**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
      Fiscal Year Ended December
      31, 2006




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.)24A
                    Jefferson Plaza, Princeton, New Jersey
                08540(Address
                    of principal executive offices)
                (Zip
                    Code)




Issuer’s
      telephone number, including area code (732)
      438-8866




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. ****




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No
o










Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      S-B contained in this form, and no disclosure will 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. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes
oNo
x




State
      issuer’s revenues for its most recent fiscal year. $23,991,950





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days:  As
      of
      March 30, 2007, the aggregate market value of voting and non-voting equity
      held
      by non-affiliates was $10,542,750.




On
      March
      30, 2007, the issuer had 10,231,750 shares of common stock outstanding.





Transitional
      Small Business Disclosure Format (check one): Yes oNo:
x




ii




**China
      Medicine Corporation**




Form
      10-KSB




Table
      of Contents




PagePART
                  IItem
                  1.
              
              Description
                  of Business
              
              2Item
                  2.
              
              Description
                  of Property
              
              11Item
                  3.
              
              Legal
                  Proceedings
              
              11Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              12PART
                  IIItem
                  5.
              
              Market
                  for Common Equity, Related Stockholder Matters
              
              12Item
                  6.
              
              Management's
                  Discussion and Analysis or Plan of Operation
              
              15Item
                  7.
              
              Financial
                  Statements
              
              22Item
                  8.
              
              Changes
                  in and Disagreements withAccountants
                  on Accounting andFinancial
                  Disclosure
              
              23Item
                  8A.
              
              Controls
                  and Procedures
              
              23Item
                  8B.
              
              Other
                  Information
              
              23PART
                  IIIItem
                  9.
              
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance,
                  Compliance With Section 16(a) of the Exchange Act
              
              24Item
                  10.
              
              Executive
                  Compensation
              
              27Item
                  11.
              
              Security
                  Ownership of Certain BeneficialOwners
                  and Management and RelatedStockholder
                  Matters
              
              29Item
                  12.
              
              Certain
                  Relationships and RelatedTransactions,
                  and Director Independence
              
              31Item
                  13.
              
              Exhibits
              
              32Item
                  14.
              
              Principal
                  Accountant Fees and Services
              
              33SignaturesFinancial
                  Statements
              
              
              
              F-1




iii




**PREDICTVE
      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 Xe.com as of March 28, 2007, US $1.00 = 7.73180
      yuan.




1




**PART
      I**




**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





OVERVIEW





China
      Medicine Corporation, formerly known as Lounsberry Holdings III, Inc. (“we,”
“us,” “our” or the “Company”) was incorporated as a Delaware corporation on
      February 10, 2005, with the objective of acquiring, or merging with, an
      operating business.





On
      February 8, 2006, we entered into a Stock Exchange Agreement (the “Exchange
      Agreement”) pursuant to which we acquired all of the equity of Guangzhou Konzern
      Medicine Co., Ltd. (“Konzern”), a company incorporated under the laws of the
      People’s Republic of China (the “PRC”). Pursuant to the Exchange Agreement, we
      issued 6,530,000 shares of common stock to the owners of Konzern.





As
      a
      result of the closing under the Exchange Agreement, through Konzern, our wholly
      owned subsidiary, we are a distributor of pharmaceutical products in the PRC
      which include prescription and over the counter medicines, traditional Chinese
      medicines (finished pharmaceutical products made from Chinese herbs) and
      nutritional supplements.





Our
      executive offices are located at 24A Jefferson Plaza, Princeton, New Jersey,
      08540,  telephone
      (732) 438-8866.




COMPANY
      HISTORY





We
      commenced our present operations in 2000 when Konzern was “privatized” by a
      purchase from the PRC government in a transaction by which Konzerns three
      principal shareholders (the “Konzern Shareholders”) acquired all of Konzern’s
      outstanding equity. On February 8, 2006, Konzern, the Konzern Shareholders
      and
      the Company entered into the Exchange Agreement pursuant to which we issued
      an
      aggregate of 6,530,000 shares of our common stock to the Konzern Shareholders
      in
      consideration of their transfer of Konzern shares us.




In
      connection with the foregoing transactions, we entered into a Preferred Stock
      Purchase Agreement, dated February 8, 2006, with Barron Partners L.P., Ray
      and
      Amy Rivers, JTROS, Steve Mazur and William Denkin (collectively, the “Preferred
      Investors”) pursuant to which we issued and sold an aggregate of 3,120,000
      shares of our Series A Convertible Preferred Stock and warrants to purchase
      an
      aggregate of 7,389,476 shares of our Common Stock (“Investor Warrants”) to the
      Preferred Investors for an aggregate purchase price of $3,900,000.





Konzern’s
      executive offices are located at Room 702 Guangri Mansion No. 8, South Wuyang
      Xin Chengsi, Guangzhou, China. Our telephone number is +86-20-87372231.
      Konzern’s website is 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.




2




OUR
      BUSINESS





We
      are a
      distributor of pharmaceutical products, including prescription and over the
      counter medicines, traditional Chinese medicines (finished pharmaceutical
      products made from Chinese herbs) and nutritional supplements. We purchase
      most
      of our products from five PRC drug manufacturers, for which we are to be the
      exclusive distributor in the PRC. These suppliers accounted for 61% and 74%
      of
      our purchases for the fiscal year ended December 31, 2006 and 2005,
      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. None of our supply agreements has any minimum purchase
      requirements on our part; however, we
      are
      frequently required to make significant down payments.





We
      have
      approximately 800 customers.
      Our customers are primarily wholesale pharmaceutical product companies,
      hospitals and retail drug stores. Our five largest customers accounted for
      46%
      of our revenue for the year ended December 31, 2006, and 75% of our revenue
      for
      the year ended December 31, 2005.


In
        addition to the sale and distribution of our medical products, we engage
        in
new
        product development for ourselves (“ Product Development”) andthe
        development of new pharmaceutical products which we sell to other pharmaceutical
        companies (“Technology Transfers”). We generated approximately $3,219,167, or
        13.4% of our total revenues for the fiscal year ended December 31, 2006 from
        our
        Technology Transfers. We anticipate that Technology Transfers will be a
        continuing segment of our business.





Products





We
      currently sell and distribute more than 1,500 different pharmaceutical products.
      Most of our products are developed and manufactured by other companies which
      hold the intellectual property and other rights thereto.





We
      currently have exclusive distribution rights to the following six products
      throughout the PRC:





Product
                Name
            
            Treatment
            
            Category
            
            Revenue
                in 2006
            
            Percentage
                of
              Total
                RevenuesIopamidol
              injection
            
            
            angiography
                & scanning of CT
            
            
            Prescription
            
            $
            4,002,739
            
            
            16.68
            %Panax
              Notoginseng
              Saponin
            
            
            cerebrovascular
                diseases
              (blood
                vessel of brain)
            
            
            Traditional
              Chinese
              Herbal
              Medicines
            
            $
            654,587
            
            
            2.73
            %Bumetanide
              injection
            
            
            Diuretic
              chronic
                kidney failure
            
            
            Prescription
            
            $
            94,903
            
            
            0.40
            %Ozagreldried
              powder
              injection
            
            
            acute
                myocardial infarction
            
            
            Prescription
            
            $
            333,308
            
            
            1.39
            %Levocarnitine
              dried
                powder
              injection
            
            
            coronary
                heart disease
              acute
                myocardial infarction
            
            
            Prescription
            
            $
            674,850
            
            
            2.81
            %Chuanbei
                Pipa
              anticough
                syrup
            
            
            bronchitis
                & anticough
            
            
            Traditional
              Chinese
              Herbal
              Medicines
            
            $
            1,027,915
            
            
            4.28
            %





3





*Prescription
      and Over the Counter Medicines.* Prescription
      and over the counter medicines account for most of our sales, representing
      sales
      of approximately $15,320,000, or 64% of our revenues for the fiscal year ended
      December 31, 2006, $10,107,138 or 68% of revenue for the year fiscal ended
      December 31, 2005, and $7.8 million, or 75% of revenue for the fiscal year
      ended
      December 31, 2004.





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 largest selling traditional pharmaceutical medicines for
      the
      year ended December 31, 2006, together with the sales volume for the period,
      are:





·
            Iopamidol,
                a liquid medication which is used for stomach radiography, which
                accounted
                for sales of approximately $4,002,739




·
            SonoVue,
                which is used in ultrasound radiography, and accounted for sales
                of
                approximately $1,311,509.




·
            Cinepazide
                maleate injection, which is used in the treatment of vascular sclerosis,
                and accounted for sales of approximately
                $1,028,357.




·
            Fengduoxin
                Cefamandolenafate, which is an injectable antibiotic,accounted for sales of approximately $735,700.




·
            Levocarnitine,
                which is used for cardiac muscle disease, bone problems and high
                cholesterol, and is also injectable,and
                accounted for sales of approximately $674,850.




Of
      the
      five products listed above, we only have exclusive distribution rights to
      Lopamidol, in the PRC. Also, none of these products is currently sold outside
      of
      the PRC.




4





*Traditional
      Chinese Medicines.* Our
      five
      largest 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 and accounted
                    for
                    sales of approximately
                    $654,588;
  ·
                Chuanbei
                    piba gao (Shedan), which is used for treatment of coughs and
                    accounted for
                    sales of approximately
                    $610,520;
  ·
                Chuanbei
                    piba gao (Milian), which is used for treatment of coughs and
                    accounted for
                    sales of approximately
                    $417,396;
  ·
                Wuji
                    Baifeng Pill, which is used for disease of gynaecological conditions
                    and
                    accounted for sales of approximately $295,629;
                    and
  ·
                Qianbai
                    biyan tablet, which is used to treat rhinitis and accounted for
                    sales of
                    approximately $251,907.




*Herbs
      and Nutritional Supplements.* We
      also
      sell Chinese herbs and dietary supplements which accounted for sales of
      approximately $32,629 for the fiscal year ended December 31, 2006.





Principal
      Suppliers





Our
      five
      largest suppliers, accounted for approximately 61% of our purchases for the
      year
      ended December 31, 2006, 74% of our purchases for the year ended December 31,
      2005and 74% of our purchases for the year ended December 31, 2004. Our five
      largest suppliers are Shanghai Bracco Sine Pharmaceutical Corporation, Guangzhou
      Pharmaceutical Holdings Limited, Guangzhou Jinxiutang Pharmaceutical
      Corporation, Shanghai New Pioneer Huakang Pharmaceutical Corporation and
      Guangzhou Pangaoshou Pharmaceutical Corporation. Our agreements with our
      suppliers generally have a term of one year and do not provide for maximum
      or
      minimum quantities. Pursuant to our supply agreements, we are required
      to make a significant down payment at the beginning of the year to cover
      purchases during the year.





We
      have
      not experienced any supply disruptions in the past and can go to alternative
      suppliers for each of our major products if necessary.





Marketing,
      Principal Customers





We
      have a
      staff of approximately 70 marketing and sales personnel. We do not sell to
      end
      users, 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. We had a
      distribution network in place when Konzern was privatized in 2000, and we used
      this network as the basis of our current distribution network. We also market
      our products at two national medicine trade shows.




5





We
      generally sell our products pursuant to one-year contracts, which do not include
      any minimum purchase requirements. While hospitals tend to be the end users
      of
      our products, we try not to sell directly to them as they usually require six
      month payment terms. Instead, we focus our efforts on large pharmaceutical
      companies with whom we can collect our accounts in a far shorter period of
      time ****




After
      Sales Service Network





We
      contact our end customers 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 September - December quarter of each year because
      most of the pharmaceutical companies and hospitals do more buying at this time.
      Sales in the January - March quarter are usually the lowest due to Chinese
      New
      Year, when only patients with very serious conditions tend to seek treatment.





Competition





Competition
      for the sale of pharmaceutical products by distributors in the PRC 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 well capitalized
      which allows them to seek hospital customers which have a six month payment
      cycle. They also are allowed to sell anaesthetic products, a right granted
      only **** to
      state-owned companies; 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, which we believe gives us a competitive
      advantage.





We
      have
      the sole distribution rights to medical products sold by 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 will improve our competitive position; however, there
      can
      be no assurance that this will be the case.




6


Product
          Development, and Technology Transfers
 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 four products: Yutian Capsule
      for
      treatment of lung cancer, Dioscorea Collettii Hook F Extraction for treatment
      of
      high blood pressure, an EGFR Test kit for lung cancer testing and a Multi
      Functional Peptide Derivative for treatment of intestinal cancers. We
      are
      scheduled to make an application of Yutian Capsule’s clinical approved with the
      PRC State Food and Drug Administration in May 2007.





We
      also
      have an agreement with Guangzhou Laitai Pharmaceutical Co., Ltd. pursuant to
      which we finance the development by Laitai of some drugs, and upon approval
      from
      the PRC State Food and Drug Administration, we will have the exclusive right
      to
      distribute any products developed by them for 10 years.




Technology
        Transfers


We
        generated approximately $3,219,167 in revenues for the year ended December
        31,
        2006 from Technology Transfers which we anticipate will be a continuing segment
        of our business.




Intellectual
      Property





We
      have
      obtained patents for the following two products:




·
                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.
 
 We
        anticipate that the patent certificates will be issued in May 2007.
 
 We
        have
        patents pending for five of our products. These patents have been approved
        by
        the PRC State Health Department, and approvals by the PRC National Intellectual
        Property Bureau are pending. These products designed to treat the following
        conditions:
  ·
                Yutian
                    capsule, used to treat lung cancer, chronic bronchitis and bronchial
                    asthma.
  ·
                Qu
                    Shi Qing Chang Du Oral Liquid, an oral medication to treat
                    constipation.
  ·
                Bao
                    Chu Dan Oral Liquid, an oral medication designed to improve kidney
                    function.
  ·
                Niu
                    Pi Tang oral medication to relieve tired and strained
                    eyes.
  ·
              A
                  chewing gum which is designed to reduce the effects of radiation
                  emitted
                  by computer monitors and relieve tired and strained
                  eyes.





7





Konzern
      is the holder of the trademark “Konzem” which was registered with the PRC
      Trademark Office of the National Industrial and Commerce 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 克梢 (kefei)
      for product category 30 (nutrition supplement) and category 3 (medicine for
      external use).





Trademarks
      issued in the PRC have a term of 10 years; the term of our trademark 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.





Konzern
      has applied for the registration of the following additional trademarks, which
      are pending the approval from the PRC Trademark Offices:





**Trademark
                in Application**
            
            **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(runxia)
            
            12/01/2004
            
            02/23/2005(buzhong)
            
            12/13/2004
            
            03/16/2005(qingshangqing)
            
            12/13/2004
            
            03/16/2005(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.




8





The
      manufacture and sale of pharmaceutical products in the PRC is governed by the
      PRC Drug Administration Law. We do not manufacture any products - all of our
      products are manufactured at a facility which has received a permit to operate
      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 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 from 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.





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
      rationally fix 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 on the basis of negotiation
      due
      to the fact that our customers are not the end user. We are required to operate
      in accordance with Good Supply Practice (the “GSP”) for Pharmaceutical Products,
      and we are subject to inspections organized by the local drug regulatory
      department of the people’s government of the province, autonomous region or
      municipality directly under the Central Government. 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,
      the
      drugs illegally produced or sold and the illegal gains therefrom 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.




9





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 Center, which are subject to the clinical
      trial
      process herein described after completion of lab testing. ****





Employees





As
      of
      December 31, 2006, 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 occurs during transportation. In the event that a
      problem arises which necessitates recalling a product, any liability associated
      with the recall or use of the product will be apportioned among the various
      parties involved in the commercialization and distribution of the product as
      may
      be determined by testing the recalled product.





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.





RECENT
      DEVELOPMENTS





On
      July
      7, 2006, Konzern entered into an agreement with Guangzhou Ji'nan Science &
Technology Industrial Group ("JSIG") and Dongsheng Yao to jointly form a new
      Chinese company, Guangzhou Co-win Bioengineering Co., Ltd. to develop
      applications of Alfatoxin-Detoxifizyme ("ADTZ"), an enzyme that can eliminate
      aflatoxin from food and animal feed. Aflatoxin is a strong poisonous toxin
      which
      causes liver, stomach and lung cancers. JSIG is an agent for Ji'nan University.
      Konzern owns 70% equity interest of Co-win and JSIG and Mr. Yao each has a
      15%
      equity interest. The agreement provides that we are to invest at total of
      approximately $2.2 million, of which $784,920 has been paid and the balance
      is
      due within two years. Ji'nan University is the holder of the four Chinese
      patents on ADTZ for which Mr. Yao is the inventor. JSIG is to transfer to the
      joint venture the four patents covering ADTZ. 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 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.




10





Effective
      April 1, 2007, the Guangdong Provincial government will implement a new system
      for the distribution of pharmaceutical products whereby the rights to distribute
      certain products in the province will be auctioned through an on-line bidding
      system. We believe that this new system will provide more transparency and
      allow
      us access to additional products we did not previously have. Through the new
      system, we have already obtained the rights to distribute an additional 657
      products.




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





We
      renewed our lease of approximately 4,500 square feet of office space at Room
      702
      Guangri Mansion No. 8, 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 $28,320 **.**





We
      also
      leased Room 701 Guangri Mansion No. 8, South Wuyang Xin Chengsi, Guangzhou,
      China from Guangzhou Carpentry Company for three years from May 1, 2006 to
      April
      30, 2009 for an annual rent of approximately $22,500.





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 Vice President, for which we pay rent of $950 per month.





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 legal
      proceeding.




11




**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, 2006.




**PART
      II**





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





Market
      Information





Our
      common stock has been quoted on the Over-the-counter Bulletin Board under the
      symbol "CHME.OB" since December 4, 2006. Prior to that date, there was no
      trading market, and no trading in our common stock or other
      securities.





For
      the
      period December 6, 2006 to December 31, 2006, the high bid price was $3.06
      and
      the low bid price was $2.95.





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





Holders





As
      of
      March 30, 2007, we had approximately 71 stockholders
      of record of our common stock. At that date, we had 10,231,750shares of common
      stock outstanding.





Dividends





We
      have
      never paid dividends to the holders of our common stock. Our agreement with
      certain investors for the purchase of Series A Preferred Stock in February
      2006
      prohibits our payment of dividends while shares of Series A Preferred Stock
      remain outstanding.




Equity
      Compensation Plan Information





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
            
            
            -0-
            
            
            --
            
            
            --




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




12




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 are 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.





As
      of
      March 30, 2007, we have issued an aggregate of 740,000 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
            
            Shares
                of Series APreferred
                Stock Converted intoCommon
                Stock11/20/2006
            
            
            Barron
                Partners, L.P.
            
            
            300,00012/19/2006
            
            
            Barron
                Partners, L.P.
            
            
            180,0002/15/2007
            
            
            Ray
                and Amy Rivers, JTROS
            
            
            100,0003/19/2007
            
            
            William
                Denkin
            
            
            160,000Total:
            
            
            
            
            
            740,000




From
      January to  March 2007, we have issued an aggregate of 1,404,850 shares of
      common stock upon the exercise of warrants at $1.75 per share to Barron
      Partners, L.P. for a gross proceeds of $458,487.50.







13




The
      shares of common stock issued upon the conversion of series A preferred stock
      and exercise of warrant have been 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 29, 2007, we had the following shares of common stock reserved for
      issuance:


·
                2,380,000
                    shares issuable upon conversion of the Series A Preferred
                    Stock.
  ·
                5,984,626
                    shares issuable upon exercise of the warrants issued to the investors
                    in
                    the February 2006 private
                    placement.
  ·
                1,575,000
                    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.





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.




14




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





**Overview**





We
      are
      holding company, and our business is conducted through our wholly owned
      subsidiary, Guangzhou Konzern Medicine Co., Ltd. (“Konzern”), which is organized
      under the laws of the PRC. Through Konzern we currently distribute approximately
      1,500 pharmaceutical products in the PRC, including prescription and over the
      counter pharmaceutical products, traditional Chinese medicines (finished
      medicines made from Chinese herbs) and nutritional supplements. In addition,
      we
      recently acquired the rights to distribute an additional 657 pharmaceutical
      products. Our distribution network reaches 28 provinces in the PRC, over 300
      hospitals, 500 pharmaceutical companies and 1700 drug stores.





Our
      business is dependent upon our ability both to acquire our products and
      distribute our products in the PRC market. We purchase our products from PRC
      pharmaceutical manufacturers, and we are the manufacturers’ sole distributor in
      the PRC for certain products. As of December 31, 2006, we had nationwide
      exclusive sales rights from our suppliers for six products they produce, which
      accounted for $6,788,302, or 28% of revenue in the twelve months ended December
      31, 2006, and $4,890,484, or 33% of
      revenue in the comparable period of 2005.





Our
      contracts with our customers do not provide for minimum purchases, and our
      customers are not restricted from purchasing competitive products from others.
      Our customers are typically wholesale medical products companies, hospitals
      and
      retail drug stores. Our five largest customers accounted for 46% and 75% of
      our
      revenue for the year ended December 31, 2006 and December 31, 2005,
      respectively. Among them, our two largest customers accounted for 40% and 62%
      of
      our revenue for the years ended December 31, 2006 and 2005. Our two largest
      customers during the fiscal year ended December 31, 2006 were Guangdong Sanhong
      Medicine Co., Ltd. (21%) and Guangdong Saikang Medical Co., Ltd.
      (13%).





Our
      typical collection period ranges from three months to one year. In addition,
      because we generally need one to two months to receive products from our
      suppliers, we have been increasing our inventory in order to have product
      available to meet anticipated orders. We are required to pay our suppliers
      in
      advance, and in some cases we must maintain funds on deposit with the supplier.
      These factors require us to use significant cash in our operations.




In
        addition to the sale and distribution of our medical products, we also have
        an
        extended line of proprietary products. We generated approximately $3,219,167
        or
        13.4% of our total revenues for the fiscal year ended December 31, 2006 from
        Technology Transfers. We anticipate that Technology Transfers will be a
        continuing segment of our business.


15




We
      have
      four new pharmaceutical products currently under development for sale and
      marketing in the PRC: Yutian Capsule, a traditional Chinese medicine which
      is
      used in the treatment of lung cancer, Dioscorea Collettii Hook F Extraction
      for
      treatment of high blood pressure, an EGFR Test kit for lung cancer testing
      and a
      Multi Functional Peptide Derivative for treatment of intestinal cancers. During
      2006, we focused on pre-clinical studies for the Yutian capsule and plan to
      apply for approval with the PRC State Food and Drug Administration in May 2007.





On
      July
      7, 2006, Konzern entered into an agreement with Guangzhou Ji’nan Science &
Technology Industrial Group and Dongsheng Yao to jointly form a new Chinese
      company to develop applications of alfatoxin-detoxifizyme, an enzyme that can
      eliminate aflatoxin from food and animal feed. Guangzhou Ji’nan Science &
Technology Industrial Group is the agent for Ji’nan University. The agreement
      provides for us to set up a Chinese joint venture company in which we will
      be a
      70% owner and Guangzhou Ji’nan Science & Technology Industrial Group and Mr.
      Yao will each have a 15% interest. The agreement provides that we are to invest
      at total of approximately $2.2 million, of which $784,920 has been paid and
      the
      balance is due within two years, based on the development effort.





The
      joint
      venture paid Guangzhou Ji’nan Science & Technology Industrial Group and Mr.
      Yao a technology fee in the amount of approximately $125,000. Although we do
      not
      have any present plans to form other joint ventures or enter into research
      and
      development agreements, it is possible that we may enter into other agreements
      relating to the development of medicine products.




Effective
      April 1, 2007, the Guangdong Provincial government will implement a new system
      for the distribution of pharmaceutical products whereby the rights to distribute
      certain products in the province will be auctioned through an on-line bidding
      system. We believe that this new system will provide more transparency and
      allow
      us access to additional products we did not previously have. Through the new
      system, we have already obtained the rights to distribute an additional 657
      products.




Because
      our business is conducted in the PRC, all of our transactions are accounted
      for
      in Chinese Yuan. Our financial condition and the results of our operations,
      expressed in terms of United States dollars, 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.




16


Results
        of Operations


The
      following table sets forth our statements of operations for the years ended
      December 31, 2006 and 2005, in U.S. dollars:




Fiscal
                Year Ended December 31,2006
            
            
            2005Revenue
            
            $
            23,991,950
            
            $
            14,925,903Costs
                of goods sold
            
            
            15,017,100
            
            
            8,656,873Gross
                profit
            
            
            8,974,850
            
            
            6,269,030R&D
                expenses
            
            
            294,080
            
            
            478,590Selling,
                general &administrative costs
            
            
            1,565,288
            
            
            511,170Reverse
                acquisition expenses
            
            
            931,270
            
            
            0Income
                from operations
            
            
            6,184,212
            
            
            5,279,270Other
                (expense) income, net
            
            
            (199,945
            )
            
            410,900Minority
                interest
            
            
            33,295
            
            
            0Income
                before income taxes
            
            
            6,017,562
            
            
            5,690,170Provision
                for income taxes
            
            
            1,229,688
            
            
            0Net
                income
            
            
            4,787,874
            
            
            5,690,170Other
                comprehensive income
            
            
            271,791
            
            
            101,132Comprehensive
                income
            
            
            5,059,665
            
            
            5,791,302





Our
      revenue is derived primarily from the sale of prescription and over the counter
      pharmaceutical products and traditional Chinese medicines, which are medicines
      derived from Chinese herbs. The following table sets forth the revenue and
      percentage of revenue derived from each of these types of products.





Fiscal
                Ended December 31,2006
            
            2005Prescription
                and Over the Counter Products
            
            $
            15,316,287
            
            
            63.84
            %
            $
            10,107,138
            
            
            67.72
            %Traditional
                Chinese Medicine
            
            
            5,423,806
            
            
            22.61
            %
            
            2,544,013
            
            
            17.04
            %Chinese
                Herbs
            
            
            32,690
            
            
            0.14
            %
            
            138,039
            
            
            0.92
            %Nutritional
                Supplements
            
            
            0
            
            
            0.00
            %
            
            1,841
            
            
            0.01
            %Medical
              Formula Sales
            
            
            3,219,167
            
            
            13.41
            %
            
            2,134,872
            
            
            14.31
            %Total
            
            $
            23,991,950
            
            
            100.00
            %
            $
            14,925,903
            
            
            100.00
            %




17




THE
      FISCAL YEAR ENDED DECEMBER 31, 2006 AND THE FISCAL YEAR ENDED DECEMBER 31,
      2005




Revenues




Revenues
      for the fiscal year ended December 31, 2006 were $23,991,950,
      an increase of $9,066,047, or 60.74%, from $14,925,903 for 2005. In 2006, we
      obtained $3.9 million of additional working capital from a financing and used
      this money to develop our sales network which resulted in our additional sales.
      We have developed various new clients throughout the PRC during fiscal year
      ended December 31, 2006 and now sell approximately 1,500 products to our
      customers, an increase of 400 from 1,100 products at the end of 2005. This
      expansion of our product line also contributed to our increased revenue.




We
      anticipate that our revenues will continue to increase due to the rights to
      distribute an additional 657 products that we recently obtained. However, there
      can be no assurance that we will be able to increase our revenues.


In
        addition to the sale and distribution of our medical products, we also have
        an
        extended line of proprietary products. We generated approximately $3,219,167
        or
        13.4% of our total revenues for the fiscal year ended December 31, 2006 from
        Technology Transfers. This line of business was recorded as other income
        at the
        amount of $2,134,872 for the year ended December 31, 2005 which was reclassified
        to be included to our total revenue after we decided that it is going to
        be our
        continuing segment of business.


Cost
      of Sales




Cost
      of
      goods sold for the year ended December 31, 2006 was $15,017,100, an increase
      of
      $6,360,227, or 73%, from $8,656,873 for 2005. The increase was primarily
      attributable to a 62% increase in revenue and cost paid for distribution of
      new
      products with higher cost.




Gross
      Profit




Gross
      profit for the year ended December 31, 2006 was $8,974,850, an increase of
      $2,705,820, or 43.16%, from $6,269,030 in 2005. Our gross margin for the year
      ended December 31, 2006 was 37.41% as compared with 42.00% for 2005. The
      decrease in our gross margin was due to the decrease in prices for our products
      dictated by the PRC government in early 2006. We believe that the continuing
      effects of this price decrease will be limited as it principally affects
      commonly-used basic medicinal products and we have diversified our product
      line
      away from such products.




We
      carry
      brand name products and special grade products which are not affected by the
      price control policy.




18




Research
      and Development Expense




Research
      and development expenses were $294,080 for the fiscal year ended December 31,
      2006, which was primarily for the pre-clinical study of the Yutian capsule.
      Research and development expenses during 2005 were $478,590.




Selling,
      General and Administrative Expenses




Selling,
      general and administrative expenses were $1,565,288 for the fiscal year ended
      December 31, 2006, an increase of $1,054,118 from $511,170 for 2005. The
      increase was primarily caused by increased employee compensation,
      transportation, advertising, tradeshow and patent application fees and marketing
      expenses. Also, additional administrative expenses were incurred as a result
      of
      maintaining an office in the United States, additional legal, accounting and
      other expenses relating to our status as a public company and compliance with
      the reporting requirements of the federal securities laws and our obligations
      under a stock purchase agreement with our investors.




Provision
      for Income Taxes




Provision
      for income taxes was $1,229,688 for the fiscal year ended December 31, 2006,
      as
      compared with no provision for 2005. As a foreign invested entity in the PRC,
      our subsidiary, Guangzhou Konzern Medicine Co., Ltd was exempt from taxation
      in
      2004 and 2005 and is receiving a 50% reduction in its income tax rate for the
      years of 2006, 2007 and 2008.




Comprehensive
      Income





Comprehensive
      income for the fiscal year ended December 31, 2006 was $5,059,665, a decrease
      of
      $731,637 from $5,791,302 for 2005. The decrease was principally due to an
      increase in the provision for income taxes of $1,229,688, a one-time charge
      of
      $931,270 for reverse acquisition expenses, $517,148 for the maintenance of
      our
      United States office and additional legal, accounting and other expenses
      relating to our status as a public company.


Net
        Income
 
 Net
        income for the fiscal year ended December 31, 2006 was $4,787,874, a decrease
        of
        $902,296 from 5,690,170 for 2005. The primary reason for the decrease is
        that
        the income tax exemption period for our subsidiary Konzern, as a wholly
        foreign-owned enterprise in the PRC, expired as of December 31, 2005 and
        therefore Konzern became subject to income tax at a reduced rate of 15% (the
        full rate is 30%) for the year of 2006. The tax reduction period for Konzern
        is
        three years from 2006 to 2008.




**Liquidity
      and Capital Resources**




Prior
      to
      February 2006, we financed our operations and met capital expenditure
      requirements primarily through short-term bank loans and trade credit. As of
      March 31, 2006, as a result of the sale of preferred stock and warrants, from
      which we received net proceeds of approximately $3.3 million, we had working
      capital of $12,826,379, an increase of $8,397,688 from $4,428,691 from December
      31, 2005.




19





The
      gross
      proceeds from the February private placement were $3.9 million, from which
      we
      received net proceeds of approximately $3.3 million.




We
      used
      cash of approximately $2.22 million in our operations for the year ended
      December 31, 2006, an increase of approximately $3.39 million from the cash
      required for 2005. The increase in net cash used in operations was principally
      due to an increase in the accounts receivable and advances to suppliers.





The
      following table sets forth the changes in certain balance sheet items, in
      dollars and percentages, from December 31, 2004 to December 31, 2005 to December
      31, 2006 (dollars in thousands).




Balance
                Sheet Caption
            
            Change
                in dollars 12/31/04 to 12/31/05
            
            Percentage
                Change
              12/31/04
                to 12/31/05
            
            Change
                in dollars 12/31/05 to 12/31/06
            
            Percentage
                Change
              12/31/05
                to 12/31/06Accounts
                receivable
            
            $
            1,050
            
            
            23
            %
            $
            4,624
            
            
            192
            %Inventories
            
            
            620
            
            
            81
            %
            
            518
            
            
            37
            %Advances
                to suppliers
            
            
            637
            
            
            145
            %
            
            3,002
            
            
            279
            %Accounts
                payable
            
            
            307
            
            
            64
            %
            
            19
            
            
            11
            %Customer
                deposits
            
            
            657
            
            
            64
            %
            
            -19
            
            
            -52
            %




The
      changes in these balance sheet items reflect the nature of the cash requirements
      of our business. The increase in accounts receivable reflects our increased
      sales. Because our collection period typically runs from three months to one
      year, the increase in accounts receivable reflects not only the increase in
      sales, but also the long collection period. Because we require one to two months
      to receive products we order, we have been increasing our inventory in order
      to
      enable us to meet anticipated increases in sales. In addition, our payment
      cycle
      is considerably shorter than our receivable cycle because we typically pay
      our
      suppliers all or a portion of the purchase price in advance and for some
      suppliers we must maintain a deposit for future orders. However, from December
      31, 2005 to December 31, 2006, our advances to suppliers increased 279% because
      of an increase in our purchases resulting from increased sales and our payment
      policies, whereby we try to pay our suppliers (other than those requiring down
      payments) once or twice a year. In addition, our customer deposits decreased
      52%
      from December 31, 2005 to December 31, 2006. We require our customers to pay
      a
      certain percentage of the sales price as a deposit before we ship products
      to
      our customers. The percentage varies from customer to customer. During the
      course of business, we reduce the deposit requirement for some customers with
      good credit.




20




In
      January 2006, we repaid our short term loans of $95,480 to CITIC Industrial
      Bank
      with $1,582 interest payment. As of December 31, 2006, we did not have any
      long-term or short-term debt.





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. We cannot assure that such funding will be available, or if
      available, that is will be available on terms acceptable to us.





Critical
      Accounting Policies and Estimates




The
      significant accounting policies which we believe are the most critical to aid
      in
      fully understanding and evaluating our reported financial results include the
      following:




Revenue
      recognition




The
      Company recognizes revenue from products sales when title has been transferred,
      the risks and rewards of ownership have been transferred to the customer, the
      fee is fixed and determinable, and the collection of the related receivable
      is
      probable which is generally at the time of shipment. Any amounts received not
      meeting these situation is recorded as deferred revenue.





Research
      and development costs




The
      Company expenses the costs associated with the research and development
      activities when incurred and capitalizes material and equipment that are
      acquired or constructed for research and development activities, if it has
      alternative future uses in research and development projects or in its
      operation. To the extent that research and development services are performed
      for us by third parties, these costs are expenses when the services are
      performed by the third party.





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 makes these estimates
      using the best information available at the time the estimates are made;
      however, actual results could differ materially from those
      estimates.




21


Inventories


We
      record
      reserves against our inventory to provide for estimated obsolete or unsalable
      inventory based on assumptions about future demand for its 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.





Off-Balance
      Sheet Arrangements





The
      Company does not have any off-balance sheet arrangements.




**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, 2006 and
      2005.





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, 2006 and 2005 and the consolidated audited balance sheets as at
      December 31, 2006 and 2005, 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
                the Fiscal Year ended December 31,2006
            
            2005Gross
                revenues
            
            $
            23,991,950
            
            $
            14,925,903Income
                from operations
            
            
            6,184,212
            
            
            5,279,270Net
                income
            
            
            4,787,874
            
            
            5,690,170Total
                assets
            
            
            14,642,399
            
            
            5,329,579Total
                liabilities
            
            
            600,027
            
            
            570,873





The
      Company's consolidated audited financial statements for the fiscal years ended
      December 31, 2006 and 2005, together with the report of the independent
      certified public accounting firm thereon and the notes thereto, are presented
      beginning at page F-1.




22


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


During
      the fiscal years ended December 31, 2006 and December 31, 2005, and the
      subsequent interim period, Moore, Stephens Wurth Frazer & Torbet, LLP
      (“MSWFT”), our principal independent accountant, has not resigned or declined to
      stand for re-appointment, and was not dismissed.





**ITEM
      8A. CONTROLS AND PROCEDURES**





(a)
      Evaluation of Disclosure Controls and Procedures





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our Exchange Act reports is recorded,
      processed, summarized and reported within the time periods specified in the
      Commission's rules and forms, and that such information is accumulated and
      communicated to our management to allow timely decisions regarding required
      disclosure. Management necessarily applied its judgment in assessing the costs
      and benefits of such controls and procedures, which, by their nature, can
      provide only reasonable assurance regarding management's control
      objectives.





At
      the
      conclusion of the period ended December 31, 2006, we carried out an evaluation,
      under the supervision and with the participation of our management, including
      our principal executive officer and principal financial officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures. Based upon that evaluation, principal executive officer and
      principal financial officer concluded that our disclosure controls and
      procedures were effective in alerting them in a timely manner to information
      relating to the Company required to be disclosed in this report.




(b)
      Changes in Internal Controls




During
      the period ended December 31, 2006, there has been no change in internal control
      over financial reporting that has materially affected, or is reasonably likely
      to materially affect our internal control over financial reporting.




**ITEM
      8B. OTHER INFORMATION**





None.


23




**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
            
            39
            
            Executive
                Vice President and DirectorHuizhen
                Yu
            
            27
            
            Chief
                Financial OfficerMeiyi
                Xia
            
            56
            
            Vice
                PresidentLin
                Li
            
            37
            
            Vice
                President & SecretaryRobert
                Adler
            
            72
            
            Director,
                member of the Audit CommitteeDr.
                Rachel Gong
            
            39
            
            Director,
                Chairman of the Audit Committee and member of the Compensation
                CommitteeDr.
                Yanfang Chen
            
            43
            
            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.





*Meiyi
      Xia.* Ms.
      Meiyi Xia has been our Vice President since March 22, 2006. Prior to that,
      she
      had been our President from February 8, 2006 to March 21, 20006 and a Director
      from February 7 through February 10, 2006. Ms. Xia has been a partner of
      Princeton Capital Group, a private investment group, since January 2006 and
      a
      partner of Spring Asset Management LLC since September 2004. From January 2003
      to December 2005, Ms. Xia was chief executive officer of AiDi Financial
      Investment LLC, a financial consulting company working mainly with companies
      in
      the PRC. From July 2002 to January 2003, she was a financial advisor at Morgan
      Stanley. From January 1999 until June 2002, she was president of Asia Pacific
      Consulting and Asia Pacific Securities, a broker dealer. She obtained her MBA
      from Long Island University and Diploma of Graduate School in Financial
      Management from Scuola Mattei, Milan, Italy. Ms. Xia devotes only a portion
      of
      her time to our business.




24





*Lin
      Li.* Ms.
      Lin
      Li has been our Vice President and Secretary since February 8, 2006. Ms. Li
      has
      been a partner of Princeton Capital Group, a private investment group, since
      December 2005. From January 2005 until December 2005, Ms. Li was an executive
      assistant at AiDi Financial Investment LLC. From 2003 to 2004, Ms. Li was a
      financial analyst at NYU Medical Center. From 2002 to 2003, she was an
      accountant for Princeton Econ Corporation, an information technology company,
      and from 2000 to 2001 she was an accountant for Genesis Health Ventures, a
      senior health care provider. She obtained her MBA degree from University of
      Delaware and Bachelor of Science degree in finance from Renmin University of
      China. Ms. Li devotes only a portion of her time to our business.





*Robert
      Adler.* Mr.
      Robert Adler has been our director and member 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.





*Dr.
      Rachel Gong.* Dr. Gong
      has been our director, Chairman 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.




25




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 FINANCIAL EXPERT





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.
      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 rules of the Nasdaq Stock Market. The Board of Directors
      has adopted a written charter for the Audit Committee.





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 fiscal year ended December 31, 2006, 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, 2006, there were
      no late filings.




26


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 2007.




**ITEM
      10.**  **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.





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
              ($)Meiyi
                Xia
            
            
            2006
              
              2005
            
            
            78,000
              
              --
            
            
            --
              
              --
            
            
            --
              
              --
            
            
            31,480
                --
            (1)
            
            --
              
              --
            
            
            --
              
              --
            
            
            --
              
              --
            
            
            109,480
              
              --Senshan
                Yang
            
            
            2006
              
              2005
            
            
            13,147
              
              25,488
            
            
            --
              
              --
            
            
            --
              
              --
            
            
            --
              
              --
            
            
            --
              
              --
            
            
            --
              
              --
            
            
            --
              
              --
            
            
            13,147
              
              25,488




**Compensation
      Discussion and Analysis**





Overview
      of Compensation Program and Philosophy





We
      have
      four executive officers, Senshan Yang, Minhua Liu, Meiyi Xia and Lin Li. The
      Board of Directors, is comprised of Senshan Yang, Minhua Liu, Robert Adler,
      Dr.
      Rachel Gong and Dr. Yanfang Chen, and Dr. Rachel Gong and Dr. Yanfang Chen
      also
      serve as our Compensation Committee. No other executive officer, other than
      Meiyi Xia, had total compensation exceeding $100,000 for the fiscal year ended
      December 31, 2006.





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 dos however, have a 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.




27




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 its 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, 2006:


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
              
              
              --
              
              
              120,000(1
              )
              
              --
              
              $
              1.25
              
              
              2/07/2011
              
              
              --
              
              
              --
              
              
              --
              
              
              ----
              
              
              450,000(2
              )
              
              --
              
              $
              1.25
              
              
              3/31/2011
              
              
              --
              
              
              --
              
              
              --
              
              
              --




(1)
            The
                vesting date is February 8, 2006.


(2)
            The
                vesting date is March 22, 2006.




28


Director
        Compensation




The
      following table reflects the compensation of directors for the Company’s fiscal
      year ended December 31, 2006:




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
            
            
            7,500
            
            
            --
            
            
            3,992
            
            
            --
            
            
            --
            
            
            --
            
            
            11,492Rachel
                Gong
            
            
            7,500
            
            
            --
            
            
            3,992
            
            
            --
            
            
            --
            
            
            --
            
            
            11,492Yanfang
                Chen
            
            
            7,500
            
            
            --
            
            
            3,992
            
            
            --
            
            
            --
            
            
            --
            
            
            11,492





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, of which
      $7,500 has been paid. 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
      10,231,750 shares of common stock outstanding as of the date of this
      report.




29





Name
                and
            
            
            
            Amount
                andAddress
                of
            
            Title
                of
            
            Nature
                of Beneficial
            
            Percent
                ofBeneficial
                Owner
            
            Class
            
            Ownership
            
            Class
                (1)Barron
              Partners L.P.
            
            
            Common
                Stock
            
            
            1,098,050
            
            
            10.7
            %730
                Fifth Avenue, 9th FloorNew
                York, New York 10019Senshan
                Yang
            
            
            Common
                Stock
            
            
            3,265,000
            
            
            31.9
            %Director
                and CEORoom
                702 Guangri Mansion No. 8South
                Wuyang Xincheng SiGuangzhouChinaMinhua
                Liu
            
            
            Common
                Stock
            
            
            2,612,000
            
            
            25.5
            %Director
                and Executive Vice PresidentRoom
                702 Guangri Mansion No. 8South
                Wuyang Xincheng SiGuangzhouChinaJunhua
                Liu
            
            
            Common
                Stock
            
            
            653,000
            
            
            6.4
            %Room
                702 Guangri Mansion No. 8South
                Wuyang Xincheng SiGuangzhouChinaMeiyi
                Xia
            
            
            Common
                Stock
            
            
            720,000
                (1
            )
            
            7.0
            %Vice
                President24A
                Jefferson PlazaPrinceton,NJ
                08540Lin
                Li
            
            
            Common
                Stock
            
            
            487,500
                (2
            )
            
            4.8
            %Vice
                President and Secretary24A
                Jefferson PlazaPrinceton,NJ
                08540Robert
                Adler
            
            
            Common
                Stock
            
            
            30,000
                (3
            )
            
            0.3
            %Directorc/o
                24A Jefferson PlazaPrinceton,NJ
                08540Rachel
                Gong
            
            
            Common
                Stock
            
            
            30,000
                (3
            )
            
            0.3
            %Directorc/o
                24A Jefferson PlazaPrinceton,NJ
                08540Yanfang
                Chen
            
            
            Common
                Stock
            
            
            30,000
                (3
            )
            
            0.3
            %Directorc/o
                24A Jefferson PlazaPrinceton,NJ
                08540All
                Directors and Officers of the Company
            
            
            Common
                Stock
            
            
            7,827,500
            
            
            69.0
            %as
                a group*
                -
                less than 1%





(1)
            Includes
                570,000 options to purchase our common stock with an exercise price
                of
                $1.25 per share.




30




(2)
            Includes
                450,000 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.




Except
      as
      otherwise indicated, each person has the sole power to vote and dispose of
      all
      shares of common stock listed opposite his or her name. Each person is deemed
      to
      own beneficially shares of common stock which are issuable upon exercise of
      warrants or options or upon conversion of convertible securities if they are
      exercisable or convertible within 60 days of the date of this Annual Report
      on
      Form 10-KSB.





The
      Series A Preferred Stock held by Barron Partners, L.P. may not be converted
      and
      the Investor Warrants held by Barron Partners L.P.may not be exercised if such
      conversion or exercise would result in Barron Partners L.P. owning more than
      4.9% of our outstanding Common Stock in a single conversion or exercise. This
      limitation may not be waived.




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AD
      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.





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.




31





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;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);10.3
              
              Registration
                  rights provisions pursuant to the stock exchange agreement
                  (1);21.1
              
              List
                  of Subsidiaries;23.1
              
              Consent
                  ofMoore
                  Stephens Wurth Fraser and Torbet, LLP dated April 2,
                  200731.1
              
              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.




32




(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 the annual report on Form
                  10-KSB
                  filed by the Company with the Commission on March 31,
                  2006.


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





The
      following lists fees billed by Moore Stephens Wurth Fraser and Torbet, LLP
      (“MSWFT”), current auditors for the Company, from the date on which MSWFT was
      engaged by the Company through the date of this report:




From
                March 8, 2006 throughdate
                of report.Audit
                Fees
            
            $
            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 therefor.




33




**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: April 2, 2007
            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 April 2, 2007.




/s/
                Minhua LiuMinhua
                Liu, Director


/s/
                Senshan YangSenshan
                Yang, Director


/s/
                Robert AdlerRobert
                Adler, Director


/s/
                Rachael GongRachael
                Gong, Director


/s/
                Yanfang ChenYanfang
                Chen, Director




34




**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, 2006 and 2005, and the related
        consolidated statements of income and other comprehensive income, shareholders’
equity, and cash flows for each of the years in the two-year period ended
        December 31, 2006. These consolidated financial statements are the
        responsibility of the company’s management. 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
        consolidated financial statement presentation. We believe that our audits
        provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of China Medicine Corporation
        and subsidiaries as of December 31, 2006 and 2005, and the results of its
        operations and its cash flows for each of the years in the two-year period
        ended
        December 31, 2006, in conformity with accounting principles generally accepted
        in the United States of America.
 
 /s/
                  Moore Stephens Wurth Frazer and Torbet, LLPWalnut,
                  California
                  March
                    28, 2007
 F-1


CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES(FORMERLY
                KNOWN AS LOUNSBERRY HOLDINGS III, INC.)CONSOLIDATED
                BALANCE SHEETSAS
                OF DECEMBER 31, 2006 AND 2005




ASSETS2006
            
            2005CURRENT
                ASSETSCash
            
            $
            371,480
            
            $
            91,964Accounts
                receivable, trade, net of allowance for doubtful accountsof
                $34,021 and $12,333 as of December 31, 2006 and2005,
                respectively
            
            
            7,034,911
            
            
            2,410,824Inventories
            
            
            1,900,467
            
            
            1,382,929Advances
                to suppliers
            
            
            4,077,412
            
            
            1,075,546Other
                current assets
            
            
            42,136
            
            
            38,301Total
                current assets
            
            
            13,426,406
            
            
            4,999,564EQUIPMENT,
                net
            
            
            1,215,311
            
            
            330,015OTHER
                ASSETS - Intangible assets
            
            
            682
            
            
            -Total
                assets
            
            $
            14,642,399
            
            $
            5,329,579LIABILITIES
                 AND  SHAREHOLDERS'  EQUITYCURRENT
                LIABILITIESAccounts
                payable, trade
            
            $
            188,877
            
            $
            170,196Short-term
                loans
            
            
            -
            
            
            95,480Other
                payables - related parties
            
            
            30,000
            
            
            -Other
                payables and accrued liabilities
            
            
            23,265
            
            
            97,449Customer
                deposits
            
            
            17,980
            
            
            37,292Taxes
                payable
            
            
            295,902
            
            
            170,456Liquidated
                damages payable
            
            
            44,003
            
            
            -Total
                liabilities
            
            
            600,027
            
            
            570,873MINORITY
                INTEREST
            
            
            908,480
            
            
            -SHAREHOLDERS'
                EQUITYPreferred
                stock, $0.0001 par value; 10,000,000 sharesauthorized,
                2,340,000 shares issued and outstanding
            
            
            234
            
            
            -Common
                stock, $0.0001 par value; $90,000,000 sharesauthorized,
                8,160,000 shares issued and outstanding at 2006and
                6,530,000 shares issued and outstanding at 2005
            
            
            816
            
            
            653Paid-in
                capital
            
            
            4,396,971
            
            
            120,347Contribution
                receivable
            
            
            (961,500
            )
            
            -Statutory
                reserves
            
            
            1,345,206
            
            
            722,909Retained
                earnings
            
            
            7,979,242
            
            
            3,813,665Accumulated
                other comprehensive income
            
            
            372,923
            
            
            101,132Total
                shareholders' equity
            
            
            13,133,892
            
            
            4,758,706Total
                liabilities and shareholders' equity
            
            $
            14,642,399
            
            $
            5,329,579


See report of independent registered public accounting firm.The accompanying notes are an integral part of this statement.


F-2


CHINA
                  MEDICINE CORPORATION AND SUBSIDIARIES(FORMERLY
                  KNOWN AS LOUNSBERRY HOLDINGS III, INC.)CONSOLIDATED
                  STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOMEFOR
                  THE YEARS ENDED DECEMBER 31, 2006 AND
                  2005
  2006
              
              2005REVENUESProduct
                  sales
              
              $
              20,772,783
              
              $
              12,791,031Medical
                  formula sales
              
              
              3,219,167
              
              
              2,134,872Total
                  revenues
              
              
              23,991,950
              
              
              14,925,903COST
                  OF GOOD SOLD
              
              
              15,017,100
              
              
              8,656,873GROSS
                  PROFIT
              
              
              8,974,850
              
              
              6,269,030OPERATING
                  EXPENSESResearch
                  and development
              
              
              294,080
              
              
              478,590Selling,
                  general and administrative
              
              
              1,565,288
              
              
              511,170Reverse
                  acquisition
              
              
              931,270
              
              
              -Total
                  operating expenses
              
              
              2,790,638
              
              
              989,760INCOME
                  FROM OPERATIONS
              
              
              6,184,212
              
              
              5,279,270OTHER
                  INCOME (EXPENSE), NET
              
              
              (199,945
              )
              
              410,900INCOME
                  BEFORE INCOME TAXES AND MINORITY INTEREST
              
              
              5,984,267
              
              
              5,690,170PROVISION
                  FOR INCOME TAXES
              
              
              1,229,688
              
              
              -INCOME
                  BEFORE MINORITY INTEREST
              
              
              4,754,579
              
              
              5,690,170MINORITY
                  INTEREST
              
              
              33,295
              
              
              -NET
                  INCOME
              
              
              4,787,874
              
              
              5,690,170OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation adjustment
              
              
              271,791
              
              
              101,132COMPREHENSIVE
                  INCOME
              
              $
              5,059,665
              
              $
              5,791,302Earning
                  per share - basic
              
              $
              0.65
              
              $
              0.87Earning
                  per share - diluted
              
              $
              0.63
              
              $
              0.87Weighted
                  average number of shares outstanding - basic
              
              
              7,352,082
              
              
              6,530,000Weighted
                  average number of shares outstanding - diluted
              
              
              7,653,584
              
              
              6,530,000




See
        report of independent registered public accounting firm.
  The
        accompanying notes are an integral part of this statement.
  F-3





CHINA
      MEDICINE CORPORATION AND SUBSIDIARIES


(FORMERLY
      KNOWN AS LOUNSBERRY HOLDINGS III, INC.)





CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY


FOR
      THE
      YEARS ENDED DECEMBER 31, 2006 AND 2005




Retained
                Earnings
            
            AccumulatedCommon
                Stock
            
            Preferred
                Stock
            
            Paid-in
            
            Contribution
            
            Statutory
            
            
            
            other
                  comprehensiveShares
            
            Par
                Value
            
            Shares
            
            Par
                Value
            
            capital
            
            receivable
            
            reserves
            
            Unrestricted
            
            income
            
            TotalsBALANCE,
                December 31, 2004
            
            
            6,530,000
            
            $
            653
            
            
            -
            
            $
            -
            
            $
            120,347
            
            $
            -
            
            $
            722,909
            
            $
            1,234,972
            
            $
            -
            
            $
            2,078,881Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,690,170
            
            
            
            
            
            5,690,170Distributions
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,111,477
            )
            
            
            
            
            (3,111,477
            )Foreign
                currency translation adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            101,132
            
            
            101,132BALANCE,
                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
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            271,791
            
            
            271,791BALANCE,
                December 31, 2006
            
            
            8,160,000
            
            $
            816
            
            
            2,340,000
            
            $
            234
            
            $
            4,396,971
            
            $
            (961,500
            )
            $
            1,345,206
            
            $
            7,979,242
            
            $
            372,923
            
            $
            13,133,892




See
        report of independent registered public accounting firm.
  The
        accompanying notes are an integral part of this statement.


F-4




CHINA
                  MEDICINE CORPORATION AND SUBSIDIARIES(FORMERLY
                  KNOWN AS LOUNSBERRY HOLDINGS III, INC.)CONSOLIDATED
                  STATEMENTS OF CASH FLOWSFOR
                  THE YEARS ENDED DECEMBER 31, 2006 AND 2005


2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            4,787,874
            
            $
            5,690,170Adjustments
                to reconcile net income to cashused
                in operating activities:Depreciation
                and amortization
            
            
            162,051
            
            
            104,890Loss
                (gain) on sale of assets
            
            
            15,732
            
            
            (337,940
            )Stock
                issued for services
            
            
            607,500
            
            
            -Gain
                on distributions of dividends in-kind
            
            
            -
            
            
            (74,828
            )Loss
                from investment
            
            
            110,982
            
            
            -Employee
                stock option
            
            
            86,521
            
            
            -Minority
                interest
            
            
            (33,295
            )
            
            -Change
                in operating assets and liabilities:(Increase)
                decrease in assets:Accounts
                receivable, trade
            
            
            (4,514,763
            )
            
            (1,001,566
            )Inventories
            
            
            (498,624
            )
            
            (1,539,182
            )Other
                receivables
            
            
            (3,172
            )
            
            (35,551
            )Other
                receivables - related parties
            
            
            -
            
            
            2,286Advances
                to suppliers
            
            
            (2,933,832
            )
            
            (617,422
            )Other
                current assets
            
            
            (125,924
            )
            
            16,779Increase
                (decrease) in liabilities:Accounts
                payable, trade
            
            
            17,275
            
            
            (315,015
            )Other
                payables and accrued liabilities
            
            
            (73,246
            )
            
            50,147Other
                payables - related parties
            
            
            30,000
            
            
            -Customer
                deposits
            
            
            (19,140
            )
            
            (664,739
            )Taxes
                payable
            
            
            121,850
            
            
            (105,058
            )Liquidated
                damages payable
            
            
            44,003
            
            
            -Net
                cash (used in) provided by operating activities
            
            
            (2,218,208
            )
            
            1,172,971CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of equipment
            
            
            (825,787
            )
            
            (166,914
            )Purchase
                of intangible assets
            
            
            (703
            )
            
            -Proceeds
                from sale of intangible assets
            
            
            -
            
            
            612,526Net
                cash (used in) provided by investing activities
            
            
            (826,490
            )
            
            445,612CASH
                FLOWS FROM FINANCING ACTIVITIES:Payments
                on short-term loans
            
            
            (94,094
            )
            
            -Proceeds
                from short-term loans
            
            
            -
            
            
            95,095Issuance
                of preferred stocks
            
            
            3,783,000
            
            
            -Payments
                for reverse acquisition
            
            
            (32,398
            )
            
            -Distributions
            
            
            (167,602
            )
            
            (1,892,422
            )Net
                cash provided by (used in) financing activities
            
            
            3,488,906
            
            
            (1,797,327
            )EFFECT
                OF EXCHANGE RATE ON CASH
            
            
            (164,692
            )
            
            27,188INCREASE
                (DECREASE) IN CASH
            
            
            279,516
            
            
            (151,556
            )CASH,
                beginning of year
            
            
            91,964
            
            
            243,520CASH,
                end of year
            
            $
            371,480
            
            $
            91,964


See
      report of independent registered public accounting firm.




The
      accompanying notes are an integral part of this statement.




F-5





CHINA
      MEDICINE CORPORATION AND SUBSIDIARIES


(FORMERLY
      KNOWN AS LOUNSBERRY HOLDINGS III, INC.)





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENT


DECEMBER
      31, 2006


**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 Stockholders in exchange for 6,530,000 shares of the
      Company's common stock. For accounting purposes, the acquisition of Konzern
      has
      been 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 and the 750,000 shares issued as disclosed in Note
      17.





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 17).
      The
      business license provides for a 24 year term and will end on September 2,
      2024.





On
      July
      7, 2006, Konzern entered into a Joint Cooperation Agreement with Guangzhou
      Ji'nan Science & Technology Industrial Group Co., Ltd. ("JSIG") and an
      individual, Mr. Dongsheng Yao, to jointly form Guangzhou Co-win Bioengineering
      Co., Ltd. (“Co-win”) for the purpose of development and application of
      aflatoxin-detoxifizyme ("ADTZ"). Konzern does not have any material relationship
      with JSIG or Mr. Yao other than this Agreement. The business licenses was
      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. As of December 31, 2006, Konzern owns
      a
      70% ownership in Co-win.





Operating
      Activities





The
      Company’s business operations consist of the wholesale of traditional Chinese
      medicine, traditional Chinese medicine raw materials, chemical medicine
      materials, chemical medicines, antibiotics, drugs of diagnosis, medical
      treatment equipment and health care food and biscuits; research and development
      of technology of new medicine and biological pharmacy.




See
      report of independent registered public accounting firm.




F-6


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


**Note
      2 - Summary of significant accounting policies**





Basis
      of presentation





The
      consolidated financial statements of the Company reflect the activities of
      its
      100% owned subsidiary, Konzern, and 70% owned subsidiary, Co-win, both are
      located in the PRC. The consolidated financial statements have been presented
      as
      if the equity Exchange Agreement of the subsidiary (Konzern) occurred during
      the
      year of 2004 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, 2006
      and
      2005, the Company had deposits in excess of federally insured limits total
      of $225,467 and $78,319 ,
      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.




See
      report of independent registered public accounting firm.




F-7


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


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 uncollected aged receivables and deterioration of customer
      operations. As such, the Company records a provision for bad debts that ranges
      from 0.3%
      to
      1.0% of the
      outstanding accounts receivable. The allowance for doubtful accounts as of
      December 31, 2006 and 2005 amounted to $34,021 and
      $12,333, respectively.





Inventories





Inventories
      are stated at the lower of cost or market value, cost is determined using the
      weighted average method.





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:




Furniture
              
              3-5
                  yearsEquipment
              
              3-5
                  yearsMotor
                  vehicles
              
              4-10
                  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 include in the statement
      of
      operations. Maintenance, repairs and minor renewals are charged directly to
      expenses 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".




See
      report of independent registered public accounting firm.




F-8


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


Impairment
      of long-lived assets





Per
      SFAS
      No. 144, long-lived assets will be analyzed for indications of impairment.
      Impairment of long-lived assets is assessed by the Company 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 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.





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 0% 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. 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.




See
      report of independent registered public accounting firm.




F-9


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


Foreign
      currency translation





The
      reporting currency of the Company is the US dollar. The functional currency
      of
      Konzern and Co-win is the Chinese Renminbi. The financial statements of Konzern
      and Co-win are translated to United Stated dollars using year-end exchange
      rates
      as to assets and liabilities and average exchange rates as to revenues and
      expenses. Capital accounts are translated at their historical exchange rates
      when the capital transaction occurred. Net gains and losses resulting from
      foreign exchange translations are included in the statements of operations
      and
      stockholders' equity as other comprehensive income.





This
      quotation of the exchange rates does not imply free convertibility of RMB to
      other foreign currencies. All foreign exchange transactions continue to take
      place either through the People's Bank of China or other banks authorized to
      buy
      and sell foreign currencies at the exchange rate quoted by PRC.





Approval
      of foreign currency payments by the Bank of China or other institutions requires
      submitting a payment application form together with invoices, shipping documents
      and signed contracts.





Translation
      adjustments resulting from this process are included in accumulated other
      comprehensive income in the consolidated statement of income and shareholders'
      equity and amounted to $372,923 and $101,132 for the years ended December 31,
      2006 and 2005, respectively. The balance sheet amounts with the exception of
      equity at December 31, 2006 were translated at 7.82 RMB to $1.00 USD as compared
      to 8.07 RMB at December 31, 2005. The equity accounts were stated at their
      historical rate. The average translation rate of 7.98 RMB and 8.18 RMB for
      the
      years ended December 31, 2006 and 2005, respectively, were applied to the income
      statement accounts.





Comprehensive
      income





The
      foreign currency translation gain or loss resulting from the translation of
      the
      financial statements expressed in Chinese RMB to United States dollars is
      reported as other comprehensive income in the statement of income and the
      statement of shareholders’ equity.





Income
      taxes





The
      Company has adopted 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, 2006 and 2005.





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.




See
      report of independent registered public accounting firm.




F-10


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


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.




China
      Medicine Corporation was incorporated in the United States and has incurred
      net
      operating losses for income tax purposes for 2006 and 2005. The net operating
      loss carry forwards for United States income taxes amounted to $1,467,593 which
      may be available to reduce future years’ taxable income. These carry forwards
      will expire, if not utilized, through 2025 and 2026. Management believes that
      the realization of the benefits from these losses appears uncertain due to
      the
      Company’ 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, 2006 was $499,000. The net change in the
      valuation allowance for 2006 was an increase of $499,000. 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





Effective
      January 1, 2006, 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.




See
      report of independent registered public accounting firm.




F-11






CHINA
      MEDICINE CORPORATION AND SUBSIDIARIES


(FORMERLY
      KNOWN AS LOUNSBERRY HOLDINGS III, INC.)





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2006




Major
      suppliers





For
      the
      years ended December 31, 2006 and 2005, two suppliers accounted for
      approximately 44 %
      and
      59%, respectively, of the Company's purchases.





Major
      customers





For
      the
      years ended December 31, 2006 and 2005, two customers accounted for
      approximately 46% and 72%, respectively, of the Company's sales. The accounts
      receivable balance of these two customers amounted $606,988 as of December
      31,
      2006.





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.





The
      following is a reconciliation of the basic and diluted earnings per share
      computations for the years ended December 31, 2006 and 2005:





2006
            
            2005Net
                income for basic earnings per share
            
            $
            4,787,874
            
            $
            5,690,170Shares
                of common stock and commonstock
                equivalents:Weighted
                average shares used in basic computation
            
            
            7,352,082
            
            
            6,530,000Convertible
                preferred stock
            
            
            301,502
            
            
            -Weighted
                average shares used in diluted computation
            
            
            7,653,584
            
            
            6,530,000Earnings
                per share:Basic
            
            $
            0.65
            
            $
            0.87Diluted
            
            $
            0.63
            
            $
            0.87




The following options and warrants have been excluded from
      diluted earnings per share because they are anti-dilutive:


2006
              
              2005Options
              
              
              13,700,000
              
              
              0Warrants
              
              
              7,389,476
              
              
              021,089,476
              
              
              0


Reclassifications





Certain
      prior year amounts have been reclassified to conform to current year
      presentation. These reclassifications have no effect on net income or cash
      flows.




See
      report of independent registered public accounting firm.




F-12


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


Recently
      issued accounting pronouncements





In
      February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
      Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. This statement is effective for all financial instruments acquired
      or issued after the beginning of the Company’s first fiscal year that begins
      after September 15, 2006. The
      Company does not expect the adoption of SFAS 155 to have a material impact
      on
      the consolidated financial statements.





In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets" ("FAS 156"), which amends SFAS No. 140. FAS 156 specifically provides
      guidance addressing the recognition and measurement of separately recognized
      servicing assets and liabilities, common with mortgage securitization
      activities, and provides an approach to simplify efforts to obtain hedge
      accounting treatment. FAS 156 is effective for all separately recognized
      servicing assets and liabilities acquired or issued after the beginning of
      an
      entity's fiscal year that begins after September 15, 2006, with early adoption
      being permitted. This statement is effective as of the beginning of the
      Company’s first fiscal year that begins after September 15, 2006. The
      Company does not expect the adoption of SFAS 156 to have a material impact
      on
      the consolidated financial statements.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
      in
      Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN
      48
      clarifies the accounting for uncertainty in income taxes recognized in a
      company's financial statements in accordance with FAS 109, "Accounting for
      Income Taxes". FIN 48 prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in a tax return. FIN 48 also provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition. The requirements of FIN 48 are
      effective beginning January 1, 2007. The
      Company does not expect the adoption
      of FIN 48 to have a material impact on the consolidated financial statements.




See
      report of independent registered public accounting firm.




F-13


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (“SFAS 157”), which provides enhanced
      guidance for using fair value to measure assets and liabilities. This standard
      also responds to investors’ requests for expanded information about the extent
      to which companies measure assets and liabilities at fair value, the information
      used to measure fair value, and the effect of fair value measurements on
      earnings. The standard applies whenever other standards require (or permit)
      assets or liabilities to be measured at fair value. The standard does not expand
      the use of fair value in any new circumstances. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 12,
      2007, and interim periods within those fiscal years. Early adoption is
      permitted. The Company is currently evaluating whether the adoption of SFAS157
      will have a material effect on the consolidated results of operations and
      financial condition.





In
      September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
      Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
      88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
      employer to recognize the overfunded or underfunded status of a defined benefit
      postretirement plan (other than a multiemployer plan) as an asset or liability
      in its statement of financial position and to recognize changes in that funded
      status in the year in which the changes occur through comprehensive income
      of a
      business entity or changes in unrestricted net assets of a not-for-profit
      organization. This Statement also improves financial reporting by requiring
      an
      employer to measure the funded status of a plan as of the date of its year-end
      statement of financial position, with limited exceptions. An employer with
      publicly traded equity securities is required to initially recognize the funded
      status of a defined benefit postretirement plan and to provide the required
      disclosures as of the end of the fiscal year ending after December 15, 2006.
      An
      employer without publicly traded equity securities is required to recognize
      the
      funded status of a defined benefit postretirement plan and to provide the
      required disclosures as of the end of the fiscal year ending after June 15,
      2007. However, an employer without publicly traded equity securities is required
      to disclose the following information in the notes to financial statements
      for a
      fiscal year ending after December 15, 2006, but before June 16, 2007, unless
      it
      has applied the recognition provisions of this Statement in preparing those
      financial statements. The requirement to measure plan assets and benefit
      obligations as of the date of the employer’s fiscal year-end statement of
      financial position is effective for fiscal years ending after December 15,
      2008. The
      Company is currently evaluating whether the adoption of SFAS158 will have a
      material effect on the consolidated results of operations and financial
      condition.


.


**Note
      3 - Contribution receivable**





On
      July
      7, 2006, Konzern, our 100% subsidiary in China, entered into a Joint Cooperation
      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 this Agreement.




See
      report of independent registered public accounting firm.




F-14


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


Ji'nan
      University, for whom JSIG is the agent, is the holder of the four Chinese
      patents on ADTZ of which Mr. Yao is the inventor. JSIG and Mr. Yao contributed
      the four patents 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
      are to be paid a total of approximately $125,000, as a technology contribution
      fee from the joint venture company. The agreement provides that we are to invest
      a total of approximately $2.2 million, of which $625,000 has been paid and
      the
      balance is due within two years, based on the development effort, for which
      we
      will receive a 70% equity interest in the joint venture company. JSIG is to
      transfer to the joint venture four patents covering ADTZ.





The
      contribution receivable represents the capital contribution to be made by
      Guangzhou Jinan Keji Chanyu Group Ltd. and Dongsheng Yang to Co-win by June
      30,
      2007. The contribution receivable amounted $961,500 as of December 31, 2006,





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 formation of the joint
      venture company is pending the approval and license from Guangzhou Industrial
      and Commerce Bureau in China.





**Note
      4 - Inventories**





Inventories
      at December 31 consisted of the following:




2006
            
            2005Chemical
                Medicine
            
            $
            1,897,789
            
            $
            1,382,929Traditional
                Chinese Medicine
            
            
            2,678
            
            
            -Totals
            
            $
            1,900,467
            
            $
            1,382,929




**Note
      5 - Advances to suppliers**





Advances
      to suppliers for inventory purchases as of December 31, 2006 and 2005 amounted
      to $4,077,412 and $1,075,546, respectively.


F-15


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
   **Note
          6 - Equipment**
 
 Equipment
          at December 31 consisted of the following:
  See
          report of independent registered public accounting
          firm.


2006
              
              2005Furniture
                  and fixtures
              
              $
              205,182
              
              $
              160,081Equipment
              
              
              1,076,368
              
              
              369,459Motor
                  vehicles
              
              
              227,933
              
              
              132,804Total
              
              
              1,509,483
              
              
              662,344Less
                  accumulated depreciation
              
              
              294,172
              
              
              332,329Equipment,
                  net
              
              $
              1,215,311
              
              $
              330,015




Depreciation
      expense for the years ended December 31, 2006 and 2005 amounted to $162,015
      and
      $104,890 respectively.





**Note
      7 - 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 $17,980 and $37,292 as of December 31,
      2006 and 2005, respectively.





**Note
      8 - Taxes**





The
      Company is organized in the United States and no tax benefit is expected from
      tax credits in the future.





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 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%.





The
      estimated tax savings for the period ending December 31, 2006 and 2005 amounted
      $1,229,688 and $1,877,756 respectively. The net effect on earnings per share if the income tax had been
      applied would decrease earnings per share from $0.65 to $0.48
      for the year ended December 31, 2006 and from $0.87 to $0.58
      for the year ended December 31, 2005, respectively.




F-16


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006
   The
          provision for income taxes at December 31 consisted of the
          following:
  See
          report of independent registered public accounting firm.


2006
              
              2005Provision
                  for China Income Tax
              
              $
              1,117,898
              
              $
              -Provision
                  for Local Tax
              
              
              111,790
              
              
              -Total
              
              $
              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:





2006
            
            2005U.S.
                Statutory rates
            
            
            34.0
            %
            
            34.0
            %Foreign
                income not reognized in USA
            
            
            (34.0
            )
            
            (34.0
            )China
                income taxes
            
            
            33.0
            
            
            -Income
                tax exemption
            
            
            (16.5
            )
            
            -Effective
                tax rate
            
            
            16.5
            %
            
            -
            %




Taxes
      payable consisted of the following at December 31:


2006
              
              2005Income
                  taxes payable
              
              $
              (15,380
              )
              $
              -Individual
                  income tax
              
              
              487
              
              
              205Value
                  added tax
              
              
              310,795
              
              
              170,251Total
              
              $
              295,902
              
              $
              170,456




**Note
      9 - Short-term loans**





In
      January 2006, the Company repaid $95,696 in short term loans to CITIC Industrial
      Bank including interest of $1,582.


December
                  31,
              
              December
                  31,2006
              
              2005Citic
                  Industrial Bank due February 1, 2006,annual
                  interest rate at 5.22%
              
              $
              -
              
              $
              95,480


**Note
      10 - Related party transactions**





As
      of
      December 31, 2006 and 2005, the due from related parties amounted to $30,000
      and
      $0, respectively. Those amounts were generated from making cash advances to
      or
      from the shareholders for ordinary business expenses. These amounts are
      unsecured, non interest bearing, and have no fixed terms of
      repayment.





F-17


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


**Note
        11 - Minority interest**
  See
        report of independent registered public accounting firm.


Minority
      interest consists of the interest of minority shareholders in Co-win. The
      Company’s wholly owned subsidiary Konzern owns 70% ownership interest in
      Co-win.





**Note
      12 - Commitments and contingencies**





Operating
      lease





The
      Company leases its facilities under short-term and long-term, non-cancelable
      operating lease agreements expiring through August 2009. The non-cancelable
      operating lease agreement states that the Company pays certain operating
      expenses applicable to the leased premises.





Total
      rental expense for the years ended December 31, 2006 and 2005 amounted to
      $74,690 and $31,282, respectively.





As
      of
      December 31, 2006, the future minimum annual lease payments required are as
      follows:


Year
                  Ending December 31,
              
              Amount2007
              
              
              72,5162008
              
              
              50,8202009
              
              
              26,380Thereafter
              
              
              —


**Notes
      13 - Supplemental disclosure of cash flows**





The
      Company paid $1,975 and $1,582 for interest and $1,244,743 and $2,900 for income
      tax for the years ended December 31, 2006 and 2005, respectively.





**Note
      14 - Statutory reserves**





The
      Company is required to make appropriations to reserve funds, comprising the
      statutory surplus reserve and discretionary surplus reserve, based on after-tax
      net income determined in accordance with generally accepted accounting
      principles of People's Republic of China ("PRC GAAP"). Appropriation to the
      statutory surplus reserve is required to be at least 10% of the after tax net
      income determined in accordance with PRC GAAP until the reserve is equal to
      50%
      of the entities' registered capital. Appropriations to the discretionary surplus
      reserve are made at the discretion of the Board of Directors.




See
      report of independent registered public accounting firm.





F-18






CHINA
      MEDICINE CORPORATION AND SUBSIDIARIES


(FORMERLY
      KNOWN AS LOUNSBERRY HOLDINGS III, INC.)





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
      31, 2006





The
      statutory 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.





The
      discretionary surplus fund may be used to acquire fixed assets or to increase
      the working capital to expend on production and operation of the business.
      The
      Company's Board of Directors decided not to make an appropriation to this
      reserve for 2006 and 2005.





The
      Company was required to transfer 5% to 10% of its net income, as determined
      in
      accordance with the PRC accounting rules and regulations, to the statutory
      common welfare fund. Effective January 1, 2006, the Chinese authority is no
      longer requiring the Company to reserve funds, and the prior reserve was
      transferred to statutory surplus reserve.





According
      to the Company’s articles, the Company should appropriate 10% of the net profit
      as statutory surplus reserve. For the year ended December 31, 2006 and 2005, the
      Company appropriated to the statutory surplus reserve in the amount of
      $1,345,206 and $722,909, respectively.





**Note
      15 - 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 $38,575 and $23,575 during the years
      ended
      December 31, 2006 and 2005, respectively.





**Note
      17 - Shareholders’ equity**





Sale
      of preferred stock





Contemporaneously
      with the reverse acquisition, the Company entered into a Preferred Stock
      Purchase Agreement, 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.




See
      report of independent registered public accounting firm.






F-19


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


The
      Series A Convertible Preferred Stock is convertible, at the option of the holder
      and at any time, into 3,120,000 shares of common stock. 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.




The
      warrants have a term of five years and are exercisable by the holder at any
      time. 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. Further, the Series A Preferred Stock can not be converted and
      the
      warrants can not 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 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.




See
      report of independent registered public accounting firm.




F-20


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


Under
      a
      Registration Rights Agreement with the investors, the Company is 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 but has not yet become
      effective. Accordingly, effective August 8, 2006, the Company has begun to
      incur
      obligations to pay liquidated damages under the Registration Rights Agreement.
      The Company is required to pay to the investors liquidated damages of 1,025
      shares of series A preferred stock each day until the registration statement
      is
      effective, up to a maximum total of 375,000 shares. After the registration
      statement becomes effective, 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 registrable securities.





The
      registration statement became effective on October 17, 2006. As
      of
      December 31, 2006, the Company has accrued $44,003 for the liquidated damages
      pursuant to that agreement. This amount has been included in general and
      administrative expenses.





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 of $3,783,000, representing the gross
      proceeds received of $3,900,000, net of $117,000 of commissions, has been
      credited to additional paid-in capital.





Common
      stock





The
      Company issued 750,000 shares of common stock to individuals for services
      performed and of which 150,000 shares were issued to Ms. Mary Xia and 37,500
      shares were issued to Ms. Lin Li, who are officers of the Company. There is
      no
      established market for the Company's common stock. Accordingly, the fair value
      of the common stock of $0.81 has been estimated 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.





During
      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. As
      of
      December 31, 2006, the Company has 8,160,000 shares of common stocks, and
      2,340,000 shares of preferred stocks outstanding.





Stock
      options





On
      February 8, 2006, contemporaneously with the reverse acquisition, the Company
      granted options to purchase 430,000 of common stock of which options to purchase
      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 to $0.23
      per share subject to the exercise of options. The plan was approved by the
      stockholders of the Company in July 2006.




See
      report of independent registered public accounting firm.




F-21


CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 (FORMERLY
        KNOWN AS LOUNSBERRY HOLDINGS III, INC.)
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2006


SFAS
      No.
      123 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. The weighted average risk-free rate was 4.65%. 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.





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
            %





See
      report of independent registered public accounting firm.




OptionSummary
                  of stock option activities:
              
              Number
                  of Outstanding
                Options
              
              Exercisable
              
              Non
                  vested options
              
              Weighted-Average
                  Exercise Price
              
              Weighted-Average
                  Remaining Contractual Term (years)Outstanding
                  as of December 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Granted
                  on February 8, 2006
              
              
              430,000
              
              
              143,000
              
              
              287,000
              
              
              1.25
              
              
              1.67Granted
                  on March 22, 2006
              
              
              850,000
              
              
              283,000
              
              
              567,000
              
              
              1.25
              
              
              1.75Granted
                  on May 9, 2006
              
              
              90,000
              
              
              90,000
              
              
              -
              
              
              1.25
              
              
              1.83Exercised
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Outstanding
                  as of December 31, 2006
              
              
              1,370,000
              
              
              516,000
              
              
              854,000




WarrantSummary
                  of warrants activities:
              
              Number
                  of warrants
              
              Fair
                  Market Vaue
              
              Weighted-Average
                  Exercise Price
              
              Weighted-Average
                  Remaining Contractual Term (years)Outstanding
                  as of December 31, 2005
              
              
              -
              
              
              
              
              
              -
              
              
              -Granted
                  on February 8, 2006
              
              
              3,694,738
              
              
              0.81
              
              
              1.75
              
              
              4.17Granted
                  on February 8, 2006
              
              
              3,694,738
              
              
              0.81
              
              
              2.50
              
              
              4.17Exercised
              
              
              -Forfeited
              
              
              -Outstanding
                  as of December 31, 2006
              
              
              7,389,476




F-22