**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**





(Mark
      One)





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934.





For
      the
      quarterly period ended **September
      30, 2007**




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





For
      the
      transition period from ____________ to ____________





Commission
      File Number 000-51379





**CHINA
      MEDICINE CORPORATION**


(Exact
      name of small business issuer as specified in its charter)




Delaware
            
            51-0539830(State
                or other jurisdiction of
            
            (IRS
                Employerincorporation
                or organization)
            
            Identification
                No.)





24A
      Jefferson Plaza,


Princeton,
      NJ 08540


(Address
      of principal executive offices)





(732)
      438 8866


(Issuer's
      telephone number)




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





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





APPLICABLE
      ONLY TO CORPORATE ISSUERS





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: 14,821,641 shares of Common Stock,
      $.0001 par value, were outstanding as of November 7, 2007.





Transitional
      Small Business Disclosure Format (check one); Yes o No x







TABLE
      OF
      CONTENTS





PagePART
                I
            
            FINANCIAL
                INFORMATIONItem
                1.
            
            Financial
                Statements
            
            F-1Consolidated
                Balance SheetsAs
                of September 30, 2007 (Unaudited) and December 31, 2006
            
            F-1Consolidated
                Statements of Income and Other Comprehensive IncomeFor
                the Three Months Ended September 30, 2007 and 2006and
                For the Nine Months Ended September 30, 2007 and 2006
                (Unaudited)
            
            F-2Consolidated
                Statements of Shareholders’ EquityFor
                the Nine Months Ended September 30, 2007 and 2006
                (Unaudited)
            
            F-3Consolidated
                Statements of Cash FlowsFor
                the Nine Months Ended September 30, 2007 and 2006
                (Unaudited)
            
            F-4Notes
                to Consolidated Financial StatementsSeptember
                30, 2007 (Unaudited)
            
            F-5Item
                2.
            
            Management’s
                Discussion and Analysis or Plan of Operation.
            
            2Item
                3.
            
            Controls
                and Procedures
            
            9PART
                II
            
            OTHER
                INFORMATIONItem
                5.
            
            Unregistered
                Sales of Equity Securities and Use of proceeds.
            
            10Item
                6.
            
            Exhibits
            
            10Signatures
            
            
            
            11Exhibits/
                Certifications





2




**PART
      I - FINANCIAL INFORMATION**





**Item
      1.** **Financial
      Statements**


CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
          BALANCE SHEETS
 AS
            OF
            SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
 September
                  30,
              
              December
                  31,2007
              
              2006UnauditedASSETSCURRENT
                  ASSETSCash
              
              $
              4,128,170
              
              $
              371,480Accounts
                  receivable, trade, net of allowance for doubtful accountsof
                  $35,401 and $34,021 as of September 30, 2007 andDecember
                  31, 2006, respectively
              
              
              8,992,953
              
              
              7,034,911Inventories
              
              
              5,231,818
              
              
              1,900,467Advances
                  to suppliers
              
              
              6,300,078
              
              
              4,077,412Other
                  current assets
              
              
              86,576
              
              
              42,136Total
                  current assets
              
              
              24,739,595
              
              
              13,426,406EQUIPMENT,
                  net
              
              
              1,293,904
              
              
              1,215,311OTHER
                  ASSETS - Intangible assets, net
              
              
              134,054
              
              
              682Total
                  assets
              
              $
              26,167,553
              
              $
              14,642,399LIABILITIES
                  AND SHARE HOLDERS' EQUITYCURRENT
                  LIABILITIESAccounts
                  payable, trade
              
              $
              320,220
              
              $
              188,877Other
                  payables - related parties
              
              
              65,132
              
              
              30,000Other
                  payables and accrued liabilities
              
              
              9,878
              
              
              23,265Customer
                  deposits
              
              
              343,972
              
              
              17,980Taxes
                  payable
              
              
              382,197
              
              
              295,902Liquidated
                  damages payable
              
              
              44,003
              
              
              44,003Total
                  liabilities
              
              
              1,165,402
              
              
              600,027MINORITY
                  INTEREST
              
              
              895,033
              
              
              908,480SHAREHOLDERS'
                  EQUITYPreferred
                  stock, $0.0001 par value; 10,000,000 shares authorized,606,255
                  shares issued and outstanding at September 30, 2007 and2,340,000
                  shares issued and outstanding at December 31, 2006
              
              
              61
              
              
              234Common
                  stock, $0.0001 par value; 90,000,000 shares authorized,13,306,738
                  shares issued and outstanding at September 30, 2007and
                  8,160,000 shares issued and outstanding at December 31,
                  2006
              
              
              1,331
              
              
              816Paid-in
                  capital
              
              
              10,372,647
              
              
              4,396,971Contribution
                  receivable
              
              
              (961,500
              )
              
              (961,500
              )Statutory
                  reserves
              
              
              1,345,206
              
              
              1,345,206Retained
                  earnings
              
              
              12,076,011
              
              
              7,979,242Accumulated
                  other comprehensive income
              
              
              1,273,362
              
              
              372,923Total
                  shareholders' equity
              
              
              24,107,118
              
              
              13,133,892Total
                  liabilities and shareholders' equity
              
              $
              26,167,553
              
              $
              14,642,399
 The accompanying notes are an integral part of this consolidated statement.F-1CHINA MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME(Unaudited)
 FOR
                  THREE MONTHS ENDED
              
              FOR
                  NINE MONTHS ENDEDSEPTEMBER
                  30,
              
              SEPTEMBER
                  30,2007
              
              2006
              
              2007
              
              2006REVENUESProduct
                  sales
              
              $
              11,904,525
              
              $
              6,366,619
              
              $
              24,552,269
              
              $
              13,856,558Medical
                  formula sales
              
              
              684,413
              
              
              1,229,912
              
              
              1,393,632
              
              
              1,589,136Total
                  revenues
              
              
              12,588,938
              
              
              7,596,531
              
              
              25,945,901
              
              
              15,445,694COST
                  OF GOOD SOLD
              
              
              8,765,477
              
              
              4,490,055
              
              
              18,029,902
              
              
              9,910,331GROSS
                  PROFIT
              
              
              3,823,461
              
              
              3,106,476
              
              
              7,915,999
              
              
              5,535,363OPERATING
                  EXPENSESResearch
                  and development
              
              
              336,794
              
              
              31,361
              
              
              437,449
              
              
              270,702Selling,
                  general and administrative
              
              
              830,518
              
              
              185,517
              
              
              2,435,288
              
              
              1,084,194Reverse
                  acquisition
              
              
              -
              
              
              -
              
              
              -
              
              
              931,270Total
                  operating expenses
              
              
              1,167,312
              
              
              216,878
              
              
              2,872,737
              
              
              2,286,166INCOME
                  FROM OPERATIONS
              
              
              2,656,149
              
              
              2,889,598
              
              
              5,043,262
              
              
              3,249,197OTHER
                  INCOME (EXPENSE), NET
              
              
              13,694
              
              
              (136,645
              )
              
              3,604
              
              
              (143,757
              )INCOME
                  BEFORE INCOME TAXES
              
              
              2,669,843
              
              
              2,752,953
              
              
              5,046,866
              
              
              3,105,440AND
                  MINORITY INTERESTPROVISION
                  FOR INCOME TAXES
              
              
              480,458
              
              
              475,574
              
              
              1,018,743
              
              
              729,831INCOME
                  BEFORE MINORITY INTEREST
              
              
              2,189,385
              
              
              2,277,379
              
              
              4,028,123
              
              
              2,375,609MINORITY
                  INTEREST
              
              
              16,529
              
              
              -
              
              
              68,646
              
              
              -NET
                  INCOME
              
              
              2,205,914
              
              
              2,277,379
              
              
              4,096,769
              
              
              2,375,609OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation adjustment
              
              
              341,114
              
              
              128,142
              
              
              900,439
              
              
              199,840COMPREHENSIVE
                  INCOME
              
              $
              2,547,028
              
              $
              2,405,521
              
              $
              4,997,208
              
              $
              2,575,449Earning
                  per share - basic
              
              $
              0.17
              
              $
              0.31
              
              $
              0.35
              
              $
              0.33Earning
                  per share - diluted
              
              
              0.14
              
              
              0.29
              
              $
              0.30
              
              $
              0.31Weighted
                  average number of shares outstanding - basic
              
              
              13,306,738
              
              
              7,380,000
              
              
              11,585,981
              
              
              7,250,926Weighted
                  average number of shares outstanding - diluted
              
              
              15,586,809
              
              
              7,749,000
              
              
              13,866,051
              
              
              7,563,893
  The accompanying notes are an integral part of this
        consolidated statement.
  F-2
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF SHAREHOLDERS' EQUITY
 FOR
            THE
            NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
  AccumulatedPreferred
                      Stock
              
              Common  Stock
              
              
              
              
              
              Retained
                  Earnings
              
              otherPar
              
              
              
              Par
              
              Paid-in
              
              Contribution
              
              Statutory
              
              
              
              comprehensiveShares
              
              Value
              
              Shares
              
              Value
              
              capital
              
              receivable
              
              reserves
              
              Unrestricted
              
              income
              
              TotalsBALANCE,
                  December 31, 2005
              
              
              -
              
              $
              -
              
              
              6,530,000
              
              $
              653
              
              $
              120,347
              
              $
              -
              
              $
              722,909
              
              $
              3,813,665
              
              $
              101,132
              
              $
              4,758,706Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,375,609
              
              
              
              
              
              2,375,609Reverse
                  acquisition, February 8, 2006
              
              
              
              
              
              
              
              
              1,028,000
              
              
              103
              
              
              (32,501
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (32,398
              )Shares
                  redeemed in connection withreverse
                  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
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,783,000Stock
                  options granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              65,067
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              65,067Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              199,840
              
              
              199,840BALANCE,
                  September 30, 2006 (Unaudited)
              
              
              3,120,000
              
              $
              312
              
              
              7,380,000
              
              $
              738
              
              $
              4,375,517
              
              $
              -
              
              $
              722,909
              
              $
              6,189,274
              
              $
              300,972
              
              $
              11,589,722Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,412,265
              
              
              
              
              
              2,412,265Adjustment
                  of statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              622,297
              
              
              (622,297
              )
              
              
              
              
              -Preferred
                  stock converted to common stock
              
              
              (780,000
              )
              
              (78
              )
              
              780,000
              
              
              78
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Stock
                  options granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,454
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,454Contribution
                  receivable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (961,500
              )
              
              
              
              
              
              
              
              
              
              
              (961,500
              )Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              71,951
              
              
              71,951BALANCE,
                  December 31, 2006
              
              
              2,340,000
              
              $
              234
              
              
              8,160,000
              
              $
              816
              
              $
              4,396,971
              
              $
              (961,500
              )
              $
              1,345,206
              
              $
              7,979,242
              
              $
              372,923
              
              $
              13,133,892Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,096,769
              
              
              
              
              
              4,096,769Preferred
                  stock converted to common stock
              
              
              (1,733,745
              )
              
              (173
              )
              
              1,773,448
              
              
              177
              
              
              (4
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Warrants
                  exercised
              
              
              
              
              
              
              
              
              3,315,790
              
              
              332
              
              
              5,717,789
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,718,121Stock
                  option granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              78,497
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              78,497Common
                  stock issued for services
              
              
              
              
              
              
              
              
              57,500
              
              
              6
              
              
              179,394
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              179,400Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              900,439
              
              
              900,439BALANCE,
                  September 30, 2007 (Unaudited)
              
              
              606,255
              
              $
              61
              
              
              13,306,738
              
              $
              1,331
              
              $
              10,372,647
              
              $
              (961,500
              )
              $
              1,345,206
              
              $
              12,076,011
              
              $
              1,273,362
              
              $
              24,107,118
  The accompanying notes are an integral part of this
        consolidated statement.
  F-3
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 FOR
          THE
          NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 (Unaudited)
  2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              4,096,769
              
              $
              2,375,609Adjustments
                  to reconcile net income to cashused
                  in operating activities:Minority
                  interest
              
              
              (68,646
              )
              
              -Depreciation
                  and amortization
              
              
              199,575
              
              
              128,152Loss
                  on sale of assets
              
              
              -
              
              
              15,658Stock
                  issued for services
              
              
              179,400
              
              
              672,567Employee
                  stock option
              
              
              78,497
              
              
              -Loss
                  on currency exchange
              
              
              19,620
              
              
              -Change
                  in operating assets and liabilities:(Increase)
                  decrease in assets:Accounts
                  receivable, trade
              
              
              (1,638,087
              )
              
              (3,095,070
              )Inventories
              
              
              (3,186,935
              )
              
              (96,958
              )Other
                  receivables
              
              
              -
              
              
              (153,754
              )Advances
                  to suppliers
              
              
              (2,014,715
              )
              
              (1,503,595
              )Other
                  current assets
              
              
              (41,847
              )
              
              22,746Increase
                  (decrease) in liabilities:Accounts
                  payable, trade
              
              
              121,123
              
              
              173,827Other
                  payables - related parties
              
              
              33,213
              
              
              (32,398
              )Other
                  payables and accrued liabilities
              
              
              (14,034
              )
              
              33,524Customer
                  deposits
              
              
              318,533
              
              
              22,831Taxes
                  payable
              
              
              72,756
              
              
              696,881Liquidated
                  damages payable
              
              
              -
              
              
              44,003Net
                  cash used in operating activities
              
              
              (1,844,778
              )
              
              (695,977
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of equipment
              
              
              (228,213
              )
              
              (1,520,555
              )Deposit
                  for investment
              
              
              -
              
              
              (774,876
              )Purchase
                  of intangible asset
              
              
              (130,640
              )
              
              -Net
                  cash used in investing activities
              
              
              (358,853
              )
              
              (2,295,431
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Payments
                  on short-term loans
              
              
              -
              
              
              (95,974
              )Proceeds
                  from issuance of preferred stock
              
              
              -
              
              
              3,783,000Proceeds
                  from exercise of warrants
              
              
              5,718,121
              
              
              -Cash
                  paid on shares redeemed
              
              
              -
              
              
              (167,602
              )Net
                  cash provided by financing activities
              
              
              5,718,121
              
              
              3,519,424EFFECT
                  OF EXCHANGE RATE ON CASH
              
              
              242,200
              
              
              22,043INCREASE
                  IN CASH
              
              
              3,756,690
              
              
              550,059CASH,
                  beginning of period
              
              
              371,480
              
              
              91,964CASH,
                  end of period
              
              $
              4,128,170
              
              $
              642,023SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid for income taxes
              
              $
              703,012
              
              $
              2,900Cash
                  paid for interest expense
              
              $
              -
              
              $
              1,582
  The accompanying notes are an integral part of this
        consolidated statement.
  F-4


CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 **Note
        1 - Organization**
 
 Organization
 
 China
        Medicine Corporation (the "Company") is a Delaware corporation, incorporated
        on
        February 10, 2005 under the name Lounsberry Holdings III, Inc., for the purpose
        of acquiring, or merging with, an operating business. On May 10, 2006, the
        Company changed its corporate name to China Medicine Corporation.
 
 Effective
        February 8, 2006, the Company entered into a Stock Exchange Agreement ("Exchange
        Agreement") with Guangzhou Konzern Medicine Co., Ltd. ("Konzern"). Pursuant
        to
        the Exchange Agreement, the Company, at closing, acquired all of the capital
        of
        Konzern from Konzern’s three principal shareholders (“Konzern Stockholders”) in
        exchange for 6,530,000 shares of the Company's common stock. For accounting
        purposes, the acquisition of Konzern was treated as a recapitalization of
        Konzern with Konzern as the acquirer. The historical financial statements
        prior
        to February 8, 2006 are those of Konzern. Contemporaneously with the reverse
        acquisition, the Company redeemed 928,000 shares of common stock from its
        then
        principal stockholder who is not affiliated with the Konzern Stockholders
        or any
        member of the investor group for $167,602 and paid off loans from a related
        party for $32,398. The 928,000 shares purchased constituted approximately
        90.3%
        of the 1,028,000 shares of common stock outstanding prior to the issuance
        of the
        shares of common stock pursuant to the Exchange Agreement. We issued 750,000
        shares of common stock as disclosed in Note 15.
 
 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 15).
        The
        business license provides for a 24 year term and will end on September 2,
        2024.
 
 Konzern
        US Holding Corporation (“Konzern Holding”) was registered in New Jersey on
        January 12, 2006 for the purpose of distributing and marketing drugs, medical
        supplies and medical equipments. Konzern Holding is wholly owned by Konzern
        with
        100,000 shares of stock authorized. Konzern Holding had no operating activities
        until September 2007, and obtained $200,000 from Konzern as initial investment.
 
 On
        July
        7, 2006, Konzern entered into a Joint Cooperation Agreement with Guangzhou
        Ji'nan Science & Technology Industrial Group Co., Ltd. ("JSIG") and Mr.
        Dongsheng Yao, an unrelated third party, to jointly form Guangzhou Co-win
        Bioengineering Co., Ltd. (“Co-win”) for the purpose of development and
        application of aflatoxin-detoxifizyme ("ADTZ"). Mr. Dongsheng Yao became
        board
        of director after the formation of Co-win. Konzern does not have any material
        relationship with JSIG or Mr. Yao other than this Agreement. The business
        licenses were approved by Guangzhou Commercial and Administrative Bureaus
        on
        October 27, 2006. The registered capital is RMB 25,000,000, approximately
        $3,200,000 with a 2-year term from June 5, 2006 to June 5, 2008. As of September
        30, 2007, Konzern owns a 70% ownership in Co-win.
  F-5
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 Operating
        Activities
 
 The
        Company’s business operations consist of the wholesale of prescription and over
        the counter medicines, traditional Chinese medicines, which are medicines
        derived from Chinese herbs, dietary supplements, medical instruments and
        the
        sale of medical formula.
 
 **Note
        2 - Summary of significant accounting policies**
 
 Basis
        of presentation
 
 The
        consolidated financial statements of the Company reflect its wholly-owned
        subsidiary, Konzern, its 70% owned subsidiary, Co-win, both located in the
        PRC,
        and its wholly-owned subsidiary Konzern US Holding. The consolidated financial
        statements have been presented as if the equity Exchange Agreement of Konzern
        occurred at the beginning of 2006 due to common management and
        ownership.
 
 The
        accompanying financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        All
        material transactions and balances have been eliminated in the
        consolidation.
 
 Use
        of
        estimates
 
 In
        preparing financial statements in conformity with generally accepted accounting
        principles, management is required to make estimates and assumptions that
        affect
        the reported amounts of assets and liabilities and the disclosure of contingent
        assets and liabilities at the date of the financial statements and revenues
        and
        expenses during the reported period. Actual results could differ from those
        estimates.
 
 Cash
        and concentration of risk
 
 For
        purposes of the cash flow statements, the Company considers all highly liquid
        investments with original maturities of three months or less at the time
        of
        purchase to be cash equivalents. Cash includes cash on hand and demand deposits
        in accounts maintained with state owned banks within PRC and the United
        States.
 
 The
        Company's operations may be adversely affected by significant political,
        economic and social uncertainties in China. Although the Chinese government
        has
        pursued economic reform policies in the past, there is no assurance that
        the
        Chinese government will continue to pursue such policies or that such policies
        may not be significantly altered, especially in the event of a change in
        leadership, social or political disruption or unforeseen circumstances affect
        China's political, economic and social conditions. There is also no guarantee
        that the Chinese government's pursuit of economic reforms will be consistent
        or
        effective.
 
 Financial
        instruments, which subject the Company to concentration of credit risk, consist
        of cash. The Company maintains balances at financial institutions which,
        from
        time to time, may exceed Federal Deposit Insurance Corporation insured limits
        for the bank that is located in the Unites States, no deposits with the state
        owned banks within the PRC are covered by insurance. As of September 30,
        2007
        and December 31, 2006, the Company had deposits in excess of federally insured
        limits total of $3,907,714 and $225,467 ,
        respectively. The Company has not experienced any losses in such accounts
        and
        believes it is not exposed to any significant risks on its cash in bank
        accounts.
  F-6
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 Accounts
        receivable, trade
 
 The
        Company extends unsecured credit to its customers. Management reviews its
        accounts receivable on a regular basis to determine if the bad debt allowance
        is
        adequate for potential uncollectible amounts due to deterioration of customer
        operations. The allowance for doubtful accounts as of September 30, 2007
        and
        December 31, 2006 amounted to $35,401 and $34,021 ,
        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 included in the statement
        of operations. Maintenance, repairs and minor renewals are expensed as
        incurred.
 
 Intangibles
 
 Under
        the
        Statement of Accounting Standards ("SFAS") No.142, "Goodwill and Other
        Intangible Assets", all goodwill and certain intangible assets determined
        to
        have indefinite lives will not be amortized but will be tested for impairment
        at
        least annually. Intangible assets other than goodwill will be amortized over
        their useful lives and reviewed for impairment in accordance with SFAS No.
        144,
        "Accounting for Impairment or Disposal of Long-Lived Assets".
 
 The
        Company acquired technology to manufacture aflatoxin-detoxifizyme ("ADTZ")
        totaling $133,400. The Company will begin amortizing costs once manufacturing
        begins.
  F-7
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 The
        Intangible assets as of September 30, 2007 and December 31, 2006, net of
        amortization, amounted to $134,054 and $682, respectively. Amortization expense
        fro the nine months ended September 30, 2007 and 2006 amounted to $55, and
        $0,
        respectively. Amortization expense for the three months ended September 30,
        2007
        and 2006 amounted to $18 and $0, respectively.
  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 periodically evaluates the recoverability of long-lived assets by
        measuring the carrying amount of the assets against the estimated undiscounted
        future cash flows associated with them. At the time such flows of certain
        long-lived assets are not sufficient to recover the carrying value of such
        assets, the assets are adjusted to their fair values.
 
 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.
 
 VAT
        on
        sales and VAT on purchases amounted to $4,173,685 and $3,488,057 for the
        nine
        months ended September 30, 2007 and $1,893,197 and $1,747,316 for the nine
        months ended September 30, 2006, respectively. Sales and purchases are recorded
        net of VAT collected and paid as the Company acts as an agent for the
        government. VAT taxes are not impacted by the income tax holiday.
 
 Shipping
        and handling costs related to costs of goods sold are included in selling,
        general and administrative costs and totaled $181,026 and $130,251 for the
        nine
        months ended September 30, 2007 and 2006 and totaled $86,443 and $16,367
        for the
        three months ended September 30, 2007 and 2006.
  F-8
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
  Advertising
          costs
 
 The
        Company expenses the cost of advertising as incurred in selling, general
        and
        administrative costs and totaled $406,245 and $53,069 for the nine months
        ended
        September 30, 2007 and 2006 and totaled $325,189 and $0 for the three months
        ended September 30, 2007and 2006.
 
 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. Research
        and development expense amounted to $437,449 and
        $270,702 for the nine months ended September 30, 2007 and 2006, respectively.
        Research and development expense amounted to $336,794 and $31,361 for the
        three
        months ended September 30, 2007 and 2006, respectively.
  Foreign
        currency translation
  The
        reporting currency of the Company is the US dollar. The Company uses their
        local
        currency, Renminbi (RMB), as their functional currency. Results of operations
        and cash flow are translated at average exchange rates during the period,
        and
        assets and liabilities are translated at the unified exchange rate as quoted
        by
        the People’s Bank of China at the end of the period. Translation adjustments
        resulting from this process are included in accumulated other comprehensive
        income in the statement of shareholders’ equity.
  Translation
        adjustments amounted to $1,273,362 and $372,923 as of September 30, 2007
        and
        December 31, 2006, respectively. Asset and liability accounts at September
        30,
        2007 were translated at 7.50 RMB to $1.00 USD as compared to 7.80 RMB at
        December 31, 2006. Equity accounts were stated at their historical rate.
        The
        average translation rates applied to income statements accounts for the nine
        months ended September 30, 2007 and 2006 were 7.65 RMB and 8.05 RMB,
        respectively. Cash flows are also translated at average translation rates
        for
        the period, therefore, amounts reported on the statement of cash flows will
        not
        necessarily agree with changes in the corresponding balances on the balance
        sheet.
 
 Transaction
        gains and losses that arise from exchange rate fluctuations on transactions
        denominated in a currency other than the functional currency are included
        in the
        results of operations as incurred. Historically, the Company has not entered
        any
        currency trading or hedging transactions, although there is no assurance
        that
        the Company will not enter into such transactions in the future.
  F-9
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 Income
        taxes
 
 The
        Company 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 September 30,
        2007
        and December 31, 2006.
 
 The
        Charge for taxation is based on the results for the year as adjusted for
        items,
        which are non-assessable or disallowed. It is calculated using tax rates
        that
        have been enacted or substantially enacted by the balance sheet
        date.
  Deferred
        tax is accounted for using the balance sheet liability method in respect
        of
        temporary differences arising from differences between the carrying amount
        of
        assets and liabilities in the financial statements and the corresponding
        tax
        basis used in the computation of assessable tax profit. In principle, deferred
        tax liabilities are recognized for all taxable temporary differences, and
        deferred tax assets are recognized to the extent that it is probably that
        taxable profit will be available against which deductible temporary differences
        can be utilized. Deferred tax is calculated at the tax rates that are expected
        to apply to the period when the asset is realized or the liability is settled.
        Deferred tax is charged or credited in the income statement, except when
        it
        related to items credited or charged directly to equity, in which case the
        deferred tax is also dealt with in equity. Deferred tax assets and liabilities
        are offset when they relate to income taxes levied by the same taxation
        authority and the Company intends to settle its current tax assets and
        liabilities on a net basis.
 
 The
        Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
        Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
        benefit only if it is “more likely than not” that the tax position would be
        sustained in a tax examination, with a tax examination being presumed to
        occur.
        The amount recognized is the largest amount of tax benefit that is greater
        than
        50% likely of being realized on examination. For tax positions not meeting
        the
“more likely than not” test, no tax benefit is recorded. The adoption had no
        affect on the Company’s financial statements.
 
 China
        Medicine Corporation was incorporated in the United States and has incurred
        net
        operating losses for income tax purposes for the nine months ended September
        30,
        2007 and 2006. The net operating loss carry forwards for United States income
        taxes amounted to $1,235,768 which may be available to reduce future years’
taxable income. These carry forwards will expire, if not utilized, through
        2027.
        Management believes that the realization of the benefits from these losses
        appears uncertain due to the Company’s limited operating history and continuing
        losses for United States income tax purposes. Accordingly, the Company has
        provided a 100% valuation allowance on the deferred tax asset benefit to
        reduce
        the asset to zero. The valuation allowance at September 30, 2007 was $420,000.
        The net change in the valuation allowance for the nine months ended September
        30, 2007 was an increase of $218,000. Management will review this valuation
        allowance periodically and make adjustments as warranted.
  F-10
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 Fair
        value of financial instruments
 
 The
        carrying amounts of the Company's financial instruments (including accounts
        receivable, shareholder loans and notes payable) approximate fair value due
        to
        the relatively short period to maturity of these instruments.
 
 Stock-based
        compensation
 
 The
        Company adopted the Statement of Financial Accounting Standards No. 123 (revised
        2004), "Share-Based Payments," ("FAS123R"), which established standards for
        the
        accounting for transactions in which an entity exchange its equity instruments
        for goods or services. This statement require a public entity to measure
        the
        cost of employee services received in exchange for an award of equity
        instruments based on the grant-date fair value of the award (with limited
        exceptions). That cost will be recognized over the period during which an
        employee is required to provide service in exchange for the award.
  Major
        suppliers
 
 For
        the
        nine months ended September 30, 2007 and 2006, five suppliers accounted for
        approximately 70 %
        and
        63%, respectively, of the Company's purchases. Advances to these five suppliers
        represent 32% of the Company’s total advances to suppliers as of September 30,
        2007. As of September 30, 2007 and 2006, no accounts payable was due to these
        suppliers.
 
 Major
        customers
 
 For
        the
        nine months ended September 30, 2007 and 2006, five customers accounted for
        approximately 43% and 52%, respectively, of the Company's total sales. The
        accounts receivable balance of these five customers amounted $2,827,898,
        representing 31% of the total accounts receivable as of September 30,
        2007.
 
 Earnings
        per share
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share is computed
        by dividing income available to common stockholders by the weighted average
        common shares outstanding during the period. Diluted earnings per share takes
        into account the potential dilution that could occur if securities or other
        contracts to issue common stock were exercised and converted into common
        stock.
 F-11
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
  The
        following is a reconciliation of the basic and diluted earnings per share
        computations for the nine and three months ended September 30:
 
 2007
              
              2006Unaudited
              
              UnauditedFor
                  the nine months ended September 30:Net
                  income
              
              $
              4,096,769
              
              $
              2,375,609Shares
                  of common stock and commonstock
                  equivalents:Weighted
                  average shares used in basic computation
              
              
              11,585,981
              
              
              7,250,926Diluted
                  effect of stock options, warrants,and
                  preferred stocks
              
              
              2,280,070
              
              
              312,967Weighted
                  average shares used in diluted computation
              
              
              13,866,051
              
              
              7,563,893Earnings
                  per share:Basic
              
              $
              0.35
              
              $
              0.33Diluted
              
              $
              0.30
              
              $
              0.31For
                  the three months ended September 30:Net
                  income
              
              $
              2,205,914
              
              $
              2,277,379Shares
                  of common stock and commonstock
                  equivalents:Weighted
                  average shares used in basic computation
              
              
              13,306,738
              
              
              7,380,000Diluted
                  effect of stock options, warrants,and
                  preferred stocks
              
              
              2,280,071
              
              
              369,000Weighted
                  average shares used in diluted computation
              
              
              15,586,809
              
              
              7,749,000Earnings
                  per share:Basic
              
              $
              0.17
              
              $
              0.31Diluted
              
              $
              0.14
              
              $
              0.29
  On
        April
        2, 2007, the Company granted a total of 15,000 stock options to three of
        its
        independent directors. The Options will become exercisable for 7,500 shares
        of
        commons stock six months from the date of grant and the remaining 7,500 options,
        eighteen months from the date of grant. The options are anti-dilutive and
        are
        not included in the calculation.
 
 Reclassifications
 
 Certain
        prior period amounts have been reclassified to conform to current period
        presentation. These reclassifications have no effect on net income or cash
        flows.
 
 Recently
        issued accounting pronouncements
 
 In
        September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
        which
        addresses the measurement of fair value by companies when they are required
        to
        use a fair value measure for recognition or disclosure purposes under GAAP.
        SFAS
        No. 157 provides a common definition of fair value to be used throughout
        GAAP
        which is intended to make the measurement of fair value more consistent and
        comparable and improve disclosures about those measures. SFAS No. 157 will
        be
        effective for an entity's financial statements issued for fiscal years beginning
        after November 15, 2007. The Company is currently evaluating the effect SFAS
        No.
        157 will have on its consolidated financial position, liquidity, or results
        of
        operations.
  F-12
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 In
        June
        2007, the
        FASB
        issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
        Payments for Goods or Services Received for use in Future Research and
        Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
        advance payments for goods or services that used or rendered for research
        and
        development activities should be expensed when the advance payment is made
        or
        when the research and development activity has been performed. Management
        is
        currently evaluating the effect of this pronouncement on financial
        statements.
  **Note
        3 - Contribution receivable**
 
 On
        July
        7, 2006, Konzern, entered into a Joint Cooperation Agreement (the “Agreement”)
        with JSIG and an individual, Mr. Dongsheng Yao, to jointly form a new Chinese
        company for the purpose of development and application of aflatoxin-detoxifizyme
        ("ADTZ"). Konzern has no material relationships with JSIG or Mr. Yao other
        than
        the Agreement.
 
 Pursuant
        to the Agreement, JSIG and Mr. Yao will transfer four patents relating to
        ADTZ
        into the joint venture company for which they will each hold a 15% equity
        interest in the joint venture company. In addition, JSIG and Mr. Yao will
        be
        paid a total of approximately $125,000, as a technology contribution fee
        from
        the joint venture company. The agreement provides that the Company will invest
        a
        total of approximately $2.2 million, of which $625,000 has been paid and
        the
        balance, according to the Chinese government requirements, is due within
        two
        years. Based on the agreement the Company will receive a 70% equity interest
        in
        the joint venture company.
 
 The
        contribution receivable represents the technology required to be contributed
        by
        JSIG and Mr. Yao to Co-win by June 30, 2007 based on the original agreement.
        The
        four patents’ application and ownership transfer were still in process as of
        September 30, 2007. The Company, JSIG and Mr. Yao agreed to extend the
        contribution deadline to May 30, 2008. The contribution receivable amounted
        $961,500 as of September 30, 2007.
 
 The
        agreement provides that the joint venture entity will have the intellectual
        property rights to any products developed by the joint venture pursuant to
        the
        agreement. The Company requires government approval as to the organization
        and
        business license for the joint venture company. The business license for
        the
        operation of the joint venture was issued by Guangzhou Commercial and
        Administrative Bureaus on October 27, 2006.
 
 **Note
        4 - Inventories**
 
 Inventories
        consisted of the following:
 
 September
                  30, 2007
              
              December
                  31, 2006UnauditedChemical
                  Medicine
              
              $
              5,231,818
              
              $
              1,897,789Traditional
                  Chinese Medicine
              
              
              -
              
              
              2,678Totals
              
              $
              5,231,818
              
              $
              1,900,467
  F-13
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 **Note
        5 - Equipment**
 
 Equipment
        consisted of the following:
 
 September
                  30, 2007
              
              December
                  31, 2006UnauditedFurniture
                  and fixtures
              
              $
              169,006
              
              $
              205,182Equipment
              
              
              1,220,565
              
              
              1,076,368Motor
                  vehicles
              
              
              280,773
              
              
              227,933Leasehold
                  improvement
              
              
              133,400
              
              
              -Total
              
              
              1,803,744
              
              
              1,509,483Less
                  accumulated depreciation
              
              
              (509,840
              )
              
              (294,172
              )Equipment,
                  net
              
              $
              1,293,904
              
              $
              1,215,311
 
 Depreciation
        expense for the nine months ended September 30, 2007 and 2006 amounted to
        $199,520 and $128,152 respectively. Depreciation expense for the three months
        ended September 30, 2007 and 2006 amounted to $69,227 and $106,674.
 
 **Note
        6 - Customer deposits**
 
 The
        Company requires their customers to deposit monies with the Company when
        they
        place an order for their products. The Company does not pay interest on these
        amounts. Customer deposits amounted to $343,972 and $17,980 as of September
        30,
        2007 and December 31, 2006, respectively.
 
 **Note
        7 - Taxes**
 
 The
        Company is organized in the United States and no tax benefit is expected
        from
        tax credits in the future.
 
 Beginning
        January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
        existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
        (“FIEs”).
 The
        key
        changes are:
 
 a.
              The
                  new standard EIT rate of 25% will replace the 33% rate currently
                  applicable to both DES and FIEs, except for High Tech companies
                  who pays a
                  reduced rate of 15%;
  F-14
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 b.
              Companies
                  established before March 16, 2007 will continue to enjoy tax holiday
                  treatment approved by local government for a grace period of either
                  for
                  the next 5 years or until the tax holiday term is completed, whichever
                  is
                  sooner. These companies will pay the standard tax rate as defined
                  in point
                  “a” above when the grace period expires.
 
 The
        Company and its subsidiaries were established before March 16, 2007 and
        therefore are qualified to continue enjoying the reduced tax rate as described
        before. Since the detailed guidelines of the new tax law were not publicized
        yet, the Company can not determine what the new tax rate (15% or 25%) will
        be
        applicable to the Company and its subsidiaries after the end of their respective
        tax holiday terms.
 
 Under
        the
        existing Income Tax Laws of PRC, the Company is generally subject to an income
        tax at an effective rate of 33% (30% state income taxes plus 3% local income
        taxes) on income reported in the statutory financial statements after
        appropriate tax adjustments, unless the enterprise is located in a specially
        designated region where it allows foreign enterprises a two-year income tax
        exemption and a 50% income tax reduction for the following three years.
 
 The
        Company’s two subsidiaries, Konzern and Co-win are located and are doing
        business in China. Konzern was approved as a foreign Joint-venture enterprise
        in
        2004 and as a wholly-owned foreign enterprise in 2006. Konzern has an income
        tax
        exemption for 2004 and 2005 and a 50% reduction on the income tax rate for
        2006,
        2007 and 2008. Co-win has not obtained the approval for the tax exemption
        in
        2006, and was subjected to an effective rate of 33%.
 
 The
        estimated tax savings for the nine-month periods ending September 30, 2007
        and
        2006 amounted $1,018,743 and $729,831 respectively. The net effect on earnings per share if the income tax had
        been
        applied would decrease earnings per share from $0.35 to $0.27
        for the nine months ended September 30, 2007 and from $0.33 to $0.23
        for the nine months ended September 30, 2006, respectively.
 
 The
        provision for income taxes at September 30 consisted of the
        following:
 
 2007
              
              2006Unaudited
              
              UnauditedProvision
                  for China Income Tax
              
              $
              926,130
              
              $
              663,483Provision
                  for Local Tax
              
              
              92,613
              
              
              66,348Total
              
              $
              1,018,743
              
              $
              729,831
 
 The
        following table reconciles the U.S. statutory rates to the Company's effective
        tax rate for the nine months ended September 30:
 
 2007
              
              2006U.S.
                  Statutory rates
              
              
              34.0
              %
              
              34.0
              %Foreign
                  income not recognized in USA
              
              
              (34.0
              )
              
              (34.0
              )China
                  income taxes
              
              
              33.0
              
              
              33.0Income
                  tax exemption
              
              
              (16.5
              )
              
              (16.5
              )Effective
                  tax rate
              
              
              16.5
              %
              
              16.5
              %
  F-15
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 Taxes
        payable consisted of the following at September 30:
 
 September
                  30, 2007
              
              December
                  31, 2006UnauditedIncome
                  taxes payable
              
              $
              306,407
              
              $
              (15,380
              )Value
                  added tax
              
              
              63,391
              
              
              310,795Other
                  income tax
              
              
              12,399
              
              
              487Total
              
              $
              382,197
              
              $
              295,902
 
 **Note
        8 - Related party transactions**
 
 Amounts
        due to related parties totaled $65,132 and $30,000 as of September 30, 2007
        and
        December 31, 2006. Those amounts were generated from making cash advances
        to or
        from the shareholders for ordinary business expenses.
 
 As
        of
        September 30, 2007, the contribution receivable from two shareholders of
        Co-win,
        JSIG and Mr. Yao, amounted to $961,500, as discussed on Note 3
        above.
 
 **Note
        9 - Commitments and contingencies**
 
 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.
 
 As
        of
        September 30, 2007, the future minimum annual lease payments required are
        as
        follows:
 Year
                    Ending December 31,
                
                Amount2007
                
                $
                33,5032008
                
                
                134,0112009
                
                
                89,341Thereafter
                
                
                —
  Total
        rental expense for the nine months ended September 30, 2007 and 2006 amounted
        to
        $91,866 and $35,344, respectively. For the three months ended September 30,
        2007
        and 2006, total rental expense amounted to $39,710 and $14,458,
        respectively.
 
 **Notes
        10 - Supplemental disclosure of cash flows**
 
 In
        the
        nine months ended September 30, 2007, non-cash financial activities include
        1,733,745 shares of preferred stock converted to 1,773,448 shares of common
        stock. 57,500 shares of common stock were issued for
        consulting services to be delivered within one year starting from July 17,
        2007.
  F-16
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 
 During
        the period ended September 30, 2007, the Company expensed $78,497 for stock
        options to employees and independent directors.
 
 **Note
        11 - Statutory reserves**
 
 The
        laws
        and regulations of the People’s Republic of China require that before an
        enterprise distributes profits to its partners, it must first satisfy all
        tax
        liabilities, provide for losses in previous years, and make allocations,
        in
        proportions determined at the discretion of the board of directors, after
        the
        statutory reserve. The statutory reserves include surplus reserve fund and
        the
        enterprise fund and represent
        restricted retained earnings.
 
 Surplus
        reserve fund
 
 The
        Company is required to transfer 10% of its net income, as determined in
        accordance with the PRC accounting rules and regulations, to a statutory
        surplus
        reserve fund until such reserve balance reaches 50% of the Company’s registered
        capital.
 
 The
        transfer to this reserve must be made before distribution of any dividend
        to
        shareholders. For
        the
        nine months ended September 30, 2007 and
        2006,
        the Company did not transfer any fund to this reserve. The surplus reserve
        fund
        is non-distributable other than during liquidation and can be used to fund
        previous years’ losses, if any, and may be utilized for business expansion or
        converted into share capital by issuing new shares to existing shareholders
        in
        proportion to their shareholding or by increasing the par value of the shares
        currently held by them, provided that the remaining reserve balance after
        such
        issue is not less than 25% of the registered capital.
 
 Enterprise
        fund
 
 The
        enterprise fund may be used to acquire plant and equipment or to increase
        the
        working capital to expend on production and operation of the business. No
        minimum contribution is required and the company did not make any contribution
        to this fund for the nine months ended September 30, 2007.
  **Note
        12 - Retirement benefit plans**
 
 Regulations
        in the PRC require the Company to contribute to a defined contribution
        retirement plan for all permanent employees. The contribution is based on
        a
        percentage required by the local government and the employees' current
        compensation. The Company contributed $32,052 and $26,261 for the nine months
        ended September 30, 2007 and 2006, respectively. For the three months ended
        September 30, 2007 and 2006, the Company contributed $11,816 and 14,003,
        respectively.
  F-17
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 **Note
        13 - Shareholders’ equity**
 
 Sale
        of preferred stock
 
 Contemporaneously
        with the reverse acquisition, the Company entered into a Preferred Stock
        Purchase Agreement (“PSPA”), dated February 8, 2006, with Barron Partners L.P.,
        Ray and Amy Rivers, JTROS, Steve Mazur and William Denkin pursuant to which
        the
        Company issued and sold an aggregate of 3,120,000 shares of its Series A
        Convertible Preferred Stock, a newly-created series of preferred stock, and
        warrants to purchase 3,694,738 shares of common stock at $1.75 per share
        and
        3,694,738 shares of common stock at $2.50 per share.
  The
        Series A Convertible Preferred Stock is convertible at the option of the
        holder
        at any time, into 3,120,000 shares of common stock, subject to adjustment
        set
        forth in the PSPA. No dividends are payable on the preferred stock and dividends
        may not be paid on the common stock while the preferred stock is outstanding.
        The preferred stock is not redeemable but has a liquidation preference of
        $1.25
        per share. Holders of the preferred stock are not entitled to vote, except
        on
        matters that would adversely affect their rights. The warrants have a term
        of
        five years and are exercisable by the holder at any time within the term.
        With
        certain exceptions, if the Company issues common stock at a price, or warrants
        or other convertible securities with an exercise or conversion price, which
        is
        less than the exercise price of the warrants, the exercise price of the warrants
        will be reduced to the sales price, exercise price or conversion price, as
        the
        case maybe, of such other securities. However, in such circumstances, the
        number
        of shares obtainable on exercise of the warrants is not changed.
 
 The
        conversion rate of the Series A Preferred Stock and the exercise price of
        the
        warrants (but not the number of shares obtainable on exercise) are subject
        to
        adjustment in certain events, including the failure to achieve specified
        levels
        of adjusted earnings before interest, taxes, depreciation and amortization
        or
        fully diluted pre-tax income per share, computed as set forth in the applicable
        agreements. Because pre-tax targets were not met, the conversion price of
        the
        preferred stock has been reduced from $1.25 to $1.22 resulting in approximately
        80,000 additional common shares to be issued. The exercise price of the warrants
        has been reduced from $1.75 to $1.70. There has been no effect on the financial
        statements for this change.
 
 On
        April
        23, 2007, the Company and the holders of the preferred shares and warrants
        executed a Waiver and Agreement that reduced the conversion price for preferred
        stock and the exercise price of the warrants by 3% of the original conversion
        amounts. The new agreement also requires the Company to redistribute the
        750,000
        shares issued to AiDi Financial Investment LLC, if recovered, as follows:
        50% to
        the Company’s senior executives and 50% to the holders of preferred shares.
        Further, the Series A Preferred Stock cannot be converted and the warrants
        cannot be exercised if such conversion or exercise would result in the holder
        and its affiliates owning more than 4.9% of the then outstanding number of
        shares of common stock. The Company evaluated the impact of this amendment
        and
        determined there is no effect on the financial statements, given that both
        instruments were originally accounted for as equity instruments and that
        a
        variation in the conversion and exercise prices was contemplated under the
        original terms of the instruments, the implementation of that condition does
        not
        require any separate accounting recognition.
  F-18
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 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.
 
 Under
        a
        Registration Rights Agreement with the investors, the Company was required
        to
        file a registration statement registering the common stock issuable upon
        conversion of the series A preferred stock and exercise of the warrants.
        The
        registration statement was filed on April 13, 2006, and was declared effective
        October 17, 2006. The Company incurred liquidated damages under the Registration
        Rights Agreement of $44,003 for the period from August 8, 2006 through October
        17, 2006; these amounts are accrued liabilities and were recorded as interest
        expense. Additionally, the Company is required to maintain its effectiveness
        until the expiration of two years after the date of the agreement or until
        the
        investors hold less than 10% of the registerable securities or more liquidated
        damages of approximately $19,000 per month will be incurred.
 
 The
        Company reviewed the terms of the Series A Preferred Stock and the Warrants,
        in
        accordance with FAS 133 and EITF Issue 00-19. The conversion option related
        to
        the Series A Preferred Stock is an embedded derivative instrument but the
        risks
        and rewards of that embedded derivative are considered to be clearly and
        closely
        related to the risks and rewards of the host instrument and, accordingly,
        the
        embedded derivative instrument has not been bifurcated. The Company has reviewed
        the requirements of EITF Issue 00-19 and concluded that the Warrants should
        be
        accounted for as equity instruments. Accordingly, the net proceeds from the
        sale
        of the preferred stock and warrants totaling $3,783,000, representing the
        gross
        proceeds received of $3,900,000, net of $117,000 of commissions, was recorded
        as
        equity.
 
 Common
        stock
 
 In
        2006,
        the Company issued 750,000 shares of common stock to individuals for services
        performed and of which 150,000 shares were issued to Ms. Meiyi Xia, the former
        officer of the Company, and 37,500 shares were issued to Ms. Lin Li, who
        is a
        officer of the Company. There is no established market for the Company's
        common
        stock. The value of the stocks was originally estimated $0.32 per share,
        totaled
        of $238,769. The Company re-evaluated the fair value of the common stock
        by
        determining the fair value that would equate the aggregate fair values of
        the
        Series A Preferred Stock and the Warrants to the gross cash proceeds received
        from the third-party investors, keeping all other valuation factors constant.
        Therefore, the Company valued the common stock at $0.81 per share for a total
        of
        $607,500 for the 750,000 shares issued, which amount was expensed during
        the
        year ended December 31, 2006.
  F-19
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 For
        the
        nine months ended September 30, 2007, holders of preferred stock converted
        1,733,745 shares of Series A Convertible Preferred Stock into 1,773,448 shares
        of common stock, par value $0.0001 per share. 1,621,750 shares of warrants
        were
        exercised at $1.75 per share and 1,694,040 shares of warrants were exercised
        at
        $1.70 per share for the nine months ended September 30, 2007. The Company
        received total of $5,718,121 cash from the exercise of warrants as of September
        30, 2007.
 
 The
        Company entered into Investor Relations Consulting Agreement with Hayden
        Communication International, Inc. (“HC”) dated October 11, 2006, pursuant to
        which HC is to provide the Company public relations consulting services for
        certain consideration including the issuance of 43,125 shares of the Company’s
        common stock. On July 19, 2007, these shares have been issued to HC. The
        issuance of the shares is exempt from registration pursuant to Section 4(2)
        and
        regulation D promulgated under the Securities Act of 1933, as amended (the
‘1933
        Act”) and should contain a standard 1933 Act restrictive legend. Therefore,
        the Company valued the common stock at $3.12 per share for a total of $179,400
        for the 43,125 shares issued, $179,400 was expensed for the nine months ended
        September 30, 2007.
 
 Stock
        options
 
 On
        February 8, 2006, contemporaneously with the reverse acquisition, the Company
        granted options to purchase 430,000 shares of common stock; 390,000 shares
        were
        granted to officers and other key employees of Konzern. On March 22, 2006,
        the
        Company granted options to purchase an additional 850,000 shares of common
        stock
        to two officers. The options all have an exercise price of $1.25 per share,
        which was the conversion price of the series A preferred stock and not less
        than
        the fair market value on the date of grant, and were granted pursuant to
        the
        Company's 2006 Long-Term Incentive Plan. The 2006 Long-Term Incentive Plan,
        which covers 1,575,000 shares of common stock, and all options granted under
        the
        plan are subject to stockholder approval of the plan. The Company estimated
        that
        the value of the options is between $0.17 and $0.23 per share subject to
        the
        exercise of options. The plan was approved by the stockholders of the Company
        in
        July 2006.
 
 On
        April
        2, 2007, the Company granted a total of 15,000 stock options to three of
        its
        independent directors. The Options become exercisable for 7,500 shares of
        common
        stock six months from the grant date and the remaining 7,500 options, eighteen
        months from the grant date. For the nine months and three months ended September
        30, 2007, the Company expensed $14,660 and 7,330, respectively, related to
        these
        stock options.
 
 SFAS
        No.
        123R requires that compensation expense related to options granted be calculated
        based on the fair value of the options as of the date of grant. The fair
        value
        calculations take into account the exercise prices and expected lives of
        the
        options, the current price of the underlying stock, its expected volatility,
        the
        expected dividends on the stock, and the current risk-free interest rate
        for the
        expected life of the option. Because there is no trading market for the
        Company's common stock, no historical data on which to base an estimate of
        volatility. The Company has considered the volatility that might be expected
        to
        occur for companies comparable to the Company and, selected three
        publicly-traded companies whose business are similar to the Company's and
        who
        are classified in the same SIC code as the Company, have assumed a volatility
        of
        50% as being reasonably representative of the volatility that could be expected
        to occur in the future over the relevant periods. The risk-free rates used
        are
        based on Treasury Constant Maturity rates, published by the U.S. Federal
        Reserve. The weighted average risk-free rate was 4.65%.
  F-20
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 Since
        the
        Company does not have a history of employee stock options, the estimated
        life is
        based on one half of the sum of the vesting period and the contractual life
        of
        the option. For the nine months ended September 30, 2007 and 2006, the Company
        expensed $63,837 and $65,067, respectively, for stock-based compensation.
        For
        the three months ended September 30, 2007 and 2006, the Company expensed
        $21,279
        and 21,454, respectively, for stock-based compensation.
 
 The
        Company used the Cox-Ross-Rubinstein binomial model to value the options,
        Warrants and the embedded conversion option of the Series A Preferred Stock.
        The
        following assumptions were used in the preparation of the above valuations
        at
        inception:
 Assumption
                
                Preferred
                    Stock
                
                Warrants
                    A
                
                Warrants
                    B
                
                Stock
                    optionsCommon
                    stock - fair value
                
                $
                0.81
                
                $
                0.81
                
                $
                0.81
                
                $
                0.81Expected
                    life
                
                
                Perpetual
                
                
                5
                    years
                
                
                5
                    years
                
                
                2.5
                    yearsVolatility
                
                
                
                
                
                50
                %
                
                50
                %
                
                50
                %Risk-free
                    rate
                
                
                
                
                
                4.55
                %
                
                4.55
                %
                
                4.65
                %
  OptionsSummary
                    of stock option activities:
                
                Outstanding
                
                Exercisable
                
                Unvested
                
                Weighted-Average
                    Exercise Price
                
                Weighted-Average
                    Remaining Contractual Term (years)Outstanding
                    as of 12/31/05
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Granted
                    on 02/08/06
                
                
                430,000
                
                
                143,000
                
                
                287,000
                
                
                1.25
                
                
                1.67Granted
                    on 03/22/06
                
                
                850,000
                
                
                283,000
                
                
                567,000
                
                
                1.25
                
                
                1.75Granted
                    on 05/09/06
                
                
                90,000
                
                
                90,000
                
                
                -
                
                
                1.25
                
                
                1.83Exercised
                
                
                -
                
                
                -
                
                
                -Forfeited
                
                
                -
                
                
                -
                
                
                -Outstanding
                    as of 12/31/06
                
                
                1,370,000
                
                
                516,000
                
                
                854,000
                
                
                1.25
                
                
                1.48Granted
                    on 4/2/07
                
                
                15,000
                
                
                -
                
                
                15,000
                
                
                3.00
                
                
                5.00Exercised
                
                
                -
                
                
                -
                
                
                -Forfeited
                
                
                -
                
                
                -
                
                
                -Outstanding
                    as of 9/30/07
                
                
                1,385,000
                
                
                516,000
                
                
                869,000
                
                
                1.28
                
                
                0.79
  F-21
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007
 (Unaudited)
 WarrantsSummary
                    of warrants activities:
                
                Outstanding
                
                Fair
                    Market Vaue
                
                Weighted-Average
                    Exercise Price
                
                Weighted-Average
                    Remaining Contractual Term (years)Outstanding
                    as of 12/31/2005
                
                
                -
                
                
                -
                
                
                -
                
                
                -Granted
                    on 02/08/2006
                
                
                3,694,738
                
                
                0.81
                
                
                1.75
                
                
                4.17Granted
                    on 02/08/2006
                
                
                3,694,738
                
                
                0.81
                
                
                2.50
                
                
                4.17Exercised
                
                
                -Forfeited
                
                
                -Outstanding
                    as of 12/31/2006
                
                
                7,389,476
                
                
                0.81
                
                
                2.13
                
                
                4.17Exercised,
                    varies date in 2007
                
                
                (1,621,750
                )
                
                3.15
                
                
                1.75Exercised,
                    varies date in 2007
                
                
                (1,694,040
                )
                
                3.05
                
                
                1.70Forfeited
                
                
                -Outstanding
                    as of 9/30/2007
                
                
                4,073,686
                
                
                3.05
                
                
                2.46
                
                
                3.42
  F-22




**Item
      2.** **Management’s
      Discussion and Analysis or Plan of Operation**





*FORWARD-LOOKING
      INFORMATION - Management's Discussion and Analysis of Financial Condition and
      Results of Operations ("MD&A") includes "forward-looking statements". All
      statements, other than statements of historical facts, included in this report
      regarding the Company's financial position, business strategy and plans and
      objectives of management of the Company for future operations are
      forward-looking statements. These forward-looking statements rely on a number
      of
      assumptions concerning future events and are subject to a number of
      uncertainties and other factors, many of which are outside of the Company's
      control, that could cause actual results to materially differ from such
      statements. While the Company believes that the assumptions concerning future
      events are reasonable, it cautions that there are inherent difficulties in
      predicting certain important factors, especially, the prospects for future
      acquisitions; the possibility that a current customer could be acquired or
      otherwise be affected by a future event that would diminish their medicine
      products requirements; the competition in the medical product market and
      governmental price policy on medical products and the impact of such factors
      on
      pricing, revenues and margins; and the cost of attracting and retaining highly
      skilled personnel.*





**Overview**





China
      Medicine Corporation (“we,” “us” or the “Company”), through Guangzhou Konzern
      Medicine Co., Ltd. (“Konzern”), our wholly owned subsidiary organized under the
      laws of the People’s Republic of China (the “PRC”, or “China”), distributes
      approximately 2,200 pharmaceutical products in China.





The
      pharmaceutical products we distribute include prescription and over-the-counter
      drugs, Chinese herbs, traditional Chinese medicines made from Chinese herbs,
      nutritional supplements, dietary supplements and medical instruments. We also
      sell improved drug formulas after purchasing the rights to drug formulas at
      an
      early stage of development and performing research to determine how to make
      improvements.





Our
      business depends on our ability both to acquire our products and to distribute
      our products in the Chinese markets. We purchase our products from PRC
      pharmaceutical manufacturers.





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





Our
      five
      largest suppliers, which were the same in each period, accounted for 70% and
      63%
      of our purchases in the nine months ended September 30, 2007 and September
      30,
      2006, respectively. Our agreements with our suppliers generally have a term
      of
      one year and provide that the suppliers will provide us with the products we
      order. None of our supply agreements has any minimum purchase requirements
      on
      our part. However, we are frequently required to make a significant down payment
      when we place an order, in order to secure the lowest possible purchase price
      and broadest possible distribution area. These down payments are made pursuant
      to contracts with the suppliers, and to the extent that we reduce the size
      of
      the order, we will receive a credit from the supplier. As of September 30,
      2007,
      we had a total balance of such advances to suppliers of $6,300,078. As of
      September 30, 2007, we had nationwide exclusive sales right from our suppliers
      for seven products, which accounted for $6,137,033 ,
      or 24%
      of our sales in the nine months ended September 30, 2007, as compared to the
      nationwide exclusive sales right we had for six products for the same period
      in
      2006, which accounted for $5,167,526 ,
      or 37%
      of sales in that period. As of September 30, 2007, we had regional exclusive
      sales right from our suppliers in Guangdong Province of the PRC for 160
      products, which accounted for $3,649,169 ,
      or 14%,
      of our sales in the nine months ended September 30, 2007. We had no regional
      exclusive sales right from our suppliers for the nine months ended September
      30,
      2006.




2




Our
      customers are typically wholesale medical products companies, hospitals and
      retail drug stores. Our contracts with our customers do not provide for minimum
      purchases, and our customers are not restricted from purchasing competitive
      products from others. Our five largest customers accounted for 43% and 52%
      of
      our sales for the nine months ended September 30, 2007 and 2006, respectively.





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





Because
      a
      substantial portion of our sales are made to a small number of customers, our
      accounts receivable from a small number of customers represent a large
      percentage of our accounts receivable and assets. Our largest account receivable
      at September 30, 2007 was approximately $1,246,241, representing approximately
      4.76% of our total assets and approximately 5.29% of our working capital. Our
      three largest accounts receivable were approximately $2,456,834, representing
      approximately 9.39% of our total assets and approximately 10.42% of our working
      capital. This concentration of accounts receivable represents a significant
      credit risk.




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.




**Results
      of Operations**





The
      following table sets forth our statements of operations for the three months
      and
      nine months ended September 30, 2007 and 2006, in U.S.
      dollars:




**Three
                Months Ended**
              **September
                30,**
            
            
            **Nine
                Months Ended**
              **September
                30,**2007
            
            
            2006
            
            
            2007
            
            
            2006Revenue
            
            
            12,588,938
            
            
            7,596,531
            
            
            25,945,901
            
            
            15,445,694Product
                sales
            
            
            11,904,525
            
            
            6,366,619
            
            
            24,552,269
            
            
            13,856,558Medical
                formula sales
            
            
            684,413
            
            
            1,229,912
            
            
            1,393,632
            
            
            1,589,136Costs
                of goods sold
            
            
            8,765,477
            
            
            4,490,055
            
            
            18,029,902
            
            
            9,910,331Gross
                profit
            
            
            3,823,461
            
            
            3,106,476
            
            
            7,915,999
            
            
            5,535,363R&D
                expenses
            
            
            336,794
            
            
            31,361
            
            
            437,449
            
            
            270,702Selling,
                general and administrative costs
            
            
            830,518
            
            
            185,517
            
            
            2,435,288
            
            
            1,084,194Reverse
                acquisition expenses
            
            
            0
            
            
            0
            
            
            0
            
            
            931,270Income
                from operations
            
            
            2,656,149
            
            
            2,889,598
            
            
            5,043,262
            
            
            3,249,197Other
                (expense) income, net
            
            
            13,694
            
            
            -136,645
            
            
            3,604
            
            
            -143,757Income
                before income taxes & Minority interest
            
            
            2,669,843
            
            
            2,752,953
            
            
            5,046,866
            
            
            3,105,440Provision
                for income taxes
            
            
            480,458
            
            
            475,574
            
            
            1,018,743
            
            
            729,831Income
                before Minority interest
            
            
            2,189,385
            
            
            2,277,379
            
            
            4,028,123
            
            
            2,375,609Minority
                interest
            
            
            16,529
            
            
            0
            
            
            68,646
            
            
            0Net
                income
            
            
            2,205,914
            
            
            2,277,379
            
            
            4,096,769
            
            
            2,375,609Other
                comprehensive incomeForeign
                currency translation adjustment
            
            
            341,114
            
            
            128,142
            
            
            900,439
            
            
            199,840Comprehensive
                income
            
            
            2,547,028
            
            
            2,405,521
            
            
            4,997,208
            
            
            2,575,449


3


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





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,**2007
            
            2006
            
            2007
            
            2006Prescription
                and Over the Counter Western Medicine
            
            $
            8,181,913
            
            
            65
            %
            $
            4,506,407
            
            
            59.32
            %
            $
            16,169,169
            
            
            62.32
            %
            $
            9,716,925
            
            
            62.91
            %Traditional
                Chinese Medicine
            
            
            3,659,616
            
            
            29.06
            %
            
            1,852,443
            
            
            24.39
            %
            
            8,067,890
            
            
            31.10
            %
            
            4,106,942
            
            
            26.59
            %Herbs
                & Medicine materials
            
            
            0
            
            
            
            
            
            7,769
            
            
            0.10
            %
            
            215,307
            
            
            0.83
            %
            
            32,691
            
            
            0.21
            %Dietary
                Supplements
            
            
            21,095
            
            
            0.17
            %
            
            
            
            
            
            
            
            39,315
            
            
            0.15
            %Medical
                Instruments
            
            
            41,901
            
            
            0.33
            %
            
            
            
            
            
            
            
            60,588
            
            
            0.23
            %Medical
                Formula
            
            
            684,413
            
            
            5.44
            %
            
            1,229,912
            
            
            16.19
            %
            
            1,393,632
            
            
            5.37
            %
            
            1,589,136
            
            
            10.29
            %Total
            
            $
            12,588,938
            
            
            100
            %
            $
            7,596,531
            
            
            100
            %
            $
            25,945,901
            
            
            100
            %
            $
            15,445,694
            
            
            100
            %




4


**Three-Month
        Period Ended September 30, 2007 Compared with Three-Month Period ended September
        30, 2006**


Revenue




Total
      revenue for the three months ended September 30, 2007 was $12,588,938, an
      increase of $4,992,407, or 65.72%, from revenue of $7,596,531 for the comparable
      period in 2006.




Revenue
      from product sales for the three months ended September 30, 2007 was
      $11,904,525, an increase of $5,537,906, or 87%, from revenue of $6,366,619
      for
      the comparable period in 2006. As of September 30, 2007, we have obtained
      exclusive regional distribution rights in Guangdong Province for 160 new
      products in 2007, which generated $1,624,369 during the three months ended
      September 30, 2007.




Medical
      formula sales were $684,413, or 5.44% of total sales, and $1,229,912, or 16.19%
      of total sales, for the three months ended September 30, 2007 and 2006,
      respectively. These amounts represent proceeds from the sale of certain
      technology and know-how relating to the production of medicines. We initially
      acquired the technology in an undeveloped state from other companies, undertook
      research and development to make improvements, and sold the improved technology
      to other drug manufacturers. The primary reason for the decrease in medical
      formula sales is that fewer new customers have signed contracts for medical
      formula sales in 2007. We believe this is due to regulatory action by the State
      Food and Drug Administration (“SFDA”), which must approve every transfer of
      ownership of a medical formula in the PRC, and which recently enhanced its
      approval procedures by setting higher application criteria which requires more
      time for review.




Cost
      of revenue




Cost
      of
      revenue for the three months ended September 30, 2007 was $8,765,477, or 69.3%
      of total revenue, compared with $4,490,055, or 59.1% of total revenue, for
      the
      comparable period in 2006. The increase in costs was due primarily to the
      increase in sales described just above, and to a lesser extent due to the
      reasons described just below relating to gross margin.




Gross
      Profit and Gross Margin




Gross
      profit for the three months ended September 30, 2007 was $3,823,461, an increase
      of $716,985, or 23%, from $3,106,476 for the comparable period of 2006. Our
      gross margin for the three months ended September 30, 2007 was 30.37%, as
      compared with 40.89% for the three months ended September 30, 2006. The decrease
      in our gross margin was due primarily to the introduction of new
      over-the-counter products we sold in the third quarter of 2007, which have
      lower
      margins than the products we sold in the same period in 2006. Because we do
      not
      intend to continue introducing new products of this kind into our mix of
      products to a significant degree in coming quarters, we do not expect decreasing
      profit margins to continue.




Research
      and Development Expenses




Research
      and development expenses were $336,794 for the three months ended September
      30,
      2007, compared with $31,361 for the same period of 2006. In both periods, these
      expenses were used primarily for the pre-clinical study of the Yutian capsule,
      a
      traditional Chinese medicine designed for use in the treatment of lung cancer
      that is being developed jointly by Konzern and the Pharmaceutical Research
      Institute of Nanhua University. As of the date of this report, our patent
      application for the Yutian capsule has been approved by the State Health
      Department and is pending before the PRC National Intellectual Property Bureau,
      and the SFDA is currently reviewing the medicine for possible license for sale
      throughout the PRC.




5




Selling,
      General and Administrative Expenses




Selling,
      general and administrative expenses were $830,518 for the three months ended
      September 30, 2007, an increase of $645,001 from $185,517 for the comparable
      period in 2006. The increase was mainly caused by (i) increased expenditures
      for
      advertising, trade shows and marketing that the Company made in order to
      increase sales in a highly competitive industry, focusing on future sales of
      relatively higher margin products, (ii) increased payroll costs, including
      the
      salaries of our Chief Executive Officer, S enshan
      Yang, and our Executive Vice President, Ms. Minhua Liu, which we began to pay
      in
      May 2007, (iii)
      increased transportation costs due to increases in the price of gasoline, and
      (iv) payroll and administrative fees to our 70% owned subsidiary, Guangzhou
      Co-win Bioengineering Co., Ltd. Because
      we do not expect significant increases in those categories of expenses over
      the
      next several quarters, we do not expect selling, general and administrative
      expenses to continue to increase.





Income
      Taxes




Provision
      for income taxes was $480,458 for the three months ended September 30, 2007,
      compared with $475,574 for the comparable period in 2006. The increase was
      due
      to the growth of sales revenue and operating income for the three months ended
      September 30, 2007.




Net
      Income




Net
      income for the three months ended September 30, 2007 was $2,205,914, a decrease
      of $71,465 from $2,277,379 for the comparable period in 2006. The decrease
      was
      mainly due to the increase in selling, general and administrative expenses
      and
      research and development expenses as we analyzed under “Selling, General and
      Administrative Expenses” above, and for the reasons described there, we do not
      expect net income to continue to decrease over the next several quarters.





**Nine-Month
      Period Ended September 30, 2007 Compared with Nine-Month Period ended September
      30, 2006**




Revenue




Total
      revenue for the nine months ended September 30, 2007 was $25,945,901, an
      increase of $10,500,207, or 68%, from total revenue of $15,445,694 for the
      comparable period in 2006.




Revenue
      from product sales for the nine months ended September 30, 2007 was $24,552,269,
      an increase of $10,695,711, or 77%, from $13,856,558 for the comparable period
      in 2006. The increase was largely attributable to sales and distribution of
      approximately $3,649,170 of new products for which we have exclusive
      distribution rights in Guangdong Province, and to sales and distribution of
      approximately $751,044 of the new “Fengduoxin” antibiotic product, for which we
      have the exclusive distribution rights throughout China.




Revenue
      from medical formula sales was $1,393,632, or 5.37% of total sales, for the
      nine
      months ended September 30, 2007, compared with $1,589,136, or 10.29% of total
      sales, for the comparable period in 2006. These amounts represent proceeds
      from
      the sale of certain technology and know-how relating to the production of
      medicines. We initially acquired the technology in an undeveloped state from
      other companies, undertook research and development to make improvements, and
      sold the improved technology to other drug manufacturers. The primary reason
      for
      the decrease in medical formula sales is that fewer new customers have signed
      contracts for medical formula sales in 2007. We believe this is due to
      regulatory action by the State Food and Drug Administration (“SFDA”), which must
      approve every transfer of ownership of a medical formula in the PRC, and which
      recently enhanced its approval procedures by setting higher application criteria
      which require more time for review.




6




Cost
      of revenue




Cost
      of
      revenue for the nine months ended September 30, 2007 was $18,029,902, an
      increase of $8,119,571, or 82%, from $9,910,331 for the comparable period in
      2006. The increase is due primarily to our increase in sales described above,
      combined with (i) a decrease in sales of our higher profit-margin products,
      such
      as medical formulas and certain prescription medicines, and (ii) a decrease
      in
      the prices of medicines generally as competition through the open bidding system
      increased.




Gross
      Profit and Gross Margin




Gross
      profit for the nine months ended September 30, 2007 was $7,915,999, an increase
      of $2,380,636, or 43%, from $5,535,363 for the comparable period of 2006. Our
      gross margin for the nine months ended September 30, 2007 was 30.51% as compared
      with 35.84% for the nine months ended September 30, 2006, a decrease of 5.33%.
      The decrease in our gross margin was due to the decrease in sales of medical
      formulas, which have a high gross margin, as well as a significant increase
      in
      sales of over-the-counter products, which have lower profit margins. Although
      our total revenue increased in the first nine months of 2007 as compared to
      the
      same period of 2006, the increase was due to relatively low-margin
      over-the-counter product sales, instead of relatively high-margin prescription
      drug sales. As a result, our gross margin decreased.




Research
      and Development Expenses




Research
      and development expenses were $437,449 for the nine months ended September
      30,
      2007, compared with $270,702 for the same period of 2006. In both periods,
      these
      expenses were used primarily for the pre-clinical study of the Yutian capsule,
      which in 2007 included further study of the molecular structure of the drug.




Selling,
      General and Administrative Expenses




Selling,
      general and administrative expenses were $2,435,288 for the nine months ended
      September 30, 2007, an increase of $1,351,094 from $1,084,194 for the comparable
      period in 2006. The increase was mainly due to (i) an increase in consulting
      fees to our investor relations firm, (ii) increased payroll expenses relating
      to
      salaries and employee sales bonuses, and (iii) increased advertising, trade-show
      and marketing expenses.




The
      reverse-merger expenses of $931,270 incurred in the nine months ended September
      30, 2006 were one-time expenses.




Income
      Taxes




Provision
      for income taxes was $1,018,743 for the nine months ended September 30, 2007
      as
      compared with $729,831 for the comparable period in 2006. The increase was
      due
      to the increase of product sales and operating income.




Net
      Income




Net
      income for the nine months ended September 30, 2007 was $4,096,769, an increase
      of $1,721,160, or 72.45%, from $2,375,609 for the comparable period in 2006.
      The
      increase was mainly due to the increase in revenue from product sales and the
      absence of reverse acquisition expenses, which affected net income in
      2006.




7




**Liquidity
      and Capital Resources**




During
      the nine months ended September 30, 2007, as a result of the sale of preferred
      stock and warrants, we received net proceeds of approximately $5.7 million.
      As
      of September 30, 2007, we had working capital of $23,574,193, an increase of
      $13,715,998, or 139%, from $9,858,195 as of September 30, 2006.




We
      used
      cash of $1,844,778 in our operations for the nine months ended September 30,
      2007, an increase of $1,148,801 from the cash used for the comparable period
      of
      2006. The increase in net cash used in operating activities was largely due
      to
      the increase of advances to suppliers and inventories related to our increased
      quantity of sales.





The
      following table sets forth the changes in certain balance sheet items, in U.S.
      dollars and percentages, from December 31, 2006 to September 30,
      2007.




**Balance
                Sheet Caption**
            
            **Change
                in dollars**
              **12/31/06
                to 09/30/07**
            
            **Percentage
                Change**
              **12/31/06
                to 09/30/07**Accounts
                receivable
            
            $
            1,958,042
            
            
            28
            %Inventories
            
            
            3,331,351
            
            
            175
            %Advances
                to suppliers
            
            
            2,222,666
            
            
            55
            %Accounts
                payable
            
            
            131,343
            
            
            70
            %Customer
                deposits
            
            
            325,992
            
            
            1813
            %




The
      change in these balance sheet captions reflects the nature of the cash
      requirements of our business. Because it takes one to two months to receive
      products we order, we have been increasing our inventories in order to meet
      anticipated increases in sales. From December 31, 2006 to September 30, 2007,
      our inventories increased 175%. In
      the
      course of our business, we must make significant deposits to our suppliers
      when
      we place an order. Our
      advances to suppliers increased 55% from December 31, 2006 to September 30,
      2007
      because of an increase in our purchases resulting from increased sales and
      our
      payment policies, whereby we try to pay our suppliers (other than required
      down
      payments) once or twice a year. As a result, until we pay our suppliers, our
      accounts payable increase. As
      of September 30,
      2007, our advance payments to our suppliers totaled approximately $6,300,078
      for
      2007, and our cash balance remaining with our suppliers was approximately
      $4,128,170. In
      addition, our customer deposits increased 1,813% from December 31, 2006 to
      September 30, 2007, reflecting increased sales. We require our customers to
      pay
      a certain percentage of the sales price as a deposit before we ship products
      to
      them. The percentage varies from customer to customer. During the course of
      business, we reduce the deposit requirement for some customers with good credit.





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





**Critical
      Accounting Policies and Estimates**




We
      have
      disclosed in Note 2 to our financial statements those accounting policies that
      we consider to be significant in determining our results of operations and
      our
      financial position which are incorporated by reference herein.




Management's
      discussion and analysis of its financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      Our financial statements reflect the selection and application of accounting
      policies which require management to make significant estimates and judgments.
      See note 2 to our consolidated financial statements, "Summary of Significant
      Accounting Policies." Management bases its estimates on historical experience
      and on various other assumptions that are believed to be reasonable under the
      circumstances. Actual results may differ from these estimates under different
      assumptions or conditions. We believe that the following reflect the more
      critical accounting policies that currently affect our financial condition
      and
      results of operations.




8




Revenue
      recognition




We
      recognize revenue when all four of the following criteria are met: (1)
      persuasive evidence has been received that an arrangement exists; (2) delivery
      of the products and/or services has occurred; (3) the selling price is fixed
      or
      determinable; and (4) collectibility is reasonably assured. We follow the
      provisions of 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 our 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, which are sold exclusively in the PRC, are
      subject to a Chinese value-added tax at a rate of 13% to 17% of the gross sales
      price. This VAT may be offset by VAT paid by the Company on raw materials and
      other materials included in the cost of producing their finished
      product.





Research
      and development costs




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





Use
      of
      estimates





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





Inventories




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




**Item
      3.** **Controls
      and Procedures**




(a)   *Evaluation
      of disclosure controls and procedures* .
      At the
      conclusion of the period ended September 30, 2007 we carried out an evaluation,
      under the supervision and with the participation of our management, including
      our Chief Executive Officer and Chief Financial Officer, of the effectiveness
      of
      the design and operation of our disclosure controls and procedures (as defined
      in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules
      13a-15e and 15d-15e). Based upon that evaluation, our Chief Executive Officer
      and Chief Financial Officer concluded that as of the end of the period covered
      by this report, our disclosure controls and procedures were effective and
      adequately designed to ensure that the information required to be disclosed
      by
      us in the reports we submit under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the applicable
      rules and forms and that such information was accumulated and communicated
      to
      our Chief Executive Officer and Chief Financial Officer, in a manner that
      allowed for timely decisions regarding required disclosure.




9


(b)  *Changes
      in internal controls* .
      During
      the period covered by this report, there was no change in our internal control
      over financial reporting that has materially affected, or is reasonably likely
      to materially affect our internal control over financial reporting.





**PART
      II OTHER INFORMATION**





**Item
      5.** **Other
      Information**





As
      reported in our definitive information statement on Schedule 14C filed with
      the
      Securities and Exchange Commission on June 23, 2006, the holders of more than
      a
      majority of the outstanding common stock of the Company approved a restated
      certificate of incorporation of the Company. We inadvertently omitted the filing
      of the restated certificate of incorporation with the Secretary of State of
      the
      State of Delaware. The Company filed the restated certificate of incorporation
      with the Secretary of State of the State of Delaware on October 29, 2007,
      effective as of the same date. A copy of the certificate is listed as Exhibit
      3.1 to this quarterly report.





**Item
      6.** **Exhibits**





(a)
      Exhibits





3.1
      -
      Restated Certificate of Incorporation





31.1
      -
      Certification of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.





31.2
      -
      Certification of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.





32.1
      -
      Certification of Chief Executive Officer and Chief Financial Officer pursuant
      to
      Section 906 of the Sarbanes-Oxley Act of 2002.





10





SIGNATURES





Pursuant
      to the requirements of the Securities Act of 1934, the Registrant has duly
      caused this report to be signed on its behalf by the undersigned there unto
      duly
      authorized.





Date:
      November 8, 2007


CHINA
              MEDICINE
              CORPORATIONBY:
            /s/ Senshan
              YangSenshan
              YangChief
              Executive Officer(principal executive
              officer)




BY:
            /s/ Huizhen
              YuHuizhen
              YuChief
              Financial Officer(principal financial officer and accounting
              officer)


11