Guangri Mansion No. 9, South Wuyang Xin Chengsi, Guangzhou, PRC from Guangzhou
      Carpentry Company for a term of three years which expires on August 31, 2009,
      pursuant to which we pay an annual rent of approximately $29,705 **.**




31





We
      also
      leased Room 701 Guangri Mansion No. 9, Siyou Nan Road, Cheng Wuyang Xin,
      Guangzhou, China from Guangzhou Carpentry Company for three years from May
      1,
      2006 to April 30, 2009 for an annual rent of approximately $23,700





We
      renewed our one-year lease of approximately 9,688 square feet of warehouse
      space
      at 67 Shahe Road, Tianhe District, Guangzhou City which expires December 31,
      2007, for which we pay an annual rent of approximately $21,696.





We
      also
      utilize office space in Princeton, New Jersey owned by an affiliate of Mary
      Xia,
      our former Vice President, for which we pay rent of $950 per month. The company
      has moved its headquarter back to China. It is currently located in Room
      702, Guangri Mansion, No. 9. Siyou Nan Road, Alley 1, 1st Street, Wuyang
      Xincheng, Guangzhou, PRC. The annual rental fee is $10,744 and the contract
      is
      valid from 2007 to 2009





We
      believe that our facilities are adequate for the conduct of our business for
      the
      foreseeable future.




**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





Neither
      the Company nor Konzern is currently a party to any pending or threatened legal
      proceeding.





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





No
      matters were submitted to a vote of shareholders in the fourth quarter of the
      fiscal year ended December 31, 2007.




**PART
      II**





**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES**





There
      is
      a limited market for our common stock.




**Dividends**




We
      have
      not paid dividends on our common stock, and the terms of the certificate of
      designation for our Series A preferred stock prohibit us from paying dividends
      while any shares of Series A preferred stock are outstanding. We plan to retain
      future earnings, if any, for use in our business, and do not anticipate paying
      dividends on our common stock in the foreseeable future. Prior to the reverse
      acquisition on February 8, 2006, Konzern made distributions to its stockholders,
      including a 2006 cash distribution of $1.9 million and a distribution of $1.2
      million of inventory. At the time of the distribution, Konzern was a
      privately-owned Chinese limited liability company, with income being taxed
      to
      stockholders. The distributions by Konzern were made partly in inventory in
      order to maintain cash in the business.




**Market
      for Our Common Stock**




Our
      common stock is traded in the over-the-counter market and quotations are
      reported on the over-the-counter Bulletin Board overseen by FINRA under the
      symbol CHME. The table below sets forth the high and low bid price for each
      quarter since there has been a market for our common stock, as reported by
      the
      Yahoo Finance website at http://finance.yahoo.com/q?s=CHME.OB.




32




These
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commission and may not represent actual transactions.




High
            
            LowFourth
                Quarter 2007
            
            $
            4.48
            
            $
            2.90Third
                Quarter 2007
            
            $
            3.35
            
            $
            2.20Second
                Quarter 2007
            
            $
            4.45
            
            $
            2.70First
                Quarter 2007
            
            $
            3.75
            
            $
            2.70Fourth
                Quarter 2006
            
            $
            3.25
            
            $
            2.50




As
      of
      March 25, 2008, there are approximately 39 holders of record of our common
      stock.





**Securities
      Authorized for Issuance Under Equity Compensation Plan**





The
      following table summarizes the equity compensation plans under which our
      securities may be issued as of the date of this report.




*Plan
                Category*
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted-average
                exercise price of outstanding
              options,
                warrants
              and
                rights
            
            Number
                of securities remaining available for future issuance under
                equity
              compensation
                plans (excluding securities reflected in column (a))Equity
                compensation plans approved by security holders
            
            
            1,370,000
            
            $
            1.25
            
            
            205,000Equity
                compensation plan not approved by security holders
            
            
            —
            
            
            —
            
            
            —Total
            
            
            1,370,000
            
            
            
            
            
            205,000




A
      2006
      long-term incentive plan and the outstanding options were approved by our board
      of directors and stockholders.




**Recent
      Issuances of Securities**





In
      February 2006, we issued 6,530,000 shares of common stock to the former Konzern
      stockholders, and 750,000 shares to other persons who performed services for
      us.
      Those shares were subject to an 18-month lockup, subject to certain exceptions.
      100,000 shares that were outstanding prior to the acquisition of Konzern were
      issued at a time when we were a shell company, and those shares, under an
      interpretation from the SEC relating to shares issued by a shell company, may
      not be sold pursuant to Rule 144, and must be registered for
      resale.





On
      February 8, 2006, we raised $3.9 million through the issuance and sale of (i)
      3,120,000 shares of Series A Preferred Stock and (ii) warrants to purchase
      7,389,476 shares of our common stock (the “Investor Warrants”). Each share of
      our Series A preferred stock is convertible into one share of common stock
      subject to adjustments. The transaction was executed under a preferred stock
      purchase agreement with Barron Partners L.P., Ray and Amy Rivers (as joint
      tenants with right of survivorship), Steve Mazur and William Denkin
      (collectively, the “Preferred Investors”). On the same date, we entered into a
      stock redemption agreement with Capital Markets Advisory Group, LLC ("Capital
      Markets"), which was then our principal stockholder, pursuant to which we
      purchased 928,000 shares of common stock from Capital Markets for $167,602
      and
      repaid $32,398 of debt to Capital Markets, using the proceeds from the sale
      of
      the Series A preferred stock.




33





Pursuant
      to the preferred stock purchase agreement relating to the issuance of the Series
      A preferred stock and warrants in the February 2006 private
      placement:




·
            We
                agreed that we will have appointed and maintain a board consisting
                of such
                number of independent directors that would result in a majority of
                our
                directors being independent directors, that our audit committee would
                be
                composed solely of independent directors and our compensation committee
                would have a majority of independent directors. Our failure to meet
                these
                requirements would results in the payment of liquidated damages that
                are
                to be paid either in cash or by the issuance of additional shares
                of
                Series A preferred stock. Although we did not meet the required deadline
                for having independent directors, because we have elected independent
                directors who comprise both a majority of the board, all of the members
                of
                the audit committee and the compensation committee, the investors
                waived
                our failure to be in compliance when initially required. This waiver
                would
                not apply to any subsequent failure to continue to meet this
                requirement.




·
            We
                and the investors entered into a registration rights agreement pursuant
                to
                which we agreed to file, within 60 days after the closing, the
                registration statement. Since the closing was on February 8, 2006,
                we were
                required to file the registration statement by April 10, 2006 and
                have the
                registration statement declared effective by August 8, 2006. We will
                be
                required to issue 1,025 shares of Series A preferred stock for each
                day of
                the delay in filing and each date after the required effective date.
                As a
                result we may be required to issue 3,225 shares of Series A preferred
                stock for the delay in filing the initial registration statement
                and an
                additional 1,025 share of Series A preferred stock for each day between
                August 8, 2006 and the effective date of the registration statement
                filed
                by the Company on April 13, 2006 and declared effective by the SEC
                on
                October 17, 2006. We will also be required to issue 1,025 shares
                of
                preferred stock for each day that we fail to keep this registration
                statement current and effective, with certain limited exceptions.
                At June
                30, 2006, we had accrued $44,003 in respect of this
                obligation.




·
            The
                investors have the right to participate in any future
                financing.




·
            We
                are required to elect a chief financial officer who is familiar with
                both
                the conduct of business in China and the SEC's rules and regulations
                relating to accounting, financial statements and accounting controls
                within fifteen days after closing. We believe that we are in compliance
                with this provision. The agreement does not include any liquidated
                damages
                provision with respect to our failure to comply with this
                requirement.




·
            With
                certain limited exceptions, if we issue stock at a purchase price
                or
                warrants or convertible securities at an exercise or conversion price
                which is less than the conversion price of the Series A preferred
                stock or
                the exercise price of the warrants, the conversion price and exercise
                price will be reduced to such lower ratio. The initial conversion
                price of
                the Series A preferred stock was $1.25 and the initial conversion
                ratio
                was one share of common stock for each share of Series A preferred
                stock.
                As of the date of this report, the conversion price is $1.21 and
                the
                conversion ratio is 1.030927 shares of common stock for each share
                of
                Series A preferred stock. Any change in the conversion price will
                automatically result in an adjustment in the conversion ratio of
                the
                Series A preferred stock.




·
            If
                our earnings before interest, taxes, depreciation and amortization
                ("EBITDA") for 2005 are less than $5,650,000, there would be a reduction
                in the conversion price of the Series A preferred stock and the exercise
                price of the warrants. Since our EBITDA was greater than that amount,
                no
                adjustment was required.




34




·
            If
                our fully-diluted pre-tax income per share for 2006 is less than
                $0.40,
                the conversion price of the Series A preferred stock and the exercise
                price of the warrants is reduced proportionately by the percentage
                shortfall, up to a maximum of 50%. Our fully-diluted pre-tax income
                per
                share for 2005, computed in the manner provided in the agreement,
                was
                $0.297. Fully-diluted pre-tax income per share is based on the number
                of
                outstanding shares of common stock plus all shares of common stock
                issuable upon conversion of all outstanding convertible securities
                and
                upon exercise of all outstanding warrants, options and rights, regardless
                of whether (i) such shares would be included in determining diluted
                earnings per share and (ii) such convertible securities are subject
                to a
                restriction or limitation on exercise.




·
            The
                following table sets forth the initial conversion price of the Series
                A
                preferred stock and the exercise price of the $1.75 warrants and
                the $2.50
                warrants and the adjusted numbers if (a) the pre-tax income per share
                for
                2006 were $0.30 per share, which is 25% below the target (a "25%
                shortfall") and (b) the pre-tax income per share for 2006 were $0.20
                or
                less per share, which is 50% or more below the target (a "50% shortfall").
                The number of shares reflects the number of shares of common stock
                issuable upon conversion of the Series A preferred stock, and is
                based on
                the assumption that no shares of Series A preferred stock are converted
                into common stock until the adjustment has been made for 2006. There
                is no
                adjustment in the number of shares issuable upon exercise of the
                warrants.





Conversion
                Price/ Conversion Ratio
            
            Number
                of Shares
            
            $1.75
                Warrant Exercise Price
            
            $2.50
                Warrant Exercise PriceUnadjusted
            
            $
            1.25/1:1
            
            
            3,120,000
            
            
            1.75
            
            
            2.5025%
                shortfall
            
            $
            .9375/1.3333:1
            
            
            4,160,000
            
            
            1.3125
            
            
            1.87550%
                shortfall
            
            $
            .625/2:1
            
            
            6,240,000
            
            
            .875
            
            
            1.25




35


As
      of
      March 25, 2008, we have issued an aggregate of 3,116,597 shares of common stock
      upon the conversion of the Company’s series A preferred stock held by the
      holders as stated in the following table:





Date
            
            Holders
            
            Common
                Stock Issued upon Conversion of Shares of Series A Preferred Stock11/16/2006
            
            
            Barron
                Partners, L.P.
            
            
            100,00011/20/2006
            
            
            Barron
                Partners, L.P.
            
            
            200,00012/06/2006
            
            
            Barron
                Partners, L.P.
            
            
            300,00012/19/2006
            
            
            Barron
                Partners, L.P.
            
            
            180,0001/10/2007
            
            
            Barron
                Partners, L.P.
            
            
            190,0002/08/2007
            
            
            Ray
                and Amy Rivers, JTROS
            
            
            100,0002/26/2007
            
            
            William
                Denkin
            
            
            160,0004/18/2007
            
            
            Barron
                Partners, L.P.
            
            
            458,5004/24/2007
            
            
            Barron
                Partners, L.P.
            
            
            300,0004/30/2007
            
            
            Steven
                Mazur
            
            
            164,9486/19/2007
            
            
            Barron
                Partners, L.P.
            
            
            100,0006/21/2007
            
            
            Barron
                Partners, L.P.
            
            
            300,00010/04/2007
            
            
            Barron
                Partners, L.P.
            
            
            309,90310/10/2007
            
            
            Barron
                Partners, L.P.
            
            
            200,00001/17/2008
            
            
            Barron
                Partners, L.P.
            
            
            1,59702/26/2008
            
            
            Barron
                Partners, L.P.
            
            
            51,649Total:
            
            
            
            
            
            3,116,597




From
      January to March 2007, we issued an aggregate of 1,621,750 shares of common
      stock upon the exercise of warrants at $1.75 per share to Barron Partners,
      L.P. for gross proceeds of $2,838,063.


From
      April to May 2007, we issued an aggregate of 1,694,040 shares of common stock
      upon the exercise of warrants at $1.70 per share to Barron Partners, L.P.
      for gross proceeds of $2,879,869. From October to December 2007, we issued
      an
      aggregate of 725,000 shares of common stock upon the exercise of warrants at
      $2.43 per share to Barron Partners, L.P. for gross proceeds of
      $1,761,750.





The
      shares of common stock issued upon the conversion of series A preferred stock
      and exercise of warrant were registered in the Registration Statement filed
      by
      the Company on April 13, 2006 and declared effective by the SEC on October
      17,
      2006 for the resale by the holders.





As
      of
      March 25, 2008, we had the following shares of common stock reserved for
      issuance:





·
            61,800
                shares issuable upon conversion of the Series A Preferred
                Stock.




·
            3,348,686
                shares issuable upon exercise of the warrants issued to the investors
                in
                the February 2006 private
                placement.




·
            1,295,000
                shares issuable upon exercise of stock options or other equity-based
                incentives pursuant to our 2006 long-term incentive plan, which is
                subject
                to stockholder approval.




**Transfer
      Agent**





The
      Company's stock transfer agent is Continental Stock Transfer & Trust
      Company, located at 17 Battery Place, New York, New York 10004. Their telephone
      number is 212-509-4000, and their facsimile is 212-509-5150.




36





**Penny
      Stock Regulations**





The
      SEC
      has adopted regulations which generally define a “penny stock” to be an equity
      security that has a market price of less than $5.00 per share. Our common stock
      falls within the definition of penny stock and is subject to rules that impose
      additional sales practice requirements on broker-dealers who sell such
      securities to persons other than established customers and accredited investors
      (generally those with assets in excess of $1,000,000, or annual incomes
      exceeding $200,000 or $300,000, together with their spouse).





For
      transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchase of such securities and have received
      the purchaser’s prior written consent to the transaction. Additionally, for any
      transaction, other than exempt transactions, involving a penny stock, the rules
      require the delivery, prior to the transaction, of a risk disclosure document
      mandated by the Commission relating to the penny stock market. The broker-dealer
      also must disclose the commissions payable to both the broker-dealer and the
      registered representative, current quotations for the securities and, if the
      broker-dealer is the sole market-maker, the broker-dealer must disclose this
      fact and the broker-dealer’s presumed control over the market. Finally, monthly
      statements must be sent disclosing recent price information for the penny stock
      held in the account and information on the limited market in penny stocks.
      Consequently, the “penny stock” rules may restrict the ability of broker-dealers
      to sell our common stock and may affect the ability of investors to sell their
      common stock in the secondary market.





**ITEM
      6.**   **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with the financial statements and
      accompanying notes and the other financial information appearing in Part I,
      Item 1 and elsewhere in this report.





Statements
      in this discussion that are not statements of historical fact could turn out
      to
      be untrue and are subject to the risks and uncertainties described in the “Risk
      Factors” and “Predictive Statements and Associated Risk” sections of this
      report.





**Overview**





China
      Medicine Corporation (“we,” “us” or the “Company”), through Guangzhou Konzern
      Medicine Co., Ltd. (“Konzern”), our wholly owned subsidiary organized under the
      laws of the People’s Republic of China (the “PRC” or “China”), is a distributor
      of approximately 2,200 pharmaceutical products in China. Also as a developer
      of
      innovative pharmaceutical products, currently the Company has four patents
      registered with the State Food and Drug Administration of PRC (“SFDA”), and has
      seven others pending for approval.





We
      generate revenue in two ways, the distribution of pharmaceutical products from
      suppliers and transfer of intellectual property, including drug formulas and
      production techniques.




The
      pharmaceutical products we distribute include prescription and over-the-counter
      drugs, Chinese herbs, traditional Chinese medicines made from Chinese herbs,
      nutritional supplements, dietary supplements and medical instruments.





Although
      we are competing with large state-owned medicine distributors that are better
      capitalized than we are, we believe that our unique competitive advantages
      include our ownership of good research and development facilities, our excellent
      after-sale customer service, and the sole nationwide or region-wide distribution
      rights to certain medical products. Our competitive pricing and our ability
      to
      provide timely delivery are also important factors to attract and retain our
      customers.




37





The
      Chinese government has recently begun the initiative to draft a series of
      policies to broaden the healthcare coverage for the population in the rural
      region. Although the details of the reform are still unclear, it is certain
      that
      the reform will result in increased healthcare spending from rural population
      and low income families.





Government
      may either subsidize hospitals or healthcare institutions in rural areas, or
      subsidize medicine manufacturers or distributors if they can distribute their
      products to rural areas with preset profit margins.





At
      the
      same time, as the disposable income in these area increases, and the aging
      of
      the rural population, the demand for healthcare products would potentially
      become stronger in the years to come. Management would carefully analyze this
      situation and try to catch up with new opportunities. For the last two quarters
      of 2007, we started to set up a distribution network to cover both the municipal
      and rural areas of Guangdong province of China.





Our
      distribution business greatly depends on our ability both to acquire our
      products and to distribute our products in the Chinese markets. Typically,
      exclusive rights to nationwide or to certain regions would contribute higher
      profit margins than non-exclusive distribution. Besides our exclusive rights
      to
      nationwide distribution of seven products made by our suppliers, we also have
      distribution rights throughout Guangdong Province of 774 products made by our
      suppliers.





We
      have
      exclusive rights to nationwide distribution of seven products made by our
      suppliers, which accounted for approximately 21.1% of our sales in fiscal year
      2007 and 28.3% of our sales in fiscal year 2006. The most significant of these
      products is Iopamidol Injection 370 and 300 prescriptive medicines that is
      used
      for angiography & scanning of CT. For the years ended December 31, 2007 and
      2006, our total revenue from these products amounted to $4,983,684 and
      $4,002,739, respectively, which were 11.84% and 16.68% of our annual sales
      for
      the years ended December 31, 2007 and 2006, respectively.





During
      2007, we had an important breakthrough in regional exclusive distribution.
      Previously we had no regional exclusive sales rights from our suppliers before
      year 2007. We
      now
      have exclusive distribution rights for 107 products in Guangdong Province.Thanks to an on-line bidding system called the “Guangdong Sunshine
      Medicine Public Internet Bidding System”, which will be described below in
      details, we successfully achieved the regional sales rights from our suppliers
      in Guangdong Province of the PRC for 774 products, which accounted for
      $5,508,551, or 13.1% of our sales for the year ended December 31,
      2007.





During
      the fiscal year 2007, our reliance on certain suppliers has been mitigated.
      Our
      five largest suppliers, accounted for 56.2% of our total purchases for the
      year
      ended December 31, 2007, and for 59.6% for the year ended December 31, 2006.
      Our
      agreements with our suppliers generally have a term of one year and provide
      that
      the suppliers will provide us with the products we order.





However,
      we are frequently required to make a significant down payment when we place
      an
      order, in order to secure the lowest possible purchase price and broadest
      possible distribution area. These down payments are made pursuant to contracts
      with the suppliers, and to the extent that we reduce the size of the order,
      we
      will receive a credit from the supplier. As of December 31, 2007, we had a
      total
      balance of such advances to suppliers of $5,983,277.





At
      the
      same time, our reliance on certain customers was also reduced. Our five largest
      customers accounted for 39.5% of total sales for the year ended December 31,
      2007, significantly lower than 58.6% and 48.5% for the corresponding period
      of
      2006 and 2005, respectively. Currently we have approximately 800
      customers.





Our
      customers are typically wholesale medical product companies, hospitals and
      retail drug stores. Our contracts with our customers do not provide for minimum
      purchases, and our customers are not restricted from purchasing competitive
      products from others.





Our
      typical collection period ranges from three months to one year. In addition,
      it
      generally takes one to two months to receive products from our suppliers after
      we place an order. In order to have product available to meet anticipated
      orders, we have been increasing our inventory in recent months, which has
      required increased advance payments to our suppliers. In some cases, we must
      maintain funds on deposit with a supplier. These factors require us to use
      significant cash in our operations.




38





Because
      a
      substantial portion of our sales were made to a small number of customers,
      our
      accounts receivable from a small number of customers represented a large
      percentage of our accounts receivable and assets. Our largest account receivable
      as of December 31, 2007 was approximately $2,366,321, representing approximately
      17.3% of our total accounts receivable, 7.2% of our total assets, 5.6% of total
      sales and approximately 8.3% of our working capital. Our three largest accounts
      receivable were approximately $4,516,589, representing approximately 33.21
      % of
      our total accounts receivable, or approximately 13.8% of our total assets,
      10.7%
      of total sales and approximately 15.9% of our working capital. This
      concentration of accounts receivable represents a significant credit risk,
      although the credit risk has been alleviated after the strong effort of the
      management.





Beginning
      in 2007, in an effort to help consolidate the provincial medicine acquisition
      market and promote a transparent bidding process, the provincial government
      of
      Guangdong Province established an on-line bidding system called the “Guangdong
      Sunshine Medicine Public Internet Bidding System.” We believe the new system
      provides us with greater opportunities to compete for distribution rights in
      Guangdong Province. As of December 31, 2007, we have obtained the rights to
      distribute a total of 774 new products through this new system.





According
      to the system’s policy, we can continue to possess the aforesaid distribution
      rights and use them to generate revenues in 2008. We began the sales of these
      products immediately after we obtained the rights, and expect a great increase
      of sales from them would become an important driver of our growth in 2008.
      Management also has an optimistic expectation to obtain more rights from this
      bidding system for the years ahead.





In
      nature, the pharmaceutical distribution industry in China is still very
      fragmented, and therefore, inefficient. Distributors compete with each other
      without sufficient regulatory control from the government, although Chinese
      government has realized and has been trying to initiate new or remedial
      regulations over this industry.





To
      distinguish ourselves from peers, we have been striving to build up our
      reputation as a better quality products provider with excellent services. We
      have been aiming at distributing those pharmaceutical products which are more
      effective in treatment, more stable in quality, and higher market
      demand.





Although
      the distribution of our suppliers’ pharmaceutical products has been the major
      source of revenues, which consisted 87.9% of our total revenues in 2007,
      management strongly believes that it is our long term strategy to distribute
      our
      self-developed pharmaceutical products, and to develop intellectual properties,
      including drug formulas and production techniques.





Our
      established reputation and marketing network as a distributor can be a valuable
      asset for production outsourcing. We can make orders to certain manufacturers,
      requiring them to produce some value-added pharmaceutical products with the
      standards set by us. At the same time, if we assess that combining the
      manufacturing of certain products with our distribution business would create
      synergy, we may consider acquire some manufacturing assets. In doing so,
      management, especially our financial team will carefully review our financial
      position, reasonably price the acquisition target, and negotiate to minimize
      the
      costs associated. We believe it is a good strategy to reap the most profitable
      parts of medicines production, to minimize operational risks, and to reduce
      the
      resources spent.





Typically
      we purchase the intellectual rights of drug formulas at an early stage of
      development from outside research institutes, then perform research and
      determine how to make improvements. After our improvements, we may eventually
      sell these improved drug formulas to our customers.





On
      July
      7, 2006, we created a PRC joint-venture company together with Guangzhou Ji'nan
      Science & Technology Industrial Group ("JSIG") and Mr. Dongsheng Yao.
      Konzern owns a 70% equity interest in Co-Win. The purpose of the company,
      Guangzhou Co-win Bioengineering Co., Ltd. (“Co-Win”), is to develop applications
      for aflatoxin-detoxifizyme, or ADTZ, an enzyme that can eliminate aflatoxin
      from
      food and animal feed. Aflatoxin, a toxic substance that causes liver, stomach
      and lung cancers in animals and humans, is produced by the common aspergillus
      fungus and frequently affects cereal grains, oilseeds, spices and acorns. During
      the year 2007, JSIG has been trying hard to develop ADTZ. We expect to undertake
      the commercialization of our development in 2008, including the application
      of
      production permit and trial sales. Management believes that the
      commercialization of ADTZ would be one of the most important drivers to our
      future growth.




39





Because
      our business is conducted in the PRC, all of our transactions are accounted
      for
      in Chinese Renminbi (RMB). Our financial condition and the results of our
      operations, expressed in terms of United States dollars (USD), is dependent
      upon
      the applicable currency exchange rate, which can change significantly from
      period to period and may be affected by the relationship between the United
      States and the PRC. During the fiscal year 2007, US dollars have been
      depreciating versus Chinese Yuan. The exchange rate of USD versus RMB declined
      from 0.1282 in January 1, 2007 to 0.1371 in December 31, 2007. As a result,
      we
      incurred a translation gain of $1,621,672, which is recognized as other
      comprehensive income.





**Results
      of Operations**





The
      following table sets forth our statements of operations for years ended December
      31, 2007 and 2006, in U.S. dollars:




Years
                Ended
              December
                31,2007
            
            2006Revenue
            
            
            42,105,387
            
            
            23,991,950Product
                sales
            
            
            39,247,130
            
            
            20,772,783Medical
                formula sales
            
            
            2,858,257
            
            
            3,219,167Costs
                of goods sold
            
            
            29,708,088
            
            
            15,017,100Gross
                profit
            
            
            12,397,299
            
            
            8,974,850R&D
                expenses
            
            
            651,990
            
            
            294,080Selling,
                general and administrative costs
            
            
            3,330,907
            
            
            1,565,288Reverse
                acquisition expenses
            
            
            -
            
            
            931,270Income
                from operations
            
            
            8,414,402
            
            
            6,184,212Other
                (expense) income, net
            
            
            15,423
            
            
            (199,945
            )Income
                before income taxes & Minority interest
            
            
            8,429,825
            
            
            5,984,267Provision
                for income taxes
            
            
            1,649,114
            
            
            1,229,688Income
                before Minority interest
            
            
            6,780,711
            
            
            4,754,579Minority
                interest
            
            
            94,658
            
            
            33,295Net
                income
            
            
            6,875,369
            
            
            4,787,874Other
                comprehensive incomeForeign
                currency translation adjustment
            
            
            1,621,672
            
            
            399,991Comprehensive
                income
            
            
            8,497,041
            
            
            5,187,865





Our
      revenue is derived primarily from the sale of prescription and over-the-counter
      medicines, Chinese herbs, traditional Chinese medicines derived from Chinese
      herbs, dietary supplements, and medical instruments (collectively “product
      sales”) and the sale of medical formulas (“medical formula sales”). The
      following table sets forth the revenues and percentage of revenues derived
      from
      each of these types of products.




40





Years
                Ended December 31,2007
            
            2006Prescription
                and Over the Counter Western Medicine
            
            $
            19,125,485
            
            
            45.42
            %
            $
            15,316,287
            
            
            63.84
            %Traditional
                Chinese Medicine
            
            
            19,419,435
            
            
            46.12
            %
            
            5,423,806
            
            
            22.61
            %Herbs
                & Medicine materials
            
            
            5,048
            
            
            0.01
            %
            
            32,690
            
            
            0.14
            %Dietary
                Supplements
            
            
            126,538
            
            
            0.30
            %Medical
                Instruments
            
            
            331,610
            
            
            0.79
            %
            
            -
            
            
            -Others
            
            
            239,014
            
            
            0.57
            %
            
            -
            
            
            -Medical
                Formula
            
            
            2,858,257
            
            
            6.79
            %
            
            3,219,167
            
            
            13.41
            %Total
            
            $
            42,105,387
            
            
            100
            %
            $
            23,991,950
            
            
            100
            %




***Revenue***





Total
      revenue for the year ended December 31, 2007 was $42,105,387, an increase of
      $18,113,437, or 75.5%, from revenue of $23,991,950 for the year ended December
      31, 2006.





Revenue
      from product sales for the year ended December 31, 2007 was $39,247,130, an
      increase of $18,474,347, or 88.9%, from revenue of $20,772,783 for 2006. As
      of
      December 31, 2007, we have obtained regional distribution rights in Guangdong
      Province for 774 new products in 2007, which generated $5,508,551 revenue during
      the year ended December 31, 2007 due to higher volume and new distribution
      rights.





Medical
      formula sales were $2,858,257 or 6.8% of total sales, and $3,219,167 or 13.4%
      of
      total sales, for the years ended December 31, 2007 and 2006, respectively.
      These
      amounts represent proceeds from the sale of certain technology and know-how
      relating to the production of medicines. We initially acquired the technology
      in
      an undeveloped state from other companies, undertook research and development
      to
      make improvements, and sold the improved technology to drug manufacturers.
      The
      primary reason for the decrease in medical formula sales is that fewer new
      customers have signed contracts for medical formula sales in 2007. We believe
      this is due to regulatory action by the State Food and Drug Administration
      (“SFDA”), which must approve every transfer of ownership of a medical formula in
      the PRC, and which recently enhanced its approval procedures by setting higher
      application criteria which requires more time for review.





***Cost
      of revenue***





Cost
      of
      revenue for the year ended December 31, 2007 was $29,708,088, or 70.6% of total
      revenue, compared with $15,017,100, or 62.6% of total revenue in 2006. The
      increase in costs was due primarily to the increase in sales described just
      above, and to a lesser extent due to the reasons described just below relating
      to gross margin.





***Gross
      Profit and Gross Margin***





Gross
      profit for the year ended December 31, 2007 was $12,397,299, an increase of
      $3,422,449, or 38.1%, from $8,974,850 for the year ended December 31, 2006.
      Our
      gross margin for the year ended December 31, 2007 was 29.4%, as compared with
      37.4% for the year ended December 31, 2006.





The
      decrease in our gross margin was due primarily to the setup of the aforesaid
      distribution network and the introduction of distributing new over-the-counter
      products to satisfy this network. Although the over-the-counter product
      distribution had lower margins than our average, we still strategically
      allocated some resources in this market, since we anticipated that associated
      market in the rural areas had great potentials.





During
      the last two quarters, we received the proceeds from warrant and option
      exercises. We utilized this extra cash to satisfy the needs to introduce new
      over-the-counter products. Because we do not intend to continue introducing
      new
      products of this kind into our product mix to a significant degree in the coming
      years, we do not expect the tendency of decreasing profit margins will
      continue.




41





***Research
      and Development Expenses***





Research
      and development expenses were $651,990 for the year ended December 31, 2007,
      compared with $294,080 for the year ended December 31, 2006. In both periods,
      these expenses were used primarily for the pre-clinical study of the Yutian
      capsule, a traditional Chinese medicine designed for use in the treatment of
      lung cancer that is being developed jointly by Konzern and the Pharmaceutical
      Research Institute of Nanhua University. As of the date of this report, our
      patent application for the Yutian capsule has been approved by the State Health
      Department and is pending before the PRC National Intellectual Property Bureau,
      and the SFDA is currently reviewing the medicine for possible license for sale
      throughout the PRC.





Management
      is committed to establishing a long term strategy in research and development.
      Nevertheless, management also carefully evaluates the cash available, the
      proportions of this expenditure to total revenues and net income, as well as
      the
      potential contributions to our business.





***Selling,
      General and Administrative Expenses***





Selling,
      general and administrative expenses were $3,330,907 for the year ended December
      31, 2007, an increase of $1,765,619 from $1,565,288 for the year ended December
      31, 2006. The increase was mainly due to (i) an increase in consulting fees
      to
      our investor relations firm, auditors and attorney, (ii) increased payroll
      expenses relating to salaries and employee sales bonuses, as well as the
      amortization of non-cash expenditure from incentive options, (iii) increased
      advertising, trade-show and marketing expenses, and (iv) the start-up costs
      of
      setting up a distribution network to cover both the municipal and rural areas
      of
      Guangdong province, China.





Because
      we do not expect significant increases in those categories of expenses over
      the
      next several quarters, we do not expect the proportion of selling, general
      and
      administrative expenses in total revenues to continue to increase.





***Income
      Taxes***





Provision
      for income taxes was $1,649,114 for the year ended December 31, 2007, compared
      with $1,229,688 for the year ended December 31, 2006. The increase was due
      to
      the growth of sales revenue and operating income.





***Net
      Income***





Net
      income for the year ended December 31, 2007 was $6,875,369, an increase of
      $2,087,495, or 43.6% from $4,787,874 for the year ended December 31, 2006.
      The
      increase was mainly due to the increase of our core business, the distribution
      of pharmaceutical products.





Besides
      the factors that we analyzed under “Selling, General and Administrative
      Expenses” above, our sales to the rural areas dragged down the overall net
      profit margin, since these sales usually had comparatively lower gross
      margin.





Nevertheless,
      we do not expect net profit margin to continue to decrease over the next several
      quarters.





**Liquidity
      and Capital Resources**





During
      the year ended December 31, 2007, as a result of the exercise of options and
      warrants, we received net proceeds of approximately $7,829,681. We expect the
      holders of warrants and options will continue to exercise their holdings in
      2008, thus generate some cash proceeds for our business. However, the amount
      of
      cash proceeds is uncertain.




42





We
      used
      cash of $2,310,113 in our operations for the year ended December 31, 2007,
      a
      minor increase of $91,905 from the cash used for the comparable period of 2006.
      The increase in net cash used in operating activities was largely due to the
      increase of advances to suppliers and inventories related to our increased
      quantity of sales, although the percentages in sales decreased.





As
      of
      December 31, 2007, we had working capital of $28,544,361, an increase of
      $16,669,294 or 140.4%, from $11,875,067 as of December 31, 2006.





The
      following table sets forth the changes in certain balance sheet items, in U.S.
      dollars and percentages, from December 31, 2006 to 2007.





Balance
                Sheet Caption
            
            Change
                in US dollars
              12/31/06
                to 12/31/07
            
            Percentage
                Change
              12/31/06
                to
              12/31/07Accounts
                receivable
            
            $
            6,591,436
            
            
            93.7
            %Inventories
            
            $
            2,047,993
            
            
            107.8
            %Advances
                to suppliers
            
            $
            2,857,177
            
            
            91.4
            %Accounts
                payable
            
            $
            (111,970
            )
            
            (59.3
            %)Customer
                deposits
            
            $
            185,301
            
            
            1031
            %




The
      change in these balance sheet captions reflects the nature of the cash
      requirements of our business. Because it takes one to two months to receive
      products we order, we have been increasing our inventories in order to meet
      anticipated increases in sales, and to protect us from the inflationary
      macroeconomic environment. From December 31, 2006 to December 31, 2007, our
      inventories increased 107.8%.





In
      the
      course of our business, we must make significant deposits to our suppliers
      when
      we place an order. Our advances to suppliers increased 91.4% from December
      31,
      2006 to December 31, 2007 because of an increase in our purchases resulting
      from
      increased sales and our payment policies, whereby we try to pay our suppliers
      (other than required down payments) once or twice a year. As of December 31,
      2007, our advance payments to our suppliers totaled approximately $5,983,277
      for
      2007.





In
      addition, our customer deposits increased 1031% from December 31, 2006 to
      December 31, 2007, reflecting the increased sales. We require our customers
      to
      pay a certain percentage of the sales price as a deposit before we ship products
      to them. The percentage varies from customer to customer, under management’s
      discretion. During the course of business, we may reduce the deposit requirement
      for some customers with good credit.





We
      intend
      to use our available funds to accelerate the development and testing of new
      drugs. We believe that our available funds will provide us with sufficient
      capital for at least the next twelve months; however, we may acquire one or
      two
      production facilities to manufacture our own products. To the extent that we
      make acquisitions or establish our own production facilities, we may require
      additional capital for the acquisition or for the operation of the combined
      companies. However, we cannot assure that such funding will be
      available.





**Critical
      Accounting Policies and Estimates**





Management's
      discussion and analysis of its financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      Our financial statements reflect the selection and application of accounting
      policies which require management to make significant estimates and
      judgments. Management bases its estimates on historical experience and on
      various other assumptions that are believed to be reasonable under the
      circumstances. Actual results may differ from these estimates under different
      assumptions or conditions. We believe that the following reflect the more
      critical accounting policies that currently affect our financial condition
      and
      results of operations.





43




***Revenue
      recognition***





We
      recognize revenue when all four of the following criteria are met: (1)
      persuasive evidence has been received that an arrangement exists; (2) delivery
      of the products and/or services has occurred; (3) the selling price is fixed
      or
      determinable; and (4) collectibility is reasonably assured. We follow the
      provisions of the SEC’s Staff Accounting Bulleting No. 104, which sets forth
      guidelines for the timing of revenue recognition based upon factors such as
      passage of title, installation, payments and customer acceptance. Any amounts
      received prior to satisfying our revenue recognition criteria are recorded
      as
      deferred revenue.





Sales
      revenue represents the invoiced value of goods, net of a value-added tax (VAT).
      All of the Company’s products, which are sold exclusively in the PRC, are
      subject to a Chinese value-added tax at a rate of 13% to 17% of the gross sales
      price. This VAT may be offset by VAT paid by the Company on raw materials and
      other materials included in the cost of producing their finished
      product.





***Research
      and development costs***




Research
      and development costs are expensed as incurred. To the extent that research
      and
      development services are performed for us by third parties, these costs are
      expensed when the services are performed by the third party. The costs of
      material and equipment that are acquired or constructed for research and
      development activities, and have alternative future uses, either in research
      and
      development, marketing, or sales, are classified as property and equipment
      or
      depreciated over their estimated useful lives.





***Use
      of estimates***





The
      preparation of financial statements in conformity with generally accepted
      accounting principles of the United States of America requires management to
      make estimates and assumptions that affect the amounts reported in the combined
      financial statements and accompanying notes. Management believes that the
      estimates utilized in preparing its financial statements are reasonable and
      prudent. Actual results could differ from these estimates.





***Inventories***





We
      record
      reserves against our inventory to provide for estimated obsolete or unsalable
      inventory based on assumptions about future demand for our products and market
      conditions. If future demand and market conditions are less favorable than
      management's assumptions, additional reserve could be required. Likewise,
      favorable future demand and market conditions could positively impact future
      operating results if previously reserved inventory is sold.




**ITEM
      7.**   **FINANCIAL
      STATEMENTS**





The
      following table presents selected financial data for the Company on a
      consolidated basis for the fiscal years ended December 31, 2007 and
      2006.





We
      derived the selected financial data set forth below from the Company's
      consolidated audited statements of operations for the fiscal years ended
      December 31, 2007 and 2006 and the consolidated audited balance sheets as at
      December 31, 2007 and 2006, each of which is included in this report. You should
      read the following summary financial data in conjunction with the consolidated
      financial statements and "Management's Discussion and Analysis of Financial
      Condition and Results of Operations" appearing elsewhere in this
      report.


For
                Year Ended
              December
                31,2007
            
            2006Gross
                revenues
            
            $
            42,105,387
            
            $
            23,991,950Income
                from operations
            
            $
            8,414,402
            
            $
            6,184,212Net
                income
            
            $
            6,875,369
            
            $
            4,787,874Total
                assets
            
            $
            32,640,238
            
            $
            14,770,599Total
                liabilities
            
            $
            862,718
            
            $
            600,027





44




The
      Company's consolidated audited financial statements for the fiscal years ended
      December 31, 2007 and 2006, together with the report of the independent
      certified public accounting firm thereon and the notes thereto, are presented
      beginning at page F-1.




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




None.





**ITEM
      8A. CONTROLS AND PROCEDURES**





***Disclosure
      Controls and Procedures***





As
      required by Rule 13a-15 under the Exchange Act, our management, including our
      Chief Executive Officer and our Chief Financial Officer, evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures as of December 31, 2007.





Disclosure
      controls and procedures refer to controls and other procedures designed to
      ensure that information required to be disclosed in the reports we file or
      submit under the Securities Exchange Act is recorded, processed, summarized
      and
      reported within the time periods specified in the rules and forms of the SEC
      and
      that such information is accumulated and communicated to our management,
      including our chief executive officer and chief financial officer, as
      appropriate, to allow timely decisions regarding required disclosure. In
      designing and evaluating our disclosure controls and procedures, management
      recognizes that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives, and management is required to apply its judgment in evaluating
      and
      implementing possible controls and procedures.




Management
      conducted its evaluation of disclosure controls and procedures under the
      supervision of our chief executive officer and our chief financial officer.
      Based on that evaluation, management concluded that because
      of the material weakness in internal control over financial reporting described
      below, our
      disclosure controls and procedures were not effective as of December 31,
      2007.




***Management’s
      Report on Internal Control over Financial Reporting***





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
      under the Securities Exchange Act. Because of its inherent limitations, internal
      control over financial reporting may not prevent or detect misstatements. Also,
      projections of any evaluation of effectiveness to future periods are subject
      to
      the risk that controls may become inadequate because of changes in conditions,
      or that the degree of compliance with the policies and procedures may
      deteriorate.




45





A
      material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a
      deficiency, or a combination of deficiencies, in internal control over financial
      reporting, such that there is a reasonable possibility that a material
      misstatement of our annual or interim financial statements will not be prevented
      or detected on a timely basis. A significant deficiency is a deficiency, or
      a
      combination of deficiencies, in internal control over financial reporting that
      is less severe than a material weakness, yet important enough to merit attention
      by those responsible for oversight of the company's financial
      reporting.





Management
      assessed the effectiveness of our internal control over financial reporting
      as
      of December 31, 2007. In making this assessment, we used the criteria set
      forth by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO) in Internal Control - Integrated Framework. Based on our assessment,
      we determined that, as of December 31, 2007, our internal control over
      financial reporting was effective based on those criteria.




During
      our assessment of the effectiveness of internal control over financial reporting
      as of December 31, 2007, management identified significant deficiencies in
      U.S. GAAP expertise and internal audit functions. The current staff in the
      accounting department of the subsidiaries is relatively new to the U.S. GAAP
      and
      internal control procedures and requires additional training. The significant
      deficiency in internal audit function is due to the Company’s lacking of
      qualified resources to perform internal audit functions.




In
      view
      of the foregoing weaknesses and deficiencies, we have taken measures and plan
      to
      continue to take measures to remediate these deficiencies as soon as practicable
      including the following measures:




(i)  We
      have
      committed to engage a senior financial executive from the U.S., who has
      extensive experience in internal control and US GAAP reporting compliance,
      to
      take charge of the financial reporting process and training of the accounting
      staff. In addition, we have also committed to recruit an experienced accounting
      manager from the U.S. to strengthen the Company’s financial reporting and
      internal control functions.




(ii)  We
      have
      committed to the establishment of effective internal audit functions, however,
      due to the scarcity of qualified candidates with extensive experience in US
      GAAP
      reporting and accounting in the region, we were not able to hire sufficient
      internal audit resources before end of 2007. However, we will increase our
      search for qualified candidates with assistance from recruiters and through
      referrals; and




We
      believe that the foregoing steps will remediate the significant deficiency
      identified above, and we will continue to monitor the effectiveness of these
      steps and make any changes that our management deems appropriate.





Our
      management does not believe that this significant deficiency is a material
      weakness or that it had a material effect on our financial condition or results
      of operations or caused our financial statements as of and for the year ended
      December 31, 2007 to contain a material misstatement.





*Auditor
      Attestation*


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 management’s report in this annual
      report.





***Changes
      in Internal Controls over Financial Reporting***




Except
      as
      described above, there were no changes in our internal controls over financial
      reporting during the fourth quarter of fiscal year 2007 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting .




46





**ITEM
      8B.**  **OTHER
      INFORMATION**





None.





**PART
      III**





**ITEM
      9.**  **DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
      GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.**





The
      following are the officers and directors of the Company as of the date of this
      report. Some of our officers and directors are residents of the PRC. As a
      result, it may be difficult for investors to effect service of process within
      the United States upon them or to enforce judgments obtained in the United
      States courts against them in the PRC.




Name
            
            Age
            
            PositionSenshan
                Yang
            
            46
            
            Chief
                Executive Officer and DirectorMinhua
                Liu
            
            40
            
            Executive
                Vice President and DirectorHuizhen
                Yu
            
            29
            
            Chief
                Financial OfficerRobert
                Adler
            
            73
            
            Director,
                Chairman of the Audit CommitteeDr.
                Rachel Gong
            
            40
            
            Director,
                member of the Audit Committee and member of the Compensation
                CommitteeDr.
                Yanfang Chen
            
            44
            
            Director,
                member of the Compensation
                Committee





*Senshan
      Yang.* Mr.
      Senshan Yang has been our Chief Executive Officer since February 8, 2006 and
      a
      Director since February 10, 2006. He has been Chairman and General Manager
      of
      Konzern since July 2000. Prior to that, Mr. Yang had served as a Manager
      Associate for Guangdong Maoming Petroleum Corporation, a state-owned company,
      for nearly 20 years. Mr. Yang obtained his bachelor’s degree from South China
      University of Technology in 1981.





*Minhua
      Liu.* Ms.
      Minhua Liu has been our Executive Vice President since February 8, 2006 and
      a
      Director since February 10, 2006. She has been Vice General Manager of Konzern
      since July 2000. Prior to that, she had served as a company herbalist doctor
      for
      China Military Science Qiming Research Center in Beijing, responsible for all
      the health care of all staff of the research center. Ms. Liu obtained her
      bachelor’s degree from Beijing College of Traditional Chinese Medicine in
      1992.





*Huizhen
      Yu.* Ms.
      Huizhen Yu has been our Chief Financial Officer since February 10, 2006. She
      has
      been Chief Financial Officer of Konzern since October 2002. Ms. Yu was an
      accountant for Shenzhen Liuge Bicycle Equipment Co., Ltd from 2000 until 2002,
      and an accountant for Guangzhou JoinWin Consultancy Ltd. from 1997 to 2000.
      She
      obtained her bachelor’s degree from Jinan University in Guangzhou and Middle
      Level Accountant Certificate in China in 2002.





*Robert
      Adler.* Mr.
      Robert Adler has been our director and Chairman of the Audit Committee since
      May
      9, 2006. He is a private investor. During the past five years, Mr. Adler has
      been an investment adviser with UBS Financial Services and most recently he
      taught financial English for a semester in Shanghai University of Finance and
      Economics. Mr. Adler's prior experience includes terms as a managing director
      for ING Furman Selz Asset Management, Vice President and Senior Investment
      Officer of BHF Securities Corp and DG Bank, New York Branch and Vice President
      of Kuhn, Loeb & Co. Mr. Adler obtained a B.A. degree from Swarthmore College
      and studied at NYU School of Business Administration. Mr. Adler is a member
      of
      Institute of Chartered Financial Analysts and a member of the New York Society
      of Security Analysts.




47





*Dr.
      Rachel Gong.* Dr. Gong
      has been our director, member of the Audit Committee and member of the
      Compensation Committee since May 9, 2006. She is an investment principal of
      Morningside, an international investment group based in Hong Kong and has served
      in that position since 2004. Prior to that, Dr. Gong served as an investment
      banker for RBC Capital Markets from 2001 to 2004 and a senior auditor for
      PricewaterhouseCoopers from 1999 to 2001. Dr. Gong obtained a Ph.D in Medical
      Science (Biochemistry and Molecular Biology) from University of South Florida
      College of Medicine and an MBA from Johnson Graduate School of Management of
      Cornell University.





*Dr.
      Yanfang Chen.* Dr. Chen
      has been our director and member of the Compensation Committee since May 9,
      2006. He is currently an assistant professor, of Department of Pharmacology
      & Toxicology, Wright State University Boonshoft School of Medicine. During
      the past five years, he has been research associate, senior research associate
      and research assistant professor at the Department of Pharmacology &
Toxicology, Wright State University Boonshoft School of Medicine. He obtained
      a
      Ph.D degree from Medical Science Center, Peking University in China in 1995
      and
      worked for Guangdong Provincial People's Hospital from 1995 to 1999. Dr. Chen
      is
      a professional member of American Heart Association and American Stroke
      Association, and a member of American Society for Pharmacology and Experimental
      Therapeutics. He has numerous publications in his field of
      research.




**Family
      Relationships**





Minhua
      Liu (our shareholder, Director and Executive Vice President) and Junhua Liu,
      a
      shareholder, are sister and brother. There are no other family relationships
      among our executive officers, directors and principal shareholders.




**Audit
      Committee**





The
      Board
      of Directors created the audit committee in May 2006. The Audit Committee is
      to
      oversee the Company's accounting and financial reporting processes, as well
      as
      its financial statement audits. The committee recommends to the Board of
      Directors the selection of the Company’s outside auditors and reviews their
      procedures for ensuring their independence with respect to the services
      performed for the Company.





The
      Audit
      Committee is comprised of two directors: Dr. Rachel Gong and Mr. Robert Adler.
      Mr. Adler is the Chairman of the Audit Committee. In the opinion of the Board
      of
      Directors, Dr. Gong and Mr. Adler are independent of management and free of
      any
      relationship that would interfere with their exercise of independent judgment
      as
      members of this committee and they are independent
      as defined by the rules of the Nasdaq Stock Market .
      The
      Board of Directors has adopted a written charter for the Audit Committee.





**Audit
      Committee Financial Expert**





The
      Board
      of Directors has determined that we have an Audit Committee financial expert,
      as
      defined under Item 407(d)(5)(i) of Regulation S-K, serving on our Audit
      Committee. Robert Adler is our Audit Committee financial expert, and he is
      independent as defined by the rules of the Nasdaq Stock Market.





**Compensation
      Committee**





In
      May
      2006, the Board of Directors established a Compensation Committee to oversee
      executive compensation and related corporate governance matters. Dr. Yanfang
      Chen and Dr. Rachel Gong currently serve on the Compensation Committee. During
      the year ended December 31, 2007, the compensation committee met one
      time.




**Section
      16(a) Beneficial Reporting Compliance**




Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's
      directors and executive officers, and persons who own more than 10% of a
      registered class of our equity securities, to file with the SEC initial reports
      of ownership and reports of changes in ownership of common stock and other
      of
      our equity securities. These insiders are required by SEC regulations to furnish
      us with copies of all Section 16(a) forms they file, including Forms 3, 4 and
      5.
      To our knowledge, during the calendar year ended December 31, 2007, there were
      no late filings.




48




**Code
      of Ethics**




We
      have
      not yet adopted a Code of Ethics for our executive officers. We intend to adopt
      a Code of Ethics applying to such persons during the fiscal year 2008.




**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**




**Summary
      of Executive Compensation**





The
      following table reflects the compensation paid to our principal executive
      officer and executive officers who have earned more than $100,000 in any of
      the
      previous two fiscal years.





**Summary
      Compensation Table**




Name
                and Principal Position
            
            
            Year
            
            
            Salary
              (cash
              or
                non-cash)
              ($)
            
            
            Bonus
              (cash
              or
                non-cash)
              ($)
            
            
            Stock
                Awards
              ($)
            
            
            Option
                Awards
              ($)
            
            
            Non-Equity
                Incentive Plan Compensation
              ($)
            
            
            Non-
              Qualified
                Deferred Compensation Earnings
              ($)
            
            
            All
                Other Compensation
              ($)
            
            
            Total
              ($)Senshan
                Yang, CEO
            
            
            2007
              2006
            
            
            100,000
              13,147
            
            
            —
              —
            
            
            —
              —
            
            
            —
              —
            
            
            ——
            
            
            —
              —
            
            
            —
              —
            
            
            100,000
              13,147Meiyi
                Xia, former Vice President*
            
            
            2007
              2006
            
            
            58,500
              78,000
            
            
            —
              —
            
            
            —
              —
            
            
            63,045
              31,480
            (2)(2)
            
            ——
            
            
            —
              —
            
            
            —
              —
            
            
            121,545
              109,480





*
      Meiyi
      Xia has resigned from the Company effective September 2007.




**Compensation
      Discussion and Analysis**





Overview
      of Compensation Program and Philosophy





We
      have
      three executive officers, Senshan Yang, Minhua Liu,and Huizhen Yu. The Board
      of
      Directors is comprised of Senshan Yang, Minhua Liu, Robert Adler, Dr. Rachel
      Gong and Dr. Yanfang Chen. Dr. Rachel Gong and Dr. Yanfang Chen also serve
      as
      our Compensation Committee. No executive officer had total compensation
      exceeding $100,000 for the fiscal year ended December 31, 2007.





The
      Board
      of Director’s goal in determining compensation levels is to adequately reward
      the efforts and achievements of executive officers for the management of the
      Company. We have no pension plan, non-equity incentive plan or deferred
      compensation arrangement. We do, however, have a long-term equity incentive
      plan.




49





Long-Term
      Equity Incentive Plan





In
      January, 2006, we adopted the 2006 Long-Term Incentive Plan covering 1,575,000
      shares of common stock. The plan provides for the grant of incentive and
      non-qualified options, stock grants, stock appreciation rights and other
      equity-based incentives to employees, including officers, and consultants.
      The
      plan is administered by our Compensation Committee.




We
      have
      not used a compensation consultant in any capacity but believe that our
      executive officer compensation package is comparable to similar businesses
      in
      our location of operations.





None
      of
      our executive officers has an employment agreement. In the absence of an
      employment agreement, the relevant PRC Labor Laws would apply and provide for
      employment-related benefits and terms to the executive officers, including
      but
      not limited to: the term of employment, the provision of labor-related
      insurance, termination for cause, termination on 30 days’ notice and termination
      without notice and benefits.





Outstanding
      Equity Awards at Fiscal Year End





The
      following table reflects the unexercised options, stock that has not vested
      and
      equity incentive plan awards for each named executive officer outstanding as
      of
      the end of the fiscal year ended December 31, 2007:





Option
                Awards
            
            Stock
                AwardsName
            
            Number
                of Securities Underlying Unexercised Options
              (#)
              Exerciseable
            
            Number
                of Securities Underlying Unexercised Options
              (#)
              Unexerciseable
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options
              (#)
            
            Option
                Exercise Price
              ($)
            
            Option
                Expiration Date
            
            Number
                of Shares or Units of Stock That Have Not Vested
              (#)
            
            Market
                Value of Shares of Units of Stock that Have Not Vested
              ($)
            
            Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested
              (#)
            
            Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested
              ($)Meiyi
                Xia
            
            
            *430,000
            (1)
            
            —
            
            
            —
            
            $
            1.25
            
            
            3/31/2011
            
            
            —
            
            
            
            
            
            —
            
            
            —
            
            
            —




(1)
            The
                vesting date was March 22, 2006.(2)
            The
                amounts in this column represent the compensation cost of stock options
                awarded by the Compensation Committee granted in 2006, except that
                these
                amounts do not include any estimate of forfeitures. The grant date
                fair
                value of option awards granted were determined in accordance with
                Statement of Financial Accounting Standards No. 123R (SFAS123(R))
                and are
                recognized as compensation cost over the requisite service period.
                The
                amount recognized for these awards was calculated using the Black
                Scholes
                option-pricing model, and our 2006 Long Term Incentive Plan is described
                under this Item 10.*
            Meiyi
                Xia has resigned as the vice president in September 2007, the Board
                of
                Directors has decided to grant Miss Xia all the options that was
                not
                vested through September 2007, therefore, all options were vested
                immediately upon resignation




50




Director
      Compensation




The
      following table reflects the compensation of directors for the Company’s fiscal
      year ended December 31, 2007:





Name
                of Director
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards
              ($)
            
            Option
                Awards
              ($)
            
            Non-Equity
                Incentive Plan Compensation
              ($)
            
            Change
                in Pension value and Nonqualified Deferred Compensation
                Earnings
            
            All
                Other Compensation
              ($)
            
            Total
              ($)Robert
                Adler
            
            
            10,000
            
            
            —
            
            
            5,497
            (1)
            
            —
            
            
            —
            
            
            —
            
            
            15,497
            **Rachel
                Gong
            
            
            10,000
            
            
            —
            
            
            5,497
            (1)
            
            —
            
            
            —
            
            
            —
            
            
            15,497
            **Yanfang
                Chen
            
            
            10,000
            
            
            —
            
            
            5,497
            (1)
            
            —
            
            
            —
            
            
            —
            
            
            15,497
            **





(1)
            The
                amounts in this column represent the compensation cost of stock options
                awarded by the Compensation Committee granted in 2007, except that
                these
                amounts do not include any estimate of forfeitures. The grant date
                fair
                value of option awards granted were determined in accordance with
                Statement of Financial Accounting Standards No. 123R (SFAS123(R))
                and are
                recognized as compensation cost over the requisite service period.
                The
                amount recognized for these awards was calculated using the Black
                Scholes
                option-pricing model, and our 2006 Long Term Incentive Plan is described
                under this Item 10.*
            The
                compensation committee has approved to increase the yearly compensation
                to
                $12,000 in 2008.





In
      accordance with the 2006 Long Term Incentive Plan, independent directors are
      not
      eligible for discretionary options. However, each newly elected independent
      director receives, at the time of his or her election, a five-year option to
      purchase 30,000 shares of common stock at the market price on the date of his
      or
      her election. In addition, the plan provides for the annual grant of an option
      to purchase 5,000 shares of common stock on April 1 st of each
      year, commencing April 1, 2007 to each independent director.





Also,
      each independent director shall receive an annual retainer of $10,000. There
      is
      no other specific compensatory arrangement for committee services, services
      as
      chairman of the board or a committee and meeting attendance. All the directors
      have the same compensation terms.




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





The
      following table sets forth as of the date of this report, certain information
      with respect to the beneficial ownership of our voting securities by (i) each
      person or group owning more than 5% of the Company’s securities, (ii) each
      director, (iii) each executive officer and (iv) all executive officers and
      directors as a group. The information presented in the table is based on
      15,164,887 shares of common stock outstanding as of the date of this
      report.




Name
                and
            
            
            
            Amount
                andAddress
                of
            
            Title
                of
            
            Nature
                of Beneficial
            
            Percent
                ofBeneficial
                Owner
            
            Class
            
            Ownership
            
            Class
                (1)Barron
                Partners L.P.
            
            
            Common
                Stock
            
            
            2,574,393
            (4)
            
            17.0
            %730
                Fifth Avenue, 9th FloorNew
                York, New York 10019Senshan
                Yang
            
            
            Common
                Stock
            
            
            3,265,000
            
            
            21.5
            %Director
                and CEORoom
                702 Guangri Mansion No. 9South
                Wuyang Xincheng SiGuangzhouChinaMinhua
                Liu
            
            
            Common
                Stock
            
            
            2,612,000
            
            
            17.2
            %Director
                and Executive Vice PresidentRoom
                702 Guangri Mansion No. 9South
                Wuyang Xincheng SiGuangzhouChinaJunhua
                Liu
            
            
            Common
                Stock
            
            
            653,000
            
            
            4.3
            %Room
                702 Guangri Mansion No. 9South
                Wuyang Xincheng SiGuangzhouChinaHuizhen
                Yu
            
            
            Common
                Stock
            
            
            50,000
            (3)
            
            0.3
            %Corporate
                Financial OfficerRoom
                702 Guangri Mansion No. 9South
                Wuyang Xincheng SiGuangzhouChinaMeiyi
                Xia (former officer)
            
            
            Common
                Stock
            
            
            580,000
            (1)
            
            3.8
            %Vice
                President24A
                Jefferson PlazaPrinceton,NJ
                08540Lin
                Li (former officer)
            
            
            Common
                Stock
            
            
            347,500
            (2)
            
            2.3
            %24A
                Jefferson PlazaPrinceton,
                NJ 08540Robert
                Adler
            
            
            Common
                Stock
            
            
            30,000
            (3)
            
            0.2
            %Directorc/o
                24A Jefferson PlazaPrinceton,NJ
                08540Rachel
                Gong
            
            
            Common
                Stock
            
            
            30,000
            (3)
            
            0.2
            %Directorc/o
                24A Jefferson PlazaPrinceton,NJ
                08540Yanfang
                Chen
            
            
            Common
                Stock
            
            
            30,000
            
            
            0.2
            %Directorc/o
                24A Jefferson PlazaPrinceton,NJ
                08540All
                Directors and Officers of the Company
            
            
            Common
                Stock
            
            
            7,597,500
            
            
            50.1
            %as
                a group







(1)
            Includes
                430,000 options to purchase our common stock with an exercise price
                of
                $1.25 per share.




51




(2)
            Includes
                310,000 options to purchase our common stock with an exercise price
                of
                $1.25 per share.





(3)
            Options
                to purchase our common stock with an exercise price of $1.25 per
                share.(4)
            This
                number includes 171,480 shares of common stock that Barron Partners
                owns
                as of March 25, 2008 and 2,402,913 shares of common stock issuable
                upon
                conversion of our Series A preferred stock and exercise of our Series
                B
                warrants. However, the Series A preferred stock may not be converted
                and
                the Series B warrants may not be exercised if such conversion or
                exercise
                would result in Barron Partners owning more than 4.9% of our outstanding
                common stock. This limitation may not be
                waived.




Except
      as
      otherwise indicated each person has the sole power to vote and dispose of all
      shares of common stock listed opposite his name. Each person is deemed to own
      beneficially shares of common stock which are issuable upon exercise or warrants
      or options or upon conversion of convertible securities if they are exercisable
      or convertible within 60 days of the date of this report.




In
      July,
      2007, the Company issued a total of 57,500 shares of common stock for services
      to Hayden Communications International, Inc. and Donnelly Consulting DBA
      pursuant to an Investor Relations Consulting Agreement with Hayden
      Communications dated October 11, 2006, for public relations consulting
      services.




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





On
      February 8, 2006, we purchased 928,000 shares of common stock from Capital
      Markets, LLC for $200,000. The purchase price was funded from the sale of the
      Series A Convertible Preferred Stock and Investor Warrants in the February
      2006
      private placement. At the time of the purchase, Capital Markets owned
      approximately 97.3% of our outstanding common stock.




52





Contemporaneously
      with the February 2006 private placement, we issued an aggregate of 750,000
      shares for services, including 150,000 shares to Meiyi Xia and 37,500 shares
      to
      Lin Li. In connection with the February 2006 private placement, we paid a
      consulting fee of $100,000 to AiDi Financial Investment LLC. Ms. Xia was Chief
      Executive Officer of AiDi Financial Investment, LLC.




As
      of
      December 31, 2006, there was $30,000 in cash advances outstanding to
      shareholders of the company for cash advances for business expenses. Such
      amounts are unsecured, non interest bearing and have no fixed terms of
      repayment.




**Director
      Independence**





Mr.
      Robert Adler, Dr. Rachel Gong and Dr. Yanfang Chen are independent directors
      pursuant to the definition of “independent director” under the Rules of NASDAQ,
      Marketplace Rule 4200(a)(15). Mr. Adler and Dr. Gong are members of our audit
      committee. Dr. Chen and Dr. Gong are members of our compensation committee.
      They
      are independent as defined under the rules above referenced.




**ITEM
      13.**  **EXHIBITS**





**Number**
            
            **Description**2.1
            
            Stock
                Exchange Agreement, dated as of February 8, 2006, among the Company
                and
                the former stockholders of Konzern (1);3.1
            
            The
                restated certificate of incorporation filed with the Delaware Secretary
                of
                State in July 2006 (2);3.2
            
            By-laws
                of the Company (3);4.1
            
            Specimen
                of Common Stock Certificate (5);4.2
            
            Specimen
                of Preferred Stock Certificate (4);4.3
            
            Certificate
                of Designation for the Series A Convertible Preferred Stock
                (1);4.4
            
            Form
                of warrant issued to investors in the February 2006 private placement
                (1);10.1
            
            Preferred
                stock purchase agreement dated February 8, 2006, between the Registrant
                and the investors in the February 2006 private placement (1);10.2
            
            Registration
                rights agreement dated February 8, 2006, between the Registrant and
                the
                investors in the February 2006 private placement
                (1);




53




10.3
            
            Registration
                rights provisions pursuant to the stock exchange agreement
                (1);21.1
            
            List
                of Subsidiaries;23.1
            
            Consent
                of Moore Stephens Wurth Fraser and Torbet, LLP dated March 31,
                200831.1
            
            Certification
                of Senshan Yang pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002;31.2
            
            Certification
                of Huizhen Yu pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a),
                as
                adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002;32.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002;99.4
            
            2006
                Long-term incentive plan (1).




Footnotes:





(1).
            Incorporated
                by reference from the exhibit to the Current Report on Form 8-K filed
                by
                the Company with the Commission on February 14,
                2006.




(2).
            Incorporated
                by reference from the appendix B to the Information Statement on
                14C filed
                by the Company with the Commission on July,
                2006.





(3).
            Incorporated
                by reference from the exhibit to the Form 10-SB filed by the Company
                with
                the Commission on June 23, 2005.




(4).
            Incorporated
                by reference from the exhibit to the annual report on Form 10-KSB
                filed by
                the Company with the Commission on March 31,
                2006.


(5).
              Incorporated
                    by reference from the exhibit to the annual report on Form 10-KSB
                    filed by
                    the Company with the Commission on April 3,
                    2007.


**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





The
      following lists fees billed by Moore Stephens Wurth Frazer and Torbet, LLP
      (“MSWFT”), current auditors for the Company, for the years ended December 31,
      2007 and 2006:




2007
            
            
            2006Audit
                Fees
            
            $
            90,000
            
            $
            70,000Audit
                Related Fees
            
            
            -
            
            
            -Tax
                Fees
            
            
            -
            
            
            -All
                Other Fees
            
            
            -
            
            
            -




In
      the
      event that we should require substantial non-audit services, the audit committee
      would pre-approve such services and fees.




54


**SIGNATURES**





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


CHINA
                MEDICINE CORPORATIONDate:
                March 31, 2008
            By:
            /s/
                Senshan YangSenshan
                Yang, CEO(principal
                executive officer)




By:
              /s/
                    Huizhen YuHuizhen
                    Yu, CFO(principal
                    financial officer and principal accounting
                    officer)


Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, this Report has been signed below by the following persons on behalf
      of
      the Registrant and in the capacities and on March 31, 2008.




/s/
                Minhua Liu
              Minhua
                Liu, Director





/s/
                Senshan Yang
              Senshan
                  Yang, Director





/s/
                Robert AdlerRobert
                  Adler, Director





/s/
                Rachael Gong
              Rachael
                  Gong, Director





/s/
                Yanfang Chen
              Yanfang
                  Chen, Director







55






**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders of
 China
        Medicine Corporation
 
 We
        have
        audited the accompanying consolidated balance sheets of China Medicine
        Corporation and Subsidiaries as of December 31, 2007 and 2006, and the related
        consolidated statements of income and other comprehensive income, stockholders’
equity, and cash flows for each of the years in the two-year period ended
        December 31, 2007. China Medicine Corporation’s management is responsible for
        these financial statements. Our responsibility is to express an opinion on
        these
        financial statements based on our audits.
 
 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 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 Medicine Corporation and
        Subsidiaries as of December 31, 2007 and 2006, and the results of its operations
        and cash flows for each of the years in the two-year period ended December
        31,
        2007 in conformity with accounting principles generally accepted in the United
        States of America.
 
 /S/
        Moore
        Stephens Wurth Frazer and Torbet, LLP
 
 Walnut,
        California
 March
        18,
        2008
  F-1
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
        BALANCE SHEETS
 AS
        OF
        DECEMBER 31, 2007 AND 2006
  2007
              
              2006A
                  S S E T SCURRENT
                  ASSETSCash
              
              $
              5,767,774
              
              $
              371,480Accounts
                  receivable, trade, net of allowance for doubtful accounts of $55,640
                  and
                  $34,021 as of December 31, 2007 and December 31, 2006,
                  respectively
              
              
              13,626,347
              
              
              7,034,911Inventories
              
              
              3,948,460
              
              
              1,900,467Advances
                  to suppliers
              
              
              5,983,277
              
              
              3,126,100Other
                  current assets
              
              
              81,221
              
              
              42,136Total
                  current assets
              
              
              29,407,079
              
              
              12,475,094EQUIPMENT,
                  net
              
              
              1,388,919
              
              
              1,215,311OTHER
                  ASSETSDeferred
                  expenses
              
              
              678,237
              
              
              951,312Intangible
                  assets, net
              
              
              1,166,003
              
              
              128,882Total
                  other assets
              
              
              1,844,240
              
              
              1,080,194Total
                  assets
              
              $
              32,640,238
              
              $
              14,770,599L
                  I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T
                  YCURRENT
                  LIABILITIESAccounts
                  payable, trade
              
              $
              76,907
              
              $
              188,877Other
                  payables - related parties
              
              
              -
              
              
              30,000Other
                  payables and accrued liabilities
              
              
              70,343
              
              
              23,265Customer
                  deposits
              
              
              203,281
              
              
              17,980Taxes
                  payable
              
              
              468,184
              
              
              295,902Liquidated
                  damages payable
              
              
              44,003
              
              
              44,003Total
                  liabilities
              
              
              862,718
              
              
              600,027MINORITY
                  INTEREST
              
              
              893,337
              
              
              908,480SHAREHOLDERS'
                  EQUITYPreferred
                  stock, $0.0001 par value; 10,000,000 shares authorized, 111,649
                  and
                  2,340,000 shares issued and outstanding at December 31, 2007 and
                  2006,
                  respectively
              
              
              11
              
              
              234Common
                  stock, $0.0001 par value; 100,000,000 shares authorized,14,821,641
                  and 8,160,000 shares issued and outstandingat
                  December 31, 2007 and 2006, respectively
              
              
              1,482
              
              
              816Paid-in
                  capital
              
              
              12,560,078
              
              
              4,396,971Contribution
                  receivable
              
              
              -
              
              
              (961,500
              )Statutory
                  reserves
              
              
              2,191,230
              
              
              1,345,206Retained
                  earnings
              
              
              14,008,587
              
              
              7,979,242Accumulated
                  other comprehensive income
              
              
              2,122,795
              
              
              501,123Total
                  shareholders' equity
              
              
              30,884,183
              
              
              13,262,092Total
                  liabilities and shareholders' equity
              
              $
              32,640,238
              
              $
              14,770,599
  See
          report of independent registered public accounting firm.
 The
          accompanying notes are an integral part of this consolidated
          statement.
  F-2
 
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006
 
 2007
              
              2006REVENUESProduct
                  sales
              
              $
              39,247,130
              
              $
              20,772,783Medical
                  formula sales
              
              
              2,858,257
              
              
              3,219,167Total
                  revenues
              
              
              42,105,387
              
              
              23,991,950COST
                  OF GOOD SOLD
              
              
              29,708,088
              
              
              15,017,100GROSS
                  PROFIT
              
              
              12,397,299
              
              
              8,974,850OPERATING
                  EXPENSESResearch
                  and development
              
              
              651,990
              
              
              294,080Selling,
                  general and administrative
              
              
              3,330,907
              
              
              1,565,288Reverse
                  acquisition
              
              
              -
              
              
              931,270Total
                  operating expenses
              
              
              3,982,897
              
              
              2,790,638INCOME
                  FROM OPERATIONS
              
              
              8,414,402
              
              
              6,184,212OTHER
                  INCOME (EXPENSE), NET
              
              
              15,423
              
              
              (199,945
              )INCOME
                    BEFORE INCOME TAXESAND MINORITY INTEREST
              
              
              8,429,825
              
              
              5,984,267PROVISION
                  FOR INCOME TAXES
              
              
              1,649,114
              
              
              1,229,688INCOME
                  BEFORE MINORITY INTEREST
              
              
              6,780,711
              
              
              4,754,579MINORITY
                  INTEREST
              
              
              94,658
              
              
              33,295NET
                  INCOME
              
              
              6,875,369
              
              
              4,787,874OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation adjustment
              
              
              1,621,672
              
              
              399,991COMPREHENSIVE
                  INCOME
              
              $
              8,497,041
              
              $
              5,187,865EARNINGS
                  PER SHAREBasic
              
              $
              0.56
              
              $
              0.65Diluted
              
              $
              0.50
              
              $
              0.63WEIGHTED
                  AVERAGE SHARES OUTSTANDINGBasic
              
              
              12,346,208
              
              
              7,352,082Diluted
              
              
              13,658,007
              
              
              7,653,584
  See
        report of independent registered public accounting firm.
 The
          accompanying notes are an integral part of this consolidated
          statement.
  F-3
 
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006
 
 AccumulatedRetained Earnings
              
              otherPreferred Stock
              
              Common Stock
              
              Paid-in
              
              Contribution
              
              Statutory
              
              
              
              comprehensiveShares
              
              Par Value
              
              Shares
              
              Par Value
              
              capital
              
              receivable
              
              reserves
              
              Unrestricted
              
              income
              
              TotalsBALANCE,
                  December 31, 2005
              
              
              -
              
              $
              -
              
              
              6,530,000
              
              $
              653
              
              $
              120,347
              
              $
              -
              
              $
              722,909
              
              $
              3,813,665
              
              $
              101,132
              
              $
              4,758,706Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,787,874
              
              
              
              
              
              4,787,874Adjustment
                  of statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              622,297
              
              
              (622,297
              )
              
              
              
              
              -Reverse
                  acquisition, February 8, 2006
              
              
              
              
              
              
              
              
              1,028,000
              
              
              103
              
              
              (32,501
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (32,398
              )Shares
                  redeemed in connection with
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -reverse
                  acquisition
              
              
              
              
              
              
              
              
              (928,000
              )
              
              (93
              )
              
              (167,509
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (167,602
              )Shares
                  issued for acquisition services
              
              
              
              
              
              
              
              
              750,000
              
              
              75
              
              
              607,425
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              607,500Issuance
                  of preferred stock
              
              
              3,120,000
              
              
              312
              
              
              
              
              
              
              
              
              3,782,688
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,783,000Preferred
                  stock converted to common stock
              
              
              (780,000
              )
              
              (78
              )
              
              780,000
              
              
              78
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Stock
                  Options Granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              86,521
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              86,521Contribution
                  receivable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (961,500
              )
              
              
              
              
              
              
              
              
              
              
              (961,500
              )Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              399,991
              
              
              399,991BALANCE,
                  December 31, 2006
              
              
              2,340,000
              
              $
              234
              
              
              8,160,000
              
              $
              816
              
              $
              4,396,971
              
              $
              (961,500
              )
              $
              1,345,206
              
              $
              7,979,242
              
              $
              501,123
              
              $
              13,262,092Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,875,369
              
              
              
              
              
              6,875,369Adjustment
                  of statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              846,024
              
              
              (846,024
              )
              
              
              
              
              -Preferred
                  stock converted to common stock
              
              
              (2,228,351
              )
              
              (223
              )
              
              2,283,351
              
              
              228
              
              
              (5
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Warrants
                  exercised for cash @ $1.70
              
              
              
              
              
              
              
              
              1,694,040
              
              
              169
              
              
              2,879,699
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,879,868Warrants
                  exercised for cash @ $1.75
              
              
              
              
              
              
              
              
              1,621,750
              
              
              162
              
              
              2,837,900
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,838,062Warrants
                  exercised for cash @ $2.43
              
              
              
              
              
              
              
              
              725,000
              
              
              73
              
              
              1,761,677
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,761,750Stock
                  options exercised for cash @ $1.25
              
              
              
              
              
              
              
              
              280,000
              
              
              28
              
              
              349,972
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              350,000Stock
                  option granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              154,470
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              154,470Common
                  stock issued for services
              
              
              
              
              
              
              
              
              57,500
              
              
              6
              
              
              179,394
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              179,400Contribution
                  receivable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              961,500
              
              
              
              
              
              
              
              
              
              
              
              961,500Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,621,672
              
              
              1,621,672BALANCE,
                  December 31, 2007
              
              
              111,649
              
              $
              11
              
              
              14,821,641
              
              $
              1,482
              
              $
              12,560,078
              
              $
              -
              
              $
              2,191,230
              
              $
              14,008,587
              
              $
              2,122,795
              
              $
              30,884,183
 
 See
          report of independent registered public accounting firm.
 The
          accompanying notes are an integral part of this consolidated
          statement.
 F-4
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006
 
 2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              6,875,369
              
              $
              4,787,874Adjustments
                  to reconcile net income to cashused
                  in operating activities:Minority
                  interest
              
              
              (94,658
              )
              
              (33,295
              )Depreciation
                  and amortization
              
              
              303,957
              
              
              162,051Bad
                  debt expenses
              
              
              18,495
              
              
              -Loss
                  on sale of assets
              
              
              -
              
              
              15,732Stock
                  issued for services
              
              
              179,400
              
              
              607,500Amortization
                  of stock option compensation
              
              
              154,470
              
              
              86,521Amortization
                  of deferred expenses
              
              
              325,687
              
              
              -Loss
                  from investment
              
              
              -
              
              
              110,982Change
                  in operating assets and liabilitiesAccounts
                  receivable, trade
              
              
              (5,879,829
              )
              
              (4,514,763
              )Inventories
              
              
              (1,840,170
              )
              
              (498,624
              )Advances
                  to suppliers
              
              
              (2,535,589
              )
              
              (2,933,832
              )Other
                  current assets
              
              
              (34,728
              )
              
              (129,096
              )Accounts
                  payable, trade
              
              
              (120,129
              )
              
              17,275Other
                  payables - related parties
              
              
              (30,000
              )
              
              30,000Other
                  payables and accrued liabilities
              
              
              45,119
              
              
              (73,246
              )Customer
                  deposits
              
              
              176,763
              
              
              (19,140
              )Taxes
                  payable
              
              
              145,730
              
              
              121,850Liquidated
                  damages payable
              
              
              -
              
              
              44,003Net
                  cash used in operating activities
              
              
              (2,310,113
              )
              
              (2,218,208
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of equipment
              
              
              (389,588
              )
              
              (825,787
              )Purchase
                  of intangible asset
              
              
              -
              
              
              (703
              )Net
                  cash used in investing activities
              
              
              (389,588
              )
              
              (826,490
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Payments
                  on short-term loans
              
              
              -
              
              
              (94,094
              )Proceeds
                  from issuance of preferred stock
              
              
              -
              
              
              3,783,000Payments
                  for reverse acquisition
              
              
              -
              
              
              (32,398
              )Proceeds
                  from exercise of warrants and options
              
              
              7,829,681
              
              
              -Cash
                  paid on shares redeemed
              
              
              -
              
              
              (167,602
              )Net
                  cash provided by financing activities
              
              
              7,829,681
              
              
              3,488,906EFFECT
                  OF EXCHANGE RATE ON CASH
              
              
              266,314
              
              
              (164,692
              )INCREASE
                  IN CASH
              
              
              5,396,294
              
              
              279,516CASH,
                  beginning of year
              
              
              371,480
              
              
              91,964CASH,
                  end of year
              
              $
              5,767,774
              
              $
              371,480
  See
        report of independent registered public accounting firm.
 The
          accompanying notes are an integral part of this consolidated
          statement.
 F-5
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 **Note
        1 - Organization**
 
 Organization
 
 China
        Medicine Corporation (the "Company") is a Delaware corporation, incorporated
        on
        February 10, 2005 under the name Lounsberry Holdings III, Inc., for the purpose
        of acquiring, or merging with, an operating business. On May 10, 2006, the
        Company changed its corporate name to China Medicine Corporation.
 
 Effective
        February 8, 2006, the Company entered into a Stock Exchange Agreement ("Exchange
        Agreement") with Guangzhou Konzern Medicine Co., Ltd. ("Konzern"). Pursuant
        to
        the Exchange Agreement, the Company, at closing, acquired all of the capital
        of
        Konzern from Konzern’s three principal shareholders (“Konzern Stockholders”) in
        exchange for 6,530,000 shares of the Company's common stock. For accounting
        purposes, the acquisition of Konzern was treated as a recapitalization of
        Konzern with Konzern as the acquirer. The historical financial statements
        prior
        to February 8, 2006 are those of Konzern. Contemporaneously with the reverse
        acquisition, the Company redeemed 928,000 shares of common stock from its
        then
        principal stockholder who is not affiliated with the Konzern Stockholders
        or any
        member of the investor group for $167,602 and paid off loans from a related
        party for $32,398. The 928,000 shares purchased constituted approximately
        90.3%
        of the 1,028,000 shares of common stock outstanding prior to the issuance
        of the
        shares of common stock pursuant to the Exchange Agreement. The Company issued
        750,000 shares of common stock as disclosed in Note 13.
 
 Konzern
        was privatized from a state-owned medicine company on July 25, 2000 in
        Guangzhou, People's Republic of China (PRC). The registered capital was
        $121,000. The Company has increased Konzern's registered capital by $2,300,000
        with the proceeds received from the sale of preferred stock (see Note 13).
        The
        business license provides for a 24 year term and will end on September 2,
        2024.
 
 Konzern
        US Holding Corporation (“Konzern Holding”) was registered in New Jersey on
        January 12, 2006 for the purpose of distributing and marketing drugs, medical
        supplies and medical equipment. Konzern Holding is wholly owned by Konzern
        with
        100,000 shares of stock authorized. Konzern Holding had no operating activities.
        As of December 31, 2007, Konzern Holding received $200,000 from Konzern as
        initial investment.
 
 On
        July
        7, 2006, Konzern entered into a Joint Cooperation Agreement with Guangzhou
        Ji'nan Science & Technology Industrial Group Co., Ltd. ("JSIG") and Mr.
        Dongsheng Yao, an unrelated third party, to jointly form Guangzhou Co-win
        Bioengineering Co., Ltd. (“Co-win”) for the purpose of development and
        application of aflatoxin-detoxifizyme ("ADTZ"). Mr. Dongsheng Yao became
        board
        of director after the formation of Co-win. Konzern does not have any material
        relationship with JSIG or Mr. Yao other than this Agreement. The business
        licenses were approved by Guangzhou Commercial and Administrative Bureaus
        on
        October 27, 2006. The registered capital is RMB 25,000,000, approximately
        $3,200,000 with a 2-year term from June 5, 2006 to June 5, 2008; Co-win will
        renew its business license when it becomes expired in June 2008. As of December
        31, 2007, Konzern owns a 70% ownership in Co-win.
  F-6
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
          31, 2007
 Operating
          Activities
 
 The
        Company’s business operations consist of the wholesale of prescription and over
        the counter medicines, traditional Chinese medicines, which are medicines
        derived from Chinese herbs, dietary supplements, medical instruments and
        the
        sale of medical formula.
 
 **Note
        2 - Summary of significant accounting policies**
 
 Basis
        of presentation
 
 The
        consolidated financial statements of the Company reflect its wholly-owned
        subsidiary, Konzern, its 70% owned subsidiary, Co-win, both located in the
        PRC,
        and its wholly-owned subsidiary Konzern US Holding. The consolidated financial
        statements have been presented as if the equity Exchange Agreement of Konzern
        occurred at the beginning of 2006 due to common management and
        ownership.
 
 The
        accompanying financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        All
        material transactions and balances have been eliminated in the
        consolidation.
 
 Use
        of
        estimates
 
 In
        preparing financial statements in conformity with generally accepted accounting
        principles, management is required to make estimates and assumptions that
        affect
        the reported amounts of assets and liabilities and the disclosure of contingent
        assets and liabilities at the date of the financial statements and revenues
        and
        expenses during the reported period. Actual results could differ from those
        estimates.
 
 Cash
        and concentration of risk
 
 For
        purposes of the cash flow statements, the Company considers all highly liquid
        investments with original maturities of three months or less at the time
        of
        purchase to be cash equivalents. Cash includes cash on hand and demand deposits
        in accounts maintained with state owned banks within PRC and the United
        States.
 
 The
        Company's operations may be adversely affected by significant political,
        economic and social uncertainties in China. Although the Chinese government
        has
        pursued economic reform policies in the past, there is no assurance that
        the
        Chinese government will continue to pursue such policies or that such policies
        may not be significantly altered, especially in the event of a change in
        leadership, social or political disruption or unforeseen circumstances affect
        China's political, economic and social conditions. There is also no guarantee
        that the Chinese government's pursuit of economic reforms will be consistent
        or
        effective.
  Financial
        instruments, which subject the Company to concentration of credit risk, consist
        of cash. The Company maintains balances at financial institutions which,
        from
        time to time, may exceed Federal Deposit Insurance Corporation insured limits
        for the bank that is located in the Unites States, no deposits with the state
        owned banks within the PRC are covered by insurance. As of December 31, 2007
        and
        2006, the Company had deposits in excess of federally insured limits total
        of
        $4,987,180 and $225,467 ,
        respectively. The Company has not experienced any losses in such accounts
        and
        believes it is not exposed to any significant risks on its cash in bank
        accounts.
  F-7
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
          31, 2007
  For
        the
        years ended December 31, 2007 and 2006, five suppliers accounted for
        approximately 56 %
        and
        60%, respectively, of the Company's purchases. Advances to these five suppliers
        represent 40% of the Company’s total advances to suppliers as of December 31,
        2007. As of December 31, 2007 and 2006, no accounts payable was due to these
        suppliers.
 
 For
        the
        years ended December 31, 2007 and 2006, five customers accounted for
        approximately 40% and 59%, respectively, of the Company's total sales. The
        accounts receivable balance of these five customers amounted $3,219,275,
        representing 24% of the total accounts receivable as of December 31,
        2007.
 
 For
        the
        years ended December 31, 2007 and 2006, two and three products accounted
        for
        approximately 27% and 23% of the Company’s total sales,
        respectively.
 
 Accounts
        receivable, trade
 
 The
        Company extends unsecured credit to its customers. Management reviews its
        accounts receivable on a regular basis to determine if the bad debt allowance
        is
        adequate for potential uncollectible amounts due to deterioration of customer
        operations. The allowance for doubtful accounts as of December 31, 2007 and
        2006
        amounted to $55,640 and $34,021 ,
        respectively.
 
 2007
              
              2006Trade
                  Accounts Receivable
              
              $
              13,681,987
              
              $
              7,068,932Allowance
                  for bad debts
              
              
              (55,640
              )
              
              (34,021
              )Trade
                  Accounts Receivable, Net
              
              $
              13,626,347
              
              $
              7,034,911
 
 December
                  31, 2007Beginning
                  allowance for doubtful accounts
              
              $
              34,021Additions
                  charged to bad debt expense
              
              
              18,495Foreign
                  currency translation adjustments
              
              
              3,124Ending
                  allowance for doubtful accounts
              
              $
              55,640
 
 Inventories
 
 Inventories
        are stated at the lower of cost or market value, cost is determined using
        the
        weighted average method.
  F-8
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 Equipment
 
 Equipment
        is stated at the actual cost of acquisition less accumulated depreciation
        and
        amortization. Depreciation and amortization are provided for in amounts
        sufficient to relate the cost of depreciation of assets to operations over
        their
        estimated service lives, principally on a straight-line basis. The estimated
        lives used in determining depreciation are:
 
 Leasehold
                  improvements
              
              
              5
                  yearsFurniture
              
              
              5
                  yearsEquipment
              
              
              5
                  yearsMotor
                  vehicles
              
              
              5
                  - 8 years
 
 The
        residual value is estimated to be 5% of the actual cost.
 
 The
        cost
        and related accumulated depreciation of assets sold or otherwise retired
        are
        eliminated from the accounts and any gain or loss is included in the statement
        of operations. Maintenance, repairs and minor renewals are expensed as
        incurred.
 
 Intangibles
 
 Under
        the
        Statement of Accounting Standards ("SFAS") No.142, "Goodwill and Other
        Intangible Assets", all goodwill and certain intangible assets determined
        to
        have indefinite lives will not be amortized but will be tested for impairment
        at
        least annually. Intangible assets other than goodwill will be amortized over
        their useful lives and reviewed for impairment in accordance with SFAS No.
        144,
        "Accounting for Impairment or Disposal of Long-Lived Assets".
 
 The
        Company acquired technology during 2007 to manufacture aflatoxin-detoxifizyme
        ("ADTZ") totaling $1,028,250. The Company will begin amortizing costs once
        manufacturing begins. The Company expects to manufacture the products in
        September 2008.
 
 The
        Intangible assets as of December 31, 2007 and 2006, net of amortization,
        amounted to $1,166,003 and $128,882, respectively.
 
 Impairment
        of long-lived assets
 
 Per
        SFAS
        No. 144, long-lived assets are analyzed for impairment. Impairment of long-lived
        assets by the Company at least annually, or more often whenever there is
        an
        indication that the carrying amount of the asset may not be recovered.
        Recoverability of these assets is determined by comparing the forecasted
        undiscounted cash flows generated by those assets to the assets' net carrying
        value. The amount of impairment loss, if any, is measured as the difference
        between the net book value of the assets and the estimated fair value of
        the
        related assets.
 
 The
        Company periodically evaluates the recoverability of long-lived assets by
        measuring the carrying amount of the assets against the estimated undiscounted
        future cash flows associated with them. At the time such flows of certain
        long-lived assets are not sufficient to recover the carrying value of such
        assets, the assets are adjusted to their fair values.
  F-9
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 Revenue
        recognition
 
 The
        Company recognizes revenue when all four of the following criteria are met:
        (1)
        persuasive evidence has been received that an arrangement exists; (2) delivery
        of the products and/or services has occurred; (3) the selling price is fixed
        or
        determinable; and (4) collectibility is reasonably assured. The Company follows
        the provisions of SAB No. 104 which sets forth guidelines in the timing of
        revenue recognition based upon factors such as passage of title, installation,
        payments and customer acceptance. Any amounts received prior to satisfying
        the
        Company's revenue recognition criteria is recorded as deferred
        revenue.
 
 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. This VAT may be
        offset by VAT paid by the Company on raw materials and other materials included
        in the cost of producing their finished product.
 
 VAT
        on
        sales and VAT on purchases amounted to $6,315,142 and $5,243,211 for the
        year
        ended December 31, 2007 and $2,762,861 and $2,670,170 for the year ended
        December 31, 2006, respectively. Sales and purchases are recorded net of
        VAT
        collected and paid as the Company acts as an agent for the government. VAT
        taxes
        are not impacted by the income tax holiday.
 
 Shipping
        and handling costs related to costs of goods sold are included in selling,
        general and administrative costs and totaled $282,891 and $233,314 for the
        years
        ended December 31, 2007 and 2006.
 
 Advertising
        costs
 
 The
        Company expenses the cost of advertising as incurred in selling, general
        and
        administrative costs. For the years ended December 31, 2007 and 2006,
        advertising expenses amounted to $411,300 and $66,595, respectively.
 
 Research
        and development costs
 
 Research
        and development costs are expensed as incurred. The costs of material and
        equipment that are acquired or constructed for research and development
        activities, and have alternative future uses, either in research and
        development, marketing, or sales, are classified as property and equipment
        or
        depreciated over their estimated useful lives.
 
 Foreign
        currency translation
  The
        reporting currency of the Company is the US dollar. The Company uses their
        local
        currency, Renminbi (RMB), as their functional currency. Results of operations
        and cash flow are translated at average exchange rates during the period,
        and
        assets and liabilities are translated at the unified exchange rate as quoted
        by
        the People’s Bank of China at the end of the period. Because cash flows are also
        translated at average translation rates, amounts reported on the statement
        of
        cash flows will not necessarily agree with changes in the corresponding balances
        on the balance sheet. Translation adjustments resulting from this process
        are
        included in accumulated other comprehensive income in the statement of
        shareholders’ equity.
  F-10
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
          31, 2007
  Translation
        adjustments amounted to $2,122,795 and $501,123 as
        of December 31, 2007 and December 31, 2006, respectively. Asset and liability
        accounts at December 31, 2007 were translated at 7.29 RMB to $1.00 USD as
        compared to 7.82 RMB at December 31, 2006. Equity accounts were stated at
        their
        historical rate. The average translation rates applied to income statements
        accounts for the years ended December 31, 2007 and 2006 were 7.59 RMB and
        7.98
        RMB, respectively.
 
 Transaction
        gains and losses that arise from exchange rate fluctuations on transactions
        denominated in a currency other than the functional currency are included
        in the
        results of operations as incurred. No material transaction gains and losses
        for
        the years ended December 31, 2007, and 2006. Historically, the Company has
        not
        entered any currency trading or hedging transactions, although there is no
        assurance that the Company will not enter into such transactions in the
        future.
 
 Income
        taxes
 
 The
        Company records income taxes pursuant to Statement of Financial Accounting
        Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires
        the recognition of deferred income tax liabilities and assets for the expected
        future tax consequences of temporary differences between income tax basis
        and
        financial reporting basis of assets and liabilities. Provision for income
        taxes
        consist of taxes currently due plus deferred taxes. There are no deferred
        tax
        amounts at December 31, 2007 and December 31, 2006.
 
 The
        Charge for taxation is based on the results for the year as adjusted for
        items,
        which are non-assessable or disallowed. It is calculated using tax rates
        that
        have been enacted or substantially enacted by the balance sheet
        date.
  Deferred
        tax is 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 probably that
        taxable profit will be available against which deductible temporary differences
        can be utilized. Deferred tax is calculated at the tax rates that are expected
        to apply to the period when the asset is realized or the liability is settled.
        Deferred tax is charged or credited in the income statement, except when
        it
        related to items credited or charged directly to equity, in which case the
        deferred tax is also dealt with 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.
  F-11
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 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 had no
        affect on the Company’s financial statements.
 
 China
        Medicine Corporation was incorporated in the United States and has incurred
        net
        operating losses for income tax purposes for the years ended December 31,
        2007
        and 2006. The net operating loss carry forwards for United States income
        taxes
        amounted to $1,799,132 which may be available to reduce future years’ taxable
        income. These carry forwards will expire, if not utilized, through 2027.
        Management believes that the realization of the benefits from these losses
        appears uncertain due to the Company’s limited operating history and continuing
        losses for United States income tax purposes. Accordingly, the Company has
        provided a 100% valuation allowance on the deferred tax asset benefit to
        reduce
        the asset to zero. The valuation allowance at December 31, 2007 was $612,000.
        The net change in the valuation allowance for the year ended December 31,
        2007
        was an increase of $409,000. Management will review this valuation allowance
        periodically and make adjustments as warranted.
  Fair
        value of financial instruments
 
 The
        carrying amounts of the Company's financial instruments (including accounts
        receivable, shareholder loans and notes payable) approximate fair value due
        to
        the relatively short period to maturity of these instruments.
 
 Stock-based
        compensation
 
 The
        Company adopted the Statement of Financial Accounting Standards No. 123 (revised
        2004), "Share-Based Payments," ("FAS123R"), which established standards for
        the
        accounting for transactions in which an entity exchange its equity instruments
        for goods or services. This statement require a public entity to measure
        the
        cost of employee services received in exchange for an award of equity
        instruments based on the grant-date fair value of the award (with limited
        exceptions). That cost will be recognized over the period during which an
        employee is required to provide service in exchange for the award.
  Earnings
        per share
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share is computed
        by dividing income available to common stockholders by the weighted average
        common shares outstanding during the period. Diluted earnings per share takes
        into account the potential dilution that could occur if securities or other
        contracts to issue common stock were exercised and converted into common
        stock.
  F-12
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 The
        following is a reconciliation of the basic and diluted earnings per share
        computations for the years ended December 31:
 
 2007
              
              2006Net
                  income
              
              $
              6,875,369
              
              $
              4,787,874Shares
                  of common stock and common stock
                  equivalents:Weighted
                  average shares used in basic computation
              
              
              12,346,208
              
              
              7,352,082Diluted
                effect of stock options, warrants, and preferred stocks
              
              
              1,311,799
              
              
              301,502Weighted
                  average shares used in diluted computation
              
              
              13,658,007
              
              
              7,653,584Earnings
                  per share:Basic
              
              $
              0.56
              
              $
              0.65Diluted
              
              $
              0.50
              
              $
              0.63
  Reclassifications
 
 Certain
        prior period amounts have been reclassified to conform to current period
        presentation. These reclassifications have no effect on net income or cash
        flows.
 
 Recently
        issued accounting pronouncements
 
 In
        September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
        which
        addresses the measurement of fair value by companies when they are required
        to
        use a fair value measure for recognition or disclosure purposes under GAAP.
        SFAS
        No. 157 provides a common definition of fair value to be used throughout
        GAAP
        which is intended to make the measurement of fair value more consistent and
        comparable and improve disclosures about those measures. SFAS No. 157 will
        be
        effective for an entity's financial statements issued for fiscal years beginning
        after November 15, 2007. The Company does not expect the adoption of SFAS
        157 to
        have a material impact on the Company’s financial position or results of
        operations.
 
 In
        February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
        Assets and Financial Liabilities—including an amendment of FASB Statement No.
        115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
        instruments and certain other items at fair value that  are
        not
        currently required to be measured at fair value. The objective of FAS 159
        is to
        provide opportunities to mitigate volatility in reported earnings caused
        by  measuring
        related assets and liabilities differently without having to apply hedge
        accounting provisions. FAS 159 also establishes presentation and
        disclosure  requirements
        designed to facilitate comparisons between companies that choose different
        measurement attributes for similar types of assets and liabilities.
        SFAS  159
        will
        be effective in the first quarter of fiscal 2009. The Company is evaluating
        the
        impact that this statement will have on its consolidated financial  statements.
  F-13
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 In
        June
        2007, the
        FASB
        issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
        Payments for Goods or Services Received for use in Future Research and
        Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
        advance payments for goods or services that used or rendered for research
        and
        development activities should be expensed when the advance payment is made
        or
        when the research and development activity has been performed. The Company
        adopted FSP EITF 07-3 and expensed the research and development as
        incurred.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements - an amendment of Accounting Research Bulletin
        No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
        ownership interests in subsidiaries held by parties other than the parent,
        the
        amount of consolidated net income attributable to the parent and to the
        noncontrolling interest, changes in a parent’s ownership interest and the
        valuation of retained non-controlling equity investments when a subsidiary
        is
        deconsolidated. The Statement also establishes reporting requirements that
        provide sufficient disclosures that clearly identify and distinguish between
        the
        interests of the parent and the interests of the non-controlling owners.
        SFAS
        160 is effective for fiscal years beginning after December 15, 2008. The
        Company
        has not determined the effect that the application of SFAS 160 will have
        on its
        consolidated financial statements.
 
 In
        December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
        Combinations* ,
        was
        issued. SFAS No. 141R replaces SFAS No. 141, *Business
        Combinations.* SFAS
        141R
        retains the fundamental requirements in SFAS 141 that the acquisition method
        of
        accounting (which SFAS 141 called the *purchase
        method* )
        be used
        for all business combinations and for an acquirer to be identified for each
        business combination. SFAS 141R requires an acquirer to recognize the assets
        acquired, the liabilities assumed, and any noncontrolling interest in the
        acquiree at the acquisition date, measured at their fair values as of that
        date,
        with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
        required the cost of an acquisition to be allocated to the individual assets
        acquired and liabilities assumed based on their estimated fair values. SFAS
        141R
        also requires the acquirer in a business combination achieved in stages
        (sometimes referred to as a step acquisition) to recognize the identifiable
        assets and liabilities, as well as the noncontrolling interest in the acquiree,
        at the full amounts of their fair values (or other amounts determined in
        accordance with SFAS 141R). SFAS 141R applies prospectively to business
        combinations for which the acquisition date is on or after the beginning
        of the
        first annual reporting period beginning on or after December 15, 2008. An
        entity
        may not apply it before that date. The Company is currently evaluating the
        impact that adopting SFAS No. 141R will have on its financial
        statements.
  F-14
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 **Note
        3 –Contribution
        receivable**
 
 On
        July
        7, 2006, Konzern, entered into a Joint Cooperation Agreement (the “Agreement”)
        with JSIG and an individual, Mr. Dongsheng Yao, to jointly form a new Chinese
        company for the purpose of development and application of aflatoxin-detoxifizyme
        ("ADTZ"). Konzern has no material relationships with JSIG or Mr. Yao other
        than
        the Agreement.
 
 Pursuant
        to the Agreement, JSIG and Mr. Yao will transfer four patents relating to
        ADTZ
        into the joint venture company for which they will each hold a 15% equity
        interest in the joint venture company. In addition, JSIG and Mr. Yao will
        be
        paid a total of approximately $125,000, as a technology contribution fee
        from
        the joint venture company. The agreement provides that the Company will invest
        a
        total of approximately $2.2 million, of which $840,000 has been paid and
        the
        balance, according to the Chinese government requirements, is due within
        two
        years. Based on the agreement the Company will receive a 70% equity interest
        in
        the joint venture company.
 
 The
        contribution receivable represented the technology required to be contributed
        by
        JSIG and Mr. Yao to Co-win based on the agreement. The four patents’ application
        and ownership were transferred to Co-win in 2007 for the value of $1.02 million
        (RMB 7.5 million).
 
 The
        agreement provides that the joint venture entity will have the intellectual
        property rights to any products developed by the joint venture pursuant to
        the
        agreement. The Company requires government approval as to the organization
        and
        business license for the joint venture company. The business license for
        the
        operation of the joint venture was issued by Guangzhou Commercial and
        Administrative Bureaus on October 27, 2006.
 
 **Note
        4 - Inventories**
 
 Inventories
        consisted only finished goods as of December 31, 2007 and 2006, inventories
        balance as of the following:
 
 December
                  31, 2007
              
              December
                  31, 2006Chemical
                  Medicine
              
              $
              3,948,460
              
              $
              1,897,789Traditional
                  Chinese Medicine
              
              
              -
              
              
              2,678Totals
              
              $
              3,948,460
              
              $
              1,900,467
 
 **Note
        5 - Equipment**
 
 Equipment
        consisted of the following:
 
 December 31, 2007
              
              
              December 31, 2006Furniture
                  and fixtures
              
              $
              174,086
              
              $
              205,182Equipment
              
              
              1,259,434
              
              
              1,076,368Motor
                  vehicles
              
              
              405,382
              
              
              227,933Leasehold
                  improvement
              
              
              181,027
              
              
              -Total
              
              
              2,019,929
              
              
              1,509,483Less
                  accumulated depreciation
              
              
              (631,010
              )
              
              (294,172
              )Equipment,
                  net
              
              $
              1,388,919
              
              $
              1,215,311
  F-15
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 Depreciation
        expense for the years ended December 31, 2007 and 2006 amounted to $303,883
        and
        $162,015 respectively.
 
 **Note
        6 - Customer deposits**
 
 The
        Company requires their customers to deposit monies with the Company when
        they
        place an order for their products. The Company does not pay interest on these
        amounts. Customer deposits amounted to $203,281 and $17,980 as of December
        31,
        2007 and December 31, 2006, respectively.
 
 **Note
        7 - Taxes**
 
 The
        Company is organized in the United States and no tax benefit is expected
        from
        tax credits in the future.
 
 Beginning
        January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
        existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
        (“FIEs”).
 The
        key
        changes are:
 
 a.
              The
                  new standard EIT rate of 25% will replace the 33% rate currently
                  applicable to both DES and FIEs, except for High Tech companies
                  who pays a
                  reduced rate of 15%;
 
 b.
              Companies
                  established before March 16, 2007 will continue to enjoy tax holiday
                  treatment approved by local government for a grace period of either
                  for
                  the next 5 years or until the tax holiday term is completed, whichever
                  is
                  sooner. These companies will pay the standard tax rate as defined
                  in point
                  “a” above when the grace period expires.
 
 The
        Company and its subsidiaries were established before March 16, 2007 and
        therefore are qualified to continue enjoying the reduced tax rate as described
        before. Since the detailed guidelines of the new tax law were not publicized
        yet, the Company can not determine what the new tax rate (15% or 25%) will
        be
        applicable to the Company and its subsidiaries after the end of their respective
        tax holiday terms.
 
 Under
        the
        Income Tax Laws of PRC, the Company is generally subject to an income tax
        at an
        effective rate of 33% (30% state income taxes plus 3% local income taxes)
        on
        income reported in the statutory financial statements after appropriate tax
        adjustments, unless the enterprise is located in a specially designated region
        where it allows foreign enterprises a two-year income tax exemption and a
        50%
        income tax reduction for the following three years.
  The
        Company’s two subsidiaries, Konzern and Co-win are located and are doing
        business in China. Konzern was approved as a foreign Joint-venture enterprise
        in
        2004 and as a wholly-owned foreign enterprise in 2006. Konzern has an income
        tax
        exemption for 2004 and 2005 and a 50% reduction on the income tax rate for
        2006,
        2007 and 2008. Co-win has not obtained the approval for the tax exemption
        in
        2006, and was subjected to an effective rate of 33%.
  F-16
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
          31, 2007
 The
        estimated tax savings for the years ended December 31, 2007 and 2006 amounted
        $1,649,114 and $1,299,688 respectively. The net effect on earnings per share if the income tax had
        been
        applied would decrease earnings per share from $0.57 to $0.44
        for the year ended December 31, 2007 and from $0.65 to $0.48
        for the year ended December 31, 2006, respectively.
 
 The
        provision for income taxes for the years ended December 31, 2007 and 2006
        consisted of the following:
 
 2007
              
              2006Provision
                  for China Income Tax
              
              $
              1,499,195
              
              $
              1,117,898Provision
                  for Local Tax
              
              
              149,919
              
              
              111,790Total
              
              $
              1,649,114
              
              $
              1,229,688
 
 The
        following table reconciles the U.S. statutory rates to the Company's effective
        tax rate for the years ended December 31:
 
 2007
              
              2006U.S.
                  Statutory rates
              
              
              34.0
              %
              
              34.0
              %Foreign
                  income not recognized in USA
              
              
              (34.0
              )
              
              (34.0
              )China
                  income taxes
              
              
              33.0
              
              
              33.0Income
                  tax exemption
              
              
              (16.5
              )
              
              (16.5
              )Effective
                  tax rate
              
              
              16.5
              %
              
              16.5
              %
 
 Taxes
        payable consisted of the following at December 31:
 
 December 31, 2007
              
              December 31, 2006Income
                  taxes payable
              
              $
              61,908
              
              $
              (15,380
              )Value
                  added tax
              
              
              405,264
              
              
              310,795Other
                  income tax
              
              
              1,012
              
              
              487Total
              
              $
              468,184
              
              $
              295,902
 
 **Note
        8 – Related
        party transactions**
 
 Amounts
        due to related parties totaled $0 and $30,000 as of December 31, 2007 and
        December 31, 2006, respectively. Those amounts were generated from making
        cash
        advances to or from the shareholders for ordinary business expenses, the
        Company
        paid off the balance in 2007 by cash.
  F-17
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 **Note
        9 - Commitments and contingencies**
 
 The
        Company enters into a non-cancelable purchase commitment with its vendor.
        As of
        December 31, 2007, the Company was obligated under the non-cancelable commitment
        to purchase products amounting to $10,282,500. The Company has experienced
        no
        losses on these purchase commitments over the years.
 
 Total
        contribution payable to Co-win amounted approximately $1.3 million (RMB 9.7
        million) will be contributed to the joint venture in June 2008. Since Co-win
        is
        a consolidated entity, contribution payable was eliminated on the consolidated
        financial statements.
 
 The
        Company leases its facilities under short-term and long-term, non-cancelable
        operating lease agreements expiring through June 2010. The non-cancelable
        operating lease agreement states that the Company pays certain operating
        expenses applicable to the leased premises.
 
 As
        of
        December 31, 2007, the future minimum annual lease payments required are
        as
        follows:
 
 Year
                  Ending December 31,
              
              Amount2008
              
              $
              98,8152009
              
              
              50,0692010
              
              
              5,758Thereafter
              
              
              -
 
 Total
        rent expense for the years ended December 31, 2007 and 2006 amounted to $115,067
        and $74,690, respectively.
 
 **Notes
        10 – Supplemental disclosure of cash flows**
 
 The
        Company received four patents for the value of $1.02 million (RMB 7.5 million)
        from its minority shareholders and has been offset to the contribution
        receivable.
 
 During
        the period ended December 31, 2007, the Company expensed $144,220 for stock
        options to employees and independent directors.
 
 The
        Company paid $0 and $1,975 interest for the years ended December 31, 2007
        and
        2006, respectively.
 
 The
        Company paid $1,573,872 and $1,244,743 income taxes for the years ended December
        31, 2007 and 2006, respectively.
 
 **Note
        11 - Statutory reserves**
 
 The
        laws
        and regulations of the People’s Republic of China require that before an
        enterprise distributes profits to its partners, it must first satisfy all
        tax
        liabilities, provide for losses in previous years, and make allocations,
        in
        proportions determined at the discretion of the board of directors, after
        the
        statutory reserve. The statutory reserves include surplus reserve fund and
        the
        enterprise fund and represent
        restricted retained earnings.
  F-18
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 Surplus
        reserve fund
 
 The
        Company is required to transfer 10% of its net income, as determined in
        accordance with the PRC accounting rules and regulations, to a statutory
        surplus
        reserve fund until such reserve balance reaches 50% of the Company’s registered
        capital.
 
 The
        transfer to this reserve must be made before distribution of any dividend
        to
        shareholders. For
        the
        years ended December 31, 2007 and
        2006,
        the Company transferred $846,024 and $622,297, respectively, to this reserve.
        The surplus reserve fund is non-distributable other than during liquidation
        and
        can be used to fund previous years’ losses, if any, and may be utilized for
        business expansion or converted into share capital by issuing new shares
        to
        existing shareholders in proportion to their shareholding or by increasing
        the
        par value of the shares currently held by them, provided that the remaining
        reserve balance after such issue is not less than 25% of the registered
        capital.
 
 Enterprise
        fund
 
 The
        enterprise fund may be used to acquire plant and equipment or to increase
        the
        working capital to expend on production and operation of the business. No
        minimum contribution is required and the company did not make any contribution
        to this fund for the years ended December 31, 2007.
  **Note
        12 - Retirement benefit plans**
 
 Regulations
        in the PRC require the Company to contribute to a defined contribution
        retirement plan for all permanent employees. The contribution is based on
        a
        percentage required by the local government and the employees' current
        compensation. The Company contributed $50,529 and $38,575 for the years ended
        December 31, 2007 and 2006, respectively.
 
 **Note
        13 - Shareholders’ equity**
 
 Sale
        of preferred stock
 
 Contemporaneously
        with the reverse acquisition, the Company entered into a Preferred Stock
        Purchase Agreement (“PSPA”), dated February 8, 2006, with Barron Partners L.P.,
        Ray and Amy Rivers, JTROS, Steve Mazur and William Denkin pursuant to which
        the
        Company issued and sold an aggregate of 3,120,000 shares of its Series A
        Convertible Preferred Stock, a newly-created series of preferred stock, and
        warrants to purchase 3,694,738 shares of common stock at $1.75 per share
        and
        3,694,738 shares of common stock at $2.50 per share.
  The
        Series A Convertible Preferred Stock is convertible at the option of the
        holder
        at any time, into 3,120,000 shares of common stock, subject to adjustment
        set
        forth in the PSPA. No dividends are payable on the preferred stock and dividends
        may not be paid on the common stock while the preferred stock is outstanding.
        The preferred stock is not redeemable but has a liquidation preference of
        $1.25
        per share. Holders of the preferred stock are not entitled to vote, except
        on
        matters that would adversely affect their rights.
  F-19
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 The
        warrants have a term of five years and are exercisable by the holder at any
        time
        within the term. With certain exceptions, if the Company issues common stock
        at
        a price, or warrants or other convertible securities with an exercise or
        conversion price, which is less than the exercise price of the warrants,
        the
        exercise price of the warrants will be reduced to the sales price, exercise
        price or conversion price, as the case maybe, of such other securities. However,
        in such circumstances, the number of shares obtainable on exercise of the
        warrants is not changed.
 
 The
        conversion rate of the Series A Preferred Stock and the exercise price of
        the
        warrants (but not the number of shares obtainable on exercise) are subject
        to
        adjustment in certain events, including the failure to achieve specified
        levels
        of adjusted earnings before interest, taxes, depreciation and amortization
        or
        fully diluted pre-tax income per share, computed as set forth in the applicable
        agreements. Because pre-tax targets were not met, the conversion price of
        the
        preferred stock has been reduced from $1.25 to $1.22 resulting in approximately
        80,000 additional common shares to be issued. The exercise price of the warrants
        has been reduced from $1.75 to $1.70. There has been no effect on the financial
        statements for this change.
 
 On
        April
        23, 2007, the Company and the holders of the preferred shares and warrants
        executed a Waiver and Agreement that reduced the conversion price for preferred
        stock and the exercise price of the warrants by 3% of the original conversion
        amounts. The new agreement also requires the Company to redistribute the
        750,000
        shares issued to AiDi Financial Investment LLC, if recovered, as follows:
        50% to
        the Company’s senior executives and 50% to the holders of preferred shares.
        Further, the Series A Preferred Stock cannot be converted and the warrants
        cannot be exercised if such conversion or exercise would result in the holder
        and its affiliates owning more than 4.9% of the then outstanding number of
        shares of common stock. The Company evaluated the impact of this amendment
        and
        determined there is no effect on the financial statements, given that both
        instruments were originally accounted for as equity instruments and that
        a
        variation in the conversion and exercise prices was contemplated under the
        original terms of the instruments, the implementation of that condition does
        not
        require any separate accounting recognition.
 
 The
        Company valued the warrants at the time they were issued using the
        Cox-Ross-Rubinstein binomial model, based on the exercise price and term
        of the
        warrants and the following assumptions: fair value of common stock - $0.81;
        volatility - 50%; interest rate - 4.55%. Because there was no public market
        for
        the Company's common stock, the Company estimated the expected volatility
        of the
        Company's common stock over the term of the warrants based on a review of
        the
        historical volatility of other publicly-traded companies considered by
        management to be comparable to the Company. The fair value of the common
        stock
        and the Series A Preferred Stock was estimated based on the implicit value
        paid
        by the investors. As a result, based on these factors, the Series A Preferred
        Stock was valued at $2,518,615 and the warrants were valued at $1,381,385,
        reflecting the aggregate gross proceeds paid by the investors of
        $3,900,000.
  F-20
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
          31, 2007
  Under
        a
        Registration Rights Agreement with the investors, the Company was required
        to
        file a registration statement registering the common stock issuable upon
        conversion of the series A preferred stock and exercise of the warrants.
        The
        registration statement was filed on April 13, 2006, and was declared effective
        October 17, 2006. The Company incurred liquidated damages under the Registration
        Rights Agreement of $44,003 for the period from August 8, 2006 through October
        17, 2006; these amounts are accrued liabilities and were recorded as interest
        expense. Additionally, the Company is required to maintain its effectiveness
        until the expiration of two years after the date of the agreement or until
        the
        investors hold less than 10% of the registerable securities or more liquidated
        damages of approximately $19,000 per month will be incurred.
  The
        Company reviewed the terms of the Series A Preferred Stock and the Warrants,
        in
        accordance with FAS 133 and EITF Issue 00-19. The conversion option related
        to
        the Series A Preferred Stock is an embedded derivative instrument but the
        risks
        and rewards of that embedded derivative are considered to be clearly and
        closely
        related to the risks and rewards of the host instrument and, accordingly,
        the
        embedded derivative instrument has not been bifurcated. The Company has reviewed
        the requirements of EITF Issue 00-19 and concluded that the Warrants should
        be
        accounted for as equity instruments. Accordingly, the net proceeds from the
        sale
        of the preferred stock and warrants totaling $3,783,000, representing the
        gross
        proceeds received of $3,900,000, net of $117,000 of commissions, was recorded
        as
        equity.
 
 Common
        stock
 
 In
        2006,
        the Company issued 750,000 shares of common stock to individuals for services
        performed and of which 150,000 shares were issued to Ms. Meiyi Xia, the former
        officer of the Company, and 37,500 shares were issued to Ms. Lin Li, who
        is a
        officer of the Company. There is no established market for the Company's
        common
        stock. The value of the stocks was originally estimated $0.32 per share,
        totaled
        of $238,769. The Company re-evaluated the fair value of the common stock
        by
        determining the fair value that would equate the aggregate fair values of
        the
        Series A Preferred Stock and the Warrants to the gross cash proceeds received
        from the third-party investors, keeping all other valuation factors constant.
        Therefore, the Company valued the common stock at $0.81 per share for a total
        of
        $607,500 for the 750,000 shares issued, which amount was expensed during
        the
        year ended December 31, 2006.
 
 For
        the
        year ended December 31, 2007, holders of preferred stock converted 2,228,351
        shares of Series A Convertible Preferred Stock into 2,283,351 shares of common
        stock, par value $0.0001 per share. For the year ended December 31, 2006,
        the
        Company converted 780,000 shares of Series A Convertible Preferred Stock
        into
        780,000 shares of common stock, par value $0.0001 per share.
 
 For
        the
        year ended December 31, 2007, 1,621,750 shares of warrants were exercised
        at
        $1.75 per share, 1,694,040 shares of warrants were exercised at $1.70 per
        share,
        and 725,000 shares of warrants were exercised at 2.43 per share for the year
        ended December 31, 2007. The Company received total of $7,479,681 cash from
        the
        exercise of warrants as of December 31, 2007.
  F-21
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 The
        Company entered into Investor Relations Consulting Agreement with Hayden
        Communication International, Inc. (“HC”) dated October 11, 2006, pursuant to
        which HC is to provide the Company public relations consulting services for
        certain consideration including the issuance of 43,125 shares of the Company’s
        common stock. On July 19, 2007, these shares have been issued to HC. The
        issuance of the shares is exempt from registration pursuant to Section 4(2)
        and
        regulation D promulgated under the Securities Act of 1933, as amended (the
‘1933
        Act”) and should contain a standard 1933 Act restrictive legend. Therefore,
        the Company valued the common stock at $3.12 per share for a total of $179,400
        for the 43,125 shares issued, $179,400 was expensed for the year ended December
        31, 2007.
 
 Stock
        options
 
 On
        February 8, 2006, contemporaneously with the reverse acquisition, the Company
        granted options to purchase 430,000 shares of common stock; 390,000 shares
        were
        granted to officers and other key employees of Konzern. On March 22, 2006,
        the
        Company granted options to purchase an additional 850,000 shares of common
        stock
        to two officers. The options all have an exercise price of $1.25 per share,
        which was the conversion price of the series A preferred stock and not less
        than
        the fair market value on the date of grant, and were granted pursuant to
        the
        Company's 2006 Long-Term Incentive Plan. The 2006 Long-Term Incentive Plan,
        which covers 1,575,000 shares of common stock, and all options granted under
        the
        plan are subject to stockholder approval of the plan. The Company estimated
        that
        the value of the options is between $0.17 and $0.23 per share subject to
        the
        exercise of options. The plan was approved by the stockholders of the Company
        in
        July 2006.
 
 For
        the
        year ended December 31, 2007, 280,000 shares of stock options were exercised
        at
        $1.25 per share. The Company received total of $350,000 cash from the exercise
        of stock options
 
 On
        April
        2, 2007, the Company granted a total of 15,000 stock options to three of
        its
        independent directors. The Options become exercisable for 7,500 shares of
        common
        stock six months from the grant date and the remaining 7,500 options, eighteen
        months from the grant date. For the year ended December 31, 2007, the Company
        expensed $16,492 related to these stock options.
 
 SFAS
        No.
        123R requires that compensation expense related to options granted be calculated
        based on the fair value of the options as of the date of grant. The fair
        value
        calculations take into account the exercise prices and expected lives of
        the
        options, the current price of the underlying stock, its expected volatility,
        the
        expected dividends on the stock, and the current risk-free interest rate
        for the
        expected life of the option. Because there is no trading market for the
        Company's common stock, no historical data on which to base an estimate of
        volatility. The Company has considered the volatility that might be expected
        to
        occur for companies comparable to the Company and, selected three
        publicly-traded companies whose business are similar to the Company's and
        who
        are classified in the same SIC code as the Company, have assumed a volatility
        of
        50% as being reasonably representative of the volatility that could be expected
        to occur in the future over the relevant periods. The risk-free rates used
        are
        based on Treasury Constant Maturity rates, published by the U.S. Federal
        Reserve.
  F-22
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2007
 
 Since
        the
        Company does not have a history of employee stock options, the estimated
        life is
        based on one half of the sum of the vesting period and the contractual life
        of
        the option. For the years ended December 31, 2007 and 2006, the Company expensed
        $101,608 and 86,521, respectively, for stock-based compensation.
 
 The
        Company used the Cox-Ross-Rubinstein binomial model to value the options,
        Warrants and the embedded conversion option of the Series A Preferred Stock.
        The
        following assumptions were used in the preparation of the above valuations
        at
        inception:
 
 Assumption
              
              
              Preferred Stock
              
              
              Warrants
                  A
              
              
              Warrants
                  B
              
              
              Stock
                  optionsCommon
                  stock - fair value
              
              $
              0.81
              
              $
              0.81
              
              $
              0.81
              
              $
              0.81Expected
                  life
              
              
              Perpetual
              
              
              5
                  years
              
              
              5
                  years
              
              
              2.5
                  yearsVolatility
              
              
              
              
              
              50
              %
              
              50
              %
              
              50
              %Risk-free
                  rate
              
              
              
              
              
              4.55
              %
              
              4.55
              %
              
              4.65
              %
 
 OptionsSummary
                  of option activity:
              
              Outstanding
              
              Exercisable
              
              Unvested
              
              Weighted-
                Average
                Exercise
                Price
              
              Weighted-
                Average
                Remaining
                Contractual
                Term
                (years)
              
              Intrinsic
                ValueDecember
                  31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Granted
              
              
              1,370,000
              
              
              944,000
              
              
              426,000
              
              
              1.25
              
              
              1.48Exercised
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -December
                  31, 2006
              
              
              1,370,000
              
              
              944,000
              
              
              426,000
              
              
              1.25
              
              
              1.48
              
              $
              2,479,700Granted
              
              
              15,000
              
              
              7,500
              
              
              7,500
              
              
              3.00
              
              
              5.00Exercised
              
              
              (280,000
              )
              
              (280,000
              )
              
              -
              
              
              1.25Forfeited
              
              
              -
              
              
              -
              
              
              -December
                  31, 2007
              
              
              1,105,000
              
              
              671,500
              
              
              433,500
              
              
              1.91
              
              
              0.53
              
              $
              1,041,750
 
 WarrantsSummary
                  of warrant activity:
              
              Outstanding
              
              Fair
                  Market
                Value
              
              Weighted-
                Average
                Exercise
                Price
              
              Weighted-
                Average
                Remaining
                Contractual Term
                (years)December
                  31, 2005
              
              -
              
              -
              
              -
              
              -Granted
              
              
              7,389,476
              
              
              0.81
              
              
              2.13
              
              
              4.17Exercised
              
              
              -Forfeited
              
              
              -December
                  31, 2006
              
              
              7,389,476
              
              
              0.81
              
              
              2.13
              
              
              4.17Granted
              
              
              10,000
              
              
              2.37
              
              
              2.26
              
              
              3.86Exercised
              
              
              (4,040,790
              )
              
              3.18
              
              
              1.85Forfeited
              
              
              -December
                  31, 2007
              
              
              3,358,686
              
              
              2.85
              
              
              2.35
              
              
              3.17
  F-23