UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB

                    U.S. SECURITIES AND EXC HANGE COMMISSION

                             Washington, D.C. 20549

(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, 2006

      |_|   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                        (I.R.S. EMPLOYER
 INCORPORATION OF ORGANIZATION)                       IDENTIFICATION NO.)


                    24A Jefferson Plaza, Princeton, NJ 08540

               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

                                  732 438 8866
                            ISSUER'S TELEPHONE NUMBER


         ---------------------------------------------------------------
              (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
                          IF CHANGED SINCE LAST REPORT)


      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 |_|.

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

      State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:

      The number of shares of Common Stock of the Registrant, par value $.0001
per share, outstanding at September 30, 2006, was 7,380,000.

      Transitional Small business Disclosure Format (Check one): Yes|_| No |X|.


<PAGE>


                           CHINA MEDICINE CORPORATION

TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I     FINANCIAL INFORMATION

Item 1.    Financial Statements & Notes                                       1

Item 2.    Management's Discussion and Analysis or Plan of Operation.        22

Item 3.    Controls and Procedures                                           29



PART II    OTHER INFORMATION

Item  6.   Exhibits                                                          30

Signatures

Exhibits/Certifications



<PAGE>




PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC.)

                           CONSOLIDATED BALANCE SHEETS
                 AS OF SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
<TABLE>
<CAPTION>
                                   A S S E T S
                                   -----------
                                                                                  September 30,            December 31,
                                                                                      2006                     2005
                                                                                  -------------           -------------
                                                                                   (Unaudited)
                                                                                  -------------           -------------
<S>                                                                               <C>                     <C>
CURRENT ASSETS:
     Cash                                                                         $     642,023           $     91,964
     Accounts receivable, trade, net of allowance for doubtful accounts
        of $12,452 and $12,333 as of September 30, 2006 and
        December 31, 2005, respectively                                               5,569,669              2,410,824
     Investment                                                                         784,920                     --
     Inventories                                                                      1,510,141              1,382,929
     Other receivables                                                                  167,362                 38,301
     Advances to suppliers                                                            2,447,416              1,075,546
                                                                                  -------------           -------------
        Total current assets                                                         11,121,531              4,999,564
                                                                                  -------------           -------------

EQUIPMENT, net                                                                        1,731,527                330,015
                                                                                  -------------           -------------
           Total assets                                                           $  12,853,058           $  5,329,579
                                                                                  =============           =============

        L I A B I L I T I E S  A N D  S H A R E H O L D E R S'  E Q U I T Y
        -------------------------------------------------------------------

CURRENT LIABILITIES:
     Accounts payable, trade                                                      $     176,081           $    170,196
     Short-term loans                                                                        --                 95,480
     Other payables and accrued liabilities                                             101,945                 97,449
     Customer deposits                                                                   34,307                 37,292
     Taxes payable                                                                      907,000                170,456
     Liquidated damages payable                                                          44,003                     --
                                                                                  -------------           -------------
        Total current liabilities                                                     1,263,336                570,873

SHAREHOLDERS' EQUITY:
     Preferred stock, $0.0001 par value; 10,000,000 shares
        authorized, 3,120,000 shares issued and outstanding                                 312                     --
     Common stock, $0.0001 par value; $90,000,000 shares
        authorized, 7,380,000 shares issued and outstanding                                 738                    653
     Paid-in capital                                                                  4,375,517                120,347
     Statutory reserves                                                                 722,909                722,909
     Retained earnings                                                                6,189,274              3,813,665
     Accumulated other comprehensive income                                             300,972                101,132
                                                                                  -------------           -------------
        Total shareholders' equity                                                   11,589,722              4,758,706
                                                                                  -------------           -------------
           Total liabilities and shareholders' equity                             $  12,853,058            $ 5,329,579
                                                                                  =============           =============
</TABLE>

The accompanying notes are an integral part of this statement.

                                       1
<PAGE>


                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC.)

        CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
     FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                          For the three months ended     For the nine months ended
                                                                 September 30,                 September 30,
                                                         ----------------------------   ----------------------------
                                                             2006             2005          2006             2005
                                                         ------------    ------------   ------------    ------------
<S>                                                      <C>             <C>            <C>             <C>
REVENUES                                                 $  6,366,619    $  2,575,896   $ 13,856,558    $  8,206,063

COST OF GOOD SOLD                                           4,490,055       1,716,375      9,910,331       5,459,973
                                                         ------------    ------------   ------------    ------------

GROSS PROFIT                                                1,876,564         859,521      3,946,227       2,746,090
                                                         ------------    ------------   ------------    ------------

OTHER OPERATING INCOME                                      1,229,912         452,024      1,589,136       1,555,693
                                                         ------------    ------------   ------------    ------------

OPERATING EXPENSES
        Research and development expenses                      31,361         109,606        270,702         314,580
        Selling, general and administrative expenses          185,517         106,649      1,084,194         336,411
        Reverse acquisition expense                                --              --        931,270              --
                                                         ------------    ------------   ------------    ------------
             Total operating expenses                         216,878         216,255      2,286,166         650,991
                                                         ------------    ------------   ------------    ------------

INCOME  FROM OPERATIONS                                     2,889,598       1,095,290      3,249,197       3,650,792

OTHER INCOME (EXPENSE)                                       (136,645)        410,203       (143,757)        410,175
                                                         ------------    ------------   ------------    ------------

INCOME BEFORE INCOME TAXES                                  2,752,953       1,505,493      3,105,440       4,060,967

PROVISION FOR INCOME TAXES                                    475,574              --        729,831              --
                                                         ------------    ------------   ------------    ------------

NET INCOME                                                  2,277,379       1,505,493      2,375,609       4,060,967

OTHER COMPREHENSIVE INCOME :
        Foreign currency translation adjustment               128,142          47,849        199,840          47,849
                                                         ------------    ------------   ------------    ------------

COMPREHENSIVE INCOME                                     $  2,405,521    $  1,553,342   $  2,575,449    $  4,108,816
                                                         ============    ============   ============    ============
Earning per share - basic                                $       0.31    $       0.23   $       0.33    $       0.62
                                                         ============    ============   ============    ============
Earning per share - diluted                              $       0.29    $       0.23   $       0.31    $       0.62
                                                         ============    ============   ============    ============
Weighted average number of shares outstanding - basic       7,380,000       6,530,000      7,250,926       6,530,000
                                                         ============    ============   ============    ============
Weighted average number of share outstanding - diluted      7,749,000       6,530,000      7,563,893       6,530,000
                                                         ============    ============   ============    ============
</TABLE>

The accompanying notes are an integral part of this statement.

                                       2
<PAGE>

                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC.)

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005


<TABLE>
<CAPTION>
                                                  Common Stock                 Preferred Stock
                                           --------------------------    --------------------------
                                                              Par                          Par           Paid-in      Statutory
                                             Shares          Value         Shares         Value          capital      reserves
                                           -----------    -----------    -----------    -----------    -----------   -----------

<S>                                          <C>          <C>            <C>            <C>            <C>           <C>
BALANCE, December 31, 2004                   6,530,000    $       653             --    $        --    $   120,347   $   722,909

           Net income

           Distributions
           Foreign currency translation
            adjustments
                                           -----------    -----------    -----------    -----------    -----------   -----------
BALANCE, September 30, 2005 (Unaudited)      6,530,000            653             --             --        120,347       722,909

           Net income

           Distributions
           Foreign currency translation
            adjustments
                                           -----------    -----------    -----------    -----------    -----------   -----------
BALANCE, December 31, 2005
                                             6,530,000            653             --             --        120,347       722,909

           Net income

           Reverse acquisition,
            February 8, 2006                 1,028,000            103                                      (32,501)

           Shares redeemed in connection
            with reverse acquisition          (928,000)           (93)                                    (167,509)

           Shares issued for acquisition
            services                           750,000             75                                      607,425

           Issuance of preferred stock                                     3,120,000            312      3,782,688

           Stock Options Granted                                                                            65,067

           Foreign currency translation
            adjustments
                                           -----------    -----------    -----------    -----------    -----------   -----------
BALANCE, September 30, 2006 (Unaudited)      7,380,000    $       738      3,120,000    $       312    $ 4,375,517   $   722,909
                                           ===========    ===========    ===========    ===========    ===========   ===========


                                                          Accumulated
                                                             other
                                            Retained     comprehensive
                                            earnings        income       Totals
                                           -----------   -----------   -----------

BALANCE, December 31, 2004                 $ 1,234,972   $        --   $ 2,078,881

           Net income                        4,060,967                   4,060,967

           Distributions                    (3,068,676)                 (3,068,676)
           Foreign currency translation
            adjustments                                       47,849        47,849
                                           -----------   -----------   -----------
BALANCE, September 30, 2005 (Unaudited)      2,227,263        47,849     3,119,021

           Net income                        1,629,203                   1,629,203

           Distributions                       (42,801)                    (42,801)

           Foreign currency translation
            adjustments                                       53,283        53,283
                                           -----------   -----------   -----------
BALANCE, December 31, 2005
                                             3,813,665       101,132     4,758,706

           Net income                        2,375,609                   2,375,609

           Reverse acquisition,
            February 8, 2006                                               (32,398)

           Shares redeemed in connection
            with reverse acquisition                                      (167,602)

           Shares issued for acquisition
            services                                                       607,500

           Issuance of preferred stock                                   3,783,000

           Stock Options Granted                                            65,067

           Foreign currency translation
            adjustments                                      199,840       199,840
                                           -----------   -----------   -----------
BALANCE, September 30, 2006 (Unaudited)    $ 6,189,274   $   300,972   $11,589,722
                                           ===========   ===========   ===========
</TABLE>

The accompanying notes are an integral part of this statement.

                                       3
<PAGE>

                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC.)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                       2006           2005
                                                                    -----------    -----------
<S>                                                                 <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

     Net income                                                     $ 2,375,609    $ 4,060,967
     Adjustments to reconcile net income to cash
        used in operating activities:
           Depreciation                                                 128,152         80,517
           Loss (gain) on sale of intangible assets                      15,658       (336,447)
           Stock issued for services                                    672,567             --
           Gain on distributions of dividends in-kind                        --        (74,497)
     Change in operating assets and liabilities:
        (Increase) decrease in assets:
           Accounts receivable, trade                                (3,095,070)       162,287
           Inventories                                                  (96,958)    (2,032,724)
           Other receivables                                           (153,754)      (168,200)
           Other receivables - related parties                               --          2,263
           Advances to suppliers                                     (1,503,595)      (753,039)
           Prepaid expenses                                              22,746           (384)
        Increase (decrease) in liabilities:
           Accounts payable, trade                                      173,827        386,222
           Other payables and accrued liabilities                        33,524         28,651
           Other payables - related parties                             (32,398)           717
           Customer deposits                                             22,831       (522,816)
           Taxes payable                                                696,881        223,114
           Liquidated damages payable                                    44,003             --
                                                                    -----------    -----------
              Net cash (used in) provided by operating activities      (695,977)     1,056,631
                                                                    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of equipment                                           (1,520,555)       (25,460)
     Investment                                                        (774,876)            --
     Proceeds from sale of intangible assets                                 --        513,770
                                                                    -----------    -----------
              Net cash (used in) provided by investing activities    (2,295,431)       488,310
                                                                    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments on short-term loan                                        (95,974)            --
     Proceeds from short-term loan                                    3,783,000         95,326
     Distributions                                                     (167,602)    (1,849,620)
                                                                    -----------    -----------
              Net cash provided by (used in) financing activities     3,519,424     (1,754,294)
                                                                    -----------    -----------


EFFECT OF EXCHANGE RATE ON CASH                                          22,043         47,849
                                                                    -----------    -----------
INCREASE (DECREASE) IN CASH                                             550,059       (161,504)

CASH, beginning of period                                                91,964        243,520
                                                                    -----------    -----------

CASH, end of period                                                 $   642,023    $    82,016
                                                                    ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for income taxes                                          $     2,900    $        --
                                                                    ===========    ===========

Cash paid for interest expense                                      $     1,582    $       557
                                                                    ===========    ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:

Stock issued for services                                           $   672,567    $        --
                                                                    ===========    ===========
</TABLE>

The accompanying notes are an integral part of this statement.

                                       4
<PAGE>


Note 1 - Organization

Organization

China  Medicine   Corporation   (the  "Company")  is  a  Delaware   corporation,
incorporated on February 10, 2005 under the name  Lounsberry  Holdings III, Inc,
for the purpose of acquiring, or merging with, an operating business. On May 10,
2006, the Company changed its corporate name to China Medicine Corporation.

Effective  February 8, 2006, the Company entered into a Stock Exchange Agreement
("Exchange  Agreement") with Guangzhou  Konzern Medicine Co., Ltd.  ("Konzern").
Pursuant to the Exchange Agreement, the Company, at closing, acquired all of the
capital of Konzern from Konzern Stockholders in exchange for 6,530,000 shares of
the Company's common stock. For accounting purposes,  the acquisition of Konzern
has been treated as a recapitalization  of Konzern with Konzern as the acquirer.
The  historical  financial  statements  prior to  February  8, 2006 are those of
Konzern.  Contemporaneously  with the reverse acquisition,  the Company redeemed
928,000  shares of common stock from its then principal  stockholder  who is not
affiliated with the Konzern Stockholders or any member of the investor group for
$167,602 and paid off loans from related party for $32,398.  The 928,000  shares
purchased  constituted  approximately  90.3% of the  1,028,000  shares of common
stock  outstanding  prior to the issuance of the shares of common stock pursuant
to the Exchange Agreement and the 750,000 shares issued as disclosed in Note 17.

Konzern was privatized from a state-owned  medicine  company on July 25, 2000 in
Guangzhou,  People's  Republic  of China  ("PRC").  The  registered  capital was
$121,000.  The Company has increased Konzern's  registered capital by $2,300,000
with the proceeds  received from the sale of preferred  stock (see Note 17). The
business license provides for a 24 year term and will end on September 2, 2024.

Konzern  is  a   distributor   of  medical   products,   including   traditional
pharmaceutical medicines, traditional Chinese medicines (finished medicines made
of Chinese herbs), Chinese herbs and dietary supplements. These products include
both prescription  drugs and  over-the-counter  drugs. The Company purchases its
products from Chinese drug manufacturers and other medicine companies.

Note 2 - Summary of significant accounting policies

Basis of presentation

The consolidated  financial  statements of the Company reflect the activities of
its 100% owned subsidiary, Konzern, that is located in the PRC. The consolidated
financial  statements have been presented as if the equity Exchange Agreement of
the  subsidiary  occurred  during the year of 2004 due to common  management and
ownership.


                                       5
<PAGE>


Note 2 - Summary of significant accounting policies, (continued)

Basis of presentation, (continued)

The  accompanying  financial  statements  have been prepared in accordance  with
accounting  principles  generally accepted in the United States of America.  The
accompanying  consolidated  financial statements include the accounts of Konzern
and the Company. 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, 2006 and December 31, 2005,  the Company had deposits in excess of
federally  insured  limits  total of $564,096  and  $78,319,  respectively.  The
Company has not  experienced  any losses in such accounts and believes it is not
exposed to any significant risks on its cash in bank accounts.


                                       6
<PAGE>


Note 2 - Summary of significant accounting policies, (continued)

Accounts receivable, trade

The Company  conducts  its  business  operations  in the PRC.  During the normal
course of  business,  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. However, the Company records a provision for
accounts  receivable  trade  that  ranges  from 0.3% to 1.0% of the  outstanding
accounts  receivable  balance in accordance with generally  accepted  accounting
principles in the PRC. The  allowance for doubtful  accounts as of September 30,
2006 and December 31, 2005 amounted to $12,452 and $12,333, respectively.

Inventories

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

Plant and equipment

Plant  and  equipment  are  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 years
    Equipment                 3 -  5 years
    Motor vehicles            4 - 10 years

The residual value is estimated to be 5% of the actual cost.

The cost and  related  accumulated  depreciation  of  assets  sold or  otherwise
retired are eliminated  from the accounts and any gain or loss is include in the
statement of  operations.  Maintenance,  repairs and minor  renewals are charged
directly to expenses as incurred.

Intangibles

Under the Statement of Accounting Standards ("SFAS") No.142, "Goodwill and Other
Intangible  Assets",  all goodwill and certain  intangible  assets determined to
have indefinite lives will not be amortized but will be tested for impairment at
least  annually.  Intangible  assets other than goodwill will be amortized  over
their useful lives and reviewed for impairment in accordance  with SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets".


                                       7
<PAGE>


Note 2 - Summary of significant accounting policies, (continued)

Impairment of long-lived assets

Per  SFAS No.  144,  long-lived  assets  will be  analyzed  for  indications  of
impairment.  Impairment of long-lived assets is assessed by the Company whenever
there  is an  indication  that  the  carrying  amount  of the  asset  may not be
recovered.  Recoverability  of these  assets  is  determined  by  comparing  the
forecasted  undiscounted cash flows generated by those assets to the assets' net
carrying  value.  The amount of  impairment  loss,  if any,  is  measured as the
difference between the net book value of the assets and the estimated fair value
of the related assets.

The Company  evaluates the  recoverability of long-lived assets by measuring the
carrying  amount of the assets  against the estimated  undiscounted  future cash
flows associated with them. At the time such flows of certain  long-lived assets
are not sufficient to recover the carrying value of such assets,  the assets are
adjusted to their fair values.

Revenue recognition

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

Sales revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company's products that are sold in the PRC are subject to a
Chinese value-added tax at a rate of 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.  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.


                                       8
<PAGE>


Note 2 - Summary of significant accounting policies, (continued)

Foreign currency translation

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

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

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

Translation  adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders' equity
and  amounted to $199,840 and $47,849 for the nine months  ended  September  30,
2006 and 2005,  respectively.  The balance  sheet  amounts with the exception of
equity  at  September  30,  2006  were  translated  at 7.90 RMB to $1.00  USD as
compared to 8.07 RMB at September 30, 2005.  The equity  accounts were stated at
their  historical  rate. The average  translation  rate of 8.00 RMB for the nine
months ended September 30, 2006 was applied to income statement accounts.

Income taxes

The Company has adopted  Statement of Financial  Accounting  Standards  No. 109,
"Accounting  for Income Taxes" (SFAS 109).  SFAS 109 requires the recognition of
deferred  income  tax  liabilities  and  assets  for  the  expected  future  tax
consequences  of temporary  differences  between  income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consist of
taxes  currently due plus deferred  taxes.  There are no deferred tax amounts at
September 30, 2006 and December 31, 2005.

The Charge for  taxation is based on the  results  for the year as adjusted  for
items, which are non-assessable or disallowed.  It is calculated using tax rates
that have been enacted or substantially enacted by the balance sheet date.


                                       9
<PAGE>


Note 2 - Summary of significant accounting policies, (continued)

Income taxes, (continued)

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 is  organized  in the United  States and no tax benefit is expected
from tax credits in the future. The Company has located its subsidiary,  Konzern
in a special  economic  region in China.  This economic  region  allows  foreign
enterprises  a two-year  income tax exemption and a 50% income tax reduction for
the  following  three  years.  Konzern was  approved as a foreign  Joint-venture
enterprise in 2004 and as a wholly-owned foreign enterprise in 2006. Konzern has
an income tax  exemption  for 2004 and 2005 and a 50%  reduction  the income tax
rate for 2006, 2007 and 2008.

The  estimated  tax savings for the period  ending  September  30, 2006 and 2005
amounted $729,831 and $,1,340,119,  respectively. The net effect on earnings per
share if the income tax had been applied would decrease  earnings per share from
$0.33 to $0.23 for the nine months  ended  September  30, 2006 and from $0.62 to
$0.42 for the nine months ended September 30, 2005, respectively.

The provision  for income taxes at September 30, 2006 and 2005  consisted of the
following:

                                    2006          2005
                                 -----------   -----------
                                  Unaudited     Unaudited
                                 -----------   -----------

Provision for China Income Tax   $   663,483   $        --
Provision for Local Tax               66,348            --
                                 -----------   -----------
Totals                           $   729,831   $        --
                                 ===========   ===========


                                       10
<PAGE>


Note 2 - Summary of significant accounting policies, (continued)

Income taxes, (continued)

The  following  table  reconciles  the U.S.  statutory  rates  to the  Company's
effective tax rate for the nine months ended September 30:

                                                           2006        2005
                                                          ------      ------
U.S. Statutory rates                                        34.0 %      34.0 %
Foreign income not reognized in USA                        (34.0)      (34.0)
China income taxes                                          33.0          --
Income taxes savings                                        (9.5)
                                                          ------      ------
Effective tax rate                                          23.5 %        -- %
                                                          ======      ======

Value added tax

Enterprises or individuals who sell commodities are subject to a value added tax
in accordance with Chinese laws. The value added tax standard rate is 17% of the
gross sales  price.  A credit is  available  whereby VAT paid on the purchase of
semi-finished  products or raw  materials  used in  production  of the Company's
finished  products  can be used to offset  the VAT due on sales of the  finished
product.

Fair value of financial instruments

The carrying amounts of the Company's financial instruments  (including accounts
receivable,  shareholder loans and notes payable)  approximate fair value due to
the relatively short period to maturity of these instruments.

Stock-based compensation

Effective  January 1, 2006,  the Company  adopted  the  Statement  of  Financial
Accounting   Standards   No.  123  (revised   2004),   "Share-Based   Payments,"
("FAS123R"),  which established standards for the accounting for transactions in
which an entity  exchange its equity  instruments  for goods or  services.  This
statement  require a public  entity to  measure  the cost of  employee  services
received in exchange for an award of equity  instruments based on the grant-date
fair value of the award (with limited exceptions).  That cost will be recognized
over the period  during  which an employee  is  required  to provide  service in
exchange for the award.


                                       11
<PAGE>


Note 2 - Summary of significant accounting policies, (continued)

Stock-based compensation, (continued)

On February 8, 2006,  contemporaneously  with the recapitalization,  the Company
granted options to purchase 430,000 of common stock of which options to purchase
390,000  shares were granted to officers and other key employees of Konzern.  On
March 22, 2006, the Company  granted  options to purchase an additional  850,000
shares of common stock to two officers.  The options all have an exercise  price
of $1.25 per share,  which was the  conversion  price of the Series A  Preferred
Stock and not less  than the fair  market  value on the date of grant,  and were
granted  pursuant to the  Company's  2006  Long-Term  Incentive  Plan.  The 2006
Long-Term Incentive Plan, which covers 1,575,000 shares of common stock, and all
options granted under the plan are subject to stockholder  approval of the plan.
The Company  estimated  that the value of the options is between  $0.17 to $0.23
per share  subject to the  exercise  of  options.  The plan was  approved by the
stockholders of the Company in July 2006.

SFAS No. 123 requires that  compensation  expense  related to options granted be
calculated  based on the fair value of the options as of the date of grant.  The
fair value calculations take into account the exercise prices and expected lives
of the  options,  the  current  price  of the  underlying  stock,  its  expected
volatility,  the  expected  dividends  on the stock,  and the current  risk-free
interest rate for the expected  life of the option.  Because there is no trading
market for the Company's  common stock,  no historical  data on which to base an
estimate of volatility.  The Company has considered the volatility that might be
expected to occur for companies  comparable to the Company and,  selected  three
publicly-traded companies whose business is similar to the Company's and who are
classified in the same SIC code as the Company, have assumed a volatility of 50%
as being reasonably  representative  of the volatility that could be expected to
occur in the future over the  relevant  periods.  The  risk-free  rates used are
based on  Treasury  Constant  Maturity  rates,  published  by the  U.S.  Federal
Reserve.  The weighted average risk-free rate was 4.65%.  Since the Company does
not have a history of employee stock options, the estimated life is based on one
half of the sum of the vesting period and the contractual life of the option.

The Company used the  Cox-Ross-Rubinstein  binomial  model to value the 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:

                              Preferred    Warrants   Warrants      Stock
Assumption                      Stock          A          B        options
-------------------------     ----------    -------    -------    ---------
Common stock - fair value      $  0.81      $  0.81    $  0.81    $    0.81
Expected life                  Perpetual    5 years    5 years    2.5 years
Volatility                                      50%        50%          50%
Risk-free rate                                4.55%      4.55%        4.65%


                                       12
<PAGE>


Note 2 - Summary of significant accounting policies, (continued)

Major suppliers

For the nine months ended September 30, 2006 and 2005, five suppliers  accounted
for approximately 63% and 68%, respectively, of the Company's purchases.

Major customers

For the nine months ended September 30, 2006 and 2005, five customers  accounted
for approximately 52% and 68%, respectively, of the Company's sales.

Recently issued accounting pronouncements

In February 2006, the FASB issued SFAS No. 155,  "Accounting  for Certain Hybrid
Financial  Instruments" ("FAS 155"), which amends SFAS No. 133,  "Accounting for
Derivative  Instruments  and Hedging  Activities"  ("FAS 133") and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of  Liabilities"  ("FAS  140").  FAS  155  provides  guidance  to  simplify  the
accounting   for  certain   hybrid   instruments   by   permitting   fair  value
re-measurement  for any hybrid  financial  instrument  that contains an embedded
derivative,  as well as,  clarifies  that  beneficial  interests in  securitized
financial  assets are  subject to FAS 133. In  addition,  FAS 155  eliminates  a
restriction   on  the  passive   derivative   instruments   that  a   qualifying
special-purpose  entity may hold  under FAS 140.  FAS 155 is  effective  for all
financial instruments acquired, issued or subject to a new basis occurring after
the beginning of an entity's  first fiscal year that begins after  September 15,
2006.

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial  Assets" ("FAS 156"),  which amends SFAS No. 140. FAS 156 specifically
provides  guidance  addressing  the  recognition  and  measurement of separately
recognized servicing assets and liabilities, common with mortgage securitization
activities,  and  provides  an  approach  to  simplify  efforts to obtain  hedge
accounting  treatment.  FAS  156 is  effective  for  all  separately  recognized
servicing  assets and  liabilities  acquired or issued after the beginning of an
entity's  fiscal year that begins after  September 15, 2006, with early adoption
being permitted.

In July 2006,  the FASB  issued  FASB  Interpretation  No. 48,  "Accounting  for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial  statements in accordance with FAS 109, "Accounting for
Income  Taxes".  FIN 48  prescribes  a  recognition  threshold  and  measurement
attribute for the  financial  statement  recognition  and  measurement  of a tax
position  taken or expected to be taken in a tax  return.  FIN 48 also  provides
guidance on derecognition, classification, interest and penalties, accounting in
interim  periods,  disclosure and  transition.  The  requirements  of FIN 48 are
effective for our fiscal year beginning January 1, 2007.


                                       13
<PAGE>


Note 2 - Summary of significant accounting policies, (continued)

Recently issued accounting pronouncements, (continued)

In July 2005, the Financial Accounting Standards Board (FASB) issued an Exposure
Draft of a proposed  Interpretation  "Accounting for Uncertain Tax Positions--an
interpretation of FASB Statement No. 109." Under the proposed Interpretation,  a
company  would  recognize in its financial  statements  its best estimate of the
benefit of a tax position,  only if the tax position is  considered  probable of
being  sustained  on audit  based  solely  on the  technical  merits  of the tax
position. In evaluating whether the probable recognition threshold has been met,
the proposed  Interpretation would require the presumption that the tax position
will  be  evaluated  during  an  audit  by  taxing  authorities.   The  proposed
Interpretation  would be effective as of the end of the first fiscal year ending
after  December 15, 2005,  with a  cumulative  effect of a change in  accounting
principle to be recorded upon the initial adoption. The proposed  Interpretation
would apply to all tax positions and only benefits from tax positions  that meet
the  probable  recognition  threshold  at or after the  effective  date would be
recognized.

The Company is  currently  analyzing  the  proposed  Interpretation  and has not
determined its potential impact on our Consolidated Financial Statements.  While
we cannot predict with certainty the rules in the final Interpretation, there is
risk that the final Interpretation could result in a cumulative effect charge to
earnings  upon  adoption,  increases  in  future  effective  tax  rates,  and/or
increases in future interperiod effective tax rate volatility.

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.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined  Benefit  Pension and Other  Postretirement  Plans an  amendment of FASB
Statements  No. 87, 88, 106, and 132(R)".  One  objective of this standard is to
make  it  easier  for  investors,  employees,  retirees  and  other  parties  to
understand  and  assess an  employer's  financial  position  and its  ability to
fulfill the obligations under its benefit plans. SFAS No. 158 requires employers
to fully recognize in their financial statements the obligations associated with
single employer  defined benefit pension plans,  retiree  healthcare  plans, and
other postretirement plans. SFAS No. 158 requires an employer to fully recognize
in its statement of financial position the over funded or under funded status of
a defined benefit  postretirement  plan (other than a multiemployer  plan) as an
asset or liability and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income.


                                       14
<PAGE>


Note 2 - Summary of significant accounting policies, (continued)

Recently issued accounting pronouncements, (continued)

This  Statement also requires an employer to measure the funded status of a plan
as of the date of its year end  statement  of financial  position,  with limited
exceptions. SFAS No. 158 requires an entity to recognize as a component of other
comprehensive income, net of tax, the gains or losses and prior service costs or
credits that arise during the period but are not recognized as components of net
periodic benefit cost pursuant to SFAS No. 87. This Statement requires an entity
to disclose in the notes to financial  statements  additional  information about
certain effects on net periodic benefit cost for the next fiscal year that arise
from delayed recognition of the gains or losses, prior service costs or credits,
and  transition  asset or  obligation.  Management  does not  currently  believe
adoption  will have a material  impact on the  Company's  financial  position or
results of operations.

Note 3 - Consolidated financial statements and condensed footnotes

The  interim  consolidated  financial  statements  presented  herein  have  been
prepared by the Company  and include the  unaudited  accounts of the Company and
its subsidiary.  All significant  inter-company  accounts and transactions  have
been eliminated in the consolidation.

These  consolidated  financial  statements have been prepared in accordance with
generally  accepted  accounting  principles  in the United  States  for  interim
financial  information  and the  instructions  for Form  10-QSB  and Item 310 of
Regulation S-B.

Certain  information  and footnote  disclosures  that are  normally  included in
financial  statements presented in accordance with generally accepted accounting
principles  have been condensed or omitted.  Management of the Company  believes
the  disclosures  made  are  adequate  to make  the  information  presented  not
misleading.

In the opinion of management,  the unaudited  consolidated  financial statements
reflect  all  adjustments  (which  include  only normal  recurring  adjustments)
necessary  to  present  fairly  the  financial  position  of the  Company  as of
September 30, 2006 and December 31, 2005, and the results of operations, changes
in  shareholders'  equity and cash flows for the nine months ended September 30,
2006 and 2005.  Interim results are not necessarily  indicative of a full year's
performance because of the impact of seasonal and short-term variations.


Note 4 - 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  excludes
dilution and is computed by dividing income available to common  stockholders by
the  weighted  average  common  shares  outstanding  during the period.  Diluted
earnings per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock.

The following is a  reconciliation  of the basic and diluted  earnings per share
computations for the nine months ended September 30, 2006 and 2005:

                                                       2006            2005
                                                   -------------    ------------
                                                     Unaudited        Unaudited
                                                   -------------    ------------
Net income for basic earnings per share            $   2,375,609    $  4,060,967
                                                   =============    ============
Shares of common stock
 and common stock equivalents:
Weighted average shares used
 in basic computation                                  7,250,926       6,530,000
                                                                    ============
Diluted effect of convertible preferred stock            312,967
                                                   -------------
Weighted average shares used in
 diluted computation                                   7,563,893
                                                   =============
Earnings per share:
Basic                                              $        0.33    $       0.62
                                                   =============    ============
Diluted                                            $        0.31
                                                   =============

Note 5 - Accounts receivable, trade

Accounts  receivable,  trade as of  September  30,  2006 and  December  31, 2005
consisted of the following:

                           September 30,    December 31,
                               2006             2005
                           -------------    -------------
                            Unaudited
                           -------------    -------------
Accounts receivable        $   5,582,121    $   2,423,157
Less: allowance for
      doubtful accounts           12,452           12,333
                           -------------    -------------
Totals                     $   5,569,669    $   2,410,824
                           =============    =============


                                       15
<PAGE>


Note 6 - Investment

Investment  in the  amount of  $784,920  represents  the  advance  payment on an
investment for a Joint  Cooperation  Agreement  with Guangzhou  Ji'nan Science &
Technology Industrial Group Co., Ltd. ("JSIG"), and an individual, Mr. Dongsheng
Yao, to jointly form a new Chinese  company for the purpose of  development  and
application of Aflatonxin-Detoxifizyme ("ADTZ").

On July 7, 2006,  Konzern,  our 100%  subsidiary in China,  entered into a Joint
Cooperation Agreement with JSIG and an individual, Mr. Dongsheng Yao, to jointly
form a new Chinese  company for the purpose of  development  and  application of
"ADTZ".  Konzern  does not have any material  relationship  with JSIG or Mr. Yao
other than with respect to the Agreement.

Ji'nan University, for whom JSIG is the agent, is the holder of the four Chinese
patents on ADTZ for which Mr. Yao is the inventor.  JSIG and Mr. Yao contributed
the four patents into the joint venture  company for which they will each hold a
15% equity interest in the joint venture company. In addition,  JSIG and Mr. Yao
are to be paid a total of approximately  $125,000, as a technology  contribution
fee from the joint venture company. The agreement provides that we are to invest
a total of approximately  $2.2 million,  of which $625,000 has been paid and the
balance is due within two years,  based on the development  effort, for which we
will  receive a 70% equity  interest in the joint  venture  company.  JSIG is to
transfer to the joint venture four patents covering ADTZ.

The agreement  provides that the joint venture entity will have the intellectual
property rights to any products  developed by the joint venture  pursuant to the
agreement.  The  formation  of  the  joint  venture  company,  Guangzhou  Co-win
Bioengineering Co., Ltd., was approved and licensed by the Guangzhou  Industrial
and Commerce Bureau on October 30, 2006. The Company is still in the development
stage and no major activity has yet occurred

Note 7 - Inventories

Inventories consisted of the following:

                                September 30,     December 31,
                                     2006             2005
                                -------------     -------------
                                 Unaudited
                                -------------     -------------
Chemical Medicine               $   1,485,498     $   1,382,929
Traditional Chinese Medicine           24,643                --
                                -------------     -------------
Totals                          $   1,510,141     $   1,382,929
                                =============     =============

Note 8 - Advances to suppliers

Advances to suppliers as of September 30, 2006 and December 31, 2005 amounted to
$2,447,416 and $1,075,546, respectively. They represent advances to suppliers on
inventory purchases.


                                       16
<PAGE>


Note 9 - Equipment

Equipment is summarized as follows:

                                         September 30,       December 31,
                                             2006                2005
                                         -------------       -----------
                                           Unaudited
                                         -------------       -----------
Furniture and fixtures                   $     202,621       $   160,081
Equipment                                    1,586,353           369,459
Motor vehicles                                 199,522           132,804
                                         -------------       -----------
   Total                                     1,988,496           662,344
Less accumulated depreciation                  256,969           332,329
                                         -------------       -----------
Equipment, net                           $   1,731,527       $   330,015
                                         =============       ===========

Depreciation  expense  for the nine  months  ended  September  30, 2006 and 2005
amounted to $128,152 and $80,517 respectively.

Note 10 - Customer deposits

The Company  requires its customers to deposit monies with the Company when they
place an order for its  products.  The  Company  does not pay  interest on these
amounts.  Customer  deposits amounted to $34,307 and $37,292 as of September 30,
2006 and December 31, 2005, respectively.

Note 11 - Taxes payable

Taxes payable consisted of the following:

                              September 30,    December 31,
                                  2006             2005
                              -----------      ------------
                               Unaudited
                              -----------      ------------
Income taxes payable          $   736,358      $         --
Individual income tax                 275               205
Value added tax                   166,351           170,251
Other taxes                         4,016                --
                              -----------      ------------
Totals                        $   907,000      $    170,456
                              ===========      ============

Note 12 - Short-term bank loan payable

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

                                                 September 30,  December 31,
                                                     2006           2005
                                                 -------------  ------------
                                                   Unaudited
                                                 -------------  ------------
Citic Industrial Bank due February 1, 2006,
     annual interest rate at 5.22%               $          --  $     95,480
                                                 =============  ============


                                       17
<PAGE>


Note 13 - Commitments and contingencies

Operating lease

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

Total  rental  expense for the nine  months  ended  September  30, 2006 and 2005
amounted to $35,344 and $24,437, respectively.


As of September 30, 2006, the future minimum annual lease payments  required are
as follows:

     Year Ending December 31,                 Amount
     -------------------------               -------
              2006                           $17,473
              2007                            60,892
              2008                            60,892
              2009                            25,245
              Thereafter                          --

Contingent liabilities

The Company has incurred  liquidated damages to its investors as provided in the
registration  rights  agreement as described in Note 16. The Company is required
to issue 1,025 shares of Series A Preferred  Stock to the investors for each day
that the  Company  failed  to meet the  schedule  dates  or  failed  to keep the
registration statement effective thereafter.

The Company has accrued  $44,003 as liquidated  damages and expensed that amount
in the nine months ended  September 30, 2006.  See Note 16. This amount is based
on the shares  accrued  from August 9, 2006 through  September  30, 2006 and the
fair market value of the Series A Preferred Stock of $0.81 per share.


Note 14 - Reclassifications

Certain amounts for the nine months ended September 30, 2006 in the accompanying
financial  statements have been  reclassified for presentation  purposes.  These
reclassifications have no effect on net income or cash flows.

Note 15 - Statutory reserves

The Company's subsidiary, Konzern, is required to make appropriations to reserve
funds,  comprising the statutory  surplus  reserve,  statutory  welfare fund and
discretionary  surplus  reserve,  based on after-tax  net income  determined  in
accordance with generally accepted accounting principles of People's Republic of
China ("PRC GAAP").  Appropriation to the statutory  surplus reserve is required
to be at least 10% of the after tax net income determined in accordance with PRC
GAAP until the  reserve  is equal to 50% of the  entities'  registered  capital.
Appropriations to the statutory public welfare fund is required to be between 5%
to 10% of the after  tax net  income  determined  in  accordance  with PRC GAAP.
Appropriations to the  discretionary  surplus reserve are made at the discretion
of the Board of Directors.


                                       18
<PAGE>


The  statutory  surplus  reserve  fund is  non-distributable  other than  during
liquidation and can be used to fund previous  years' losses,  if any, and may be
utilized for business  expansion or converted  into share capital by issuing new
shares to  existing  shareholders  in  proportion  to their  shareholding  or by
increasing the par value of the shares currently held by them, provided that the
remaining  reserve  balance  after  such  issue  is  not  less  than  25% of the
registered capital.

The  statutory  welfare  reserve can only be  utilized on capital  items for the
collective  benefit  of  the  Company's  employees,   such  as  construction  of
dormitories, cafeteria facilities, and other staff welfare facilities. This fund
is non-distributable other than upon liquidation. The transfer to this fund must
be made before distribution of any dividend to shareholders.

The  discretionary  surplus  fund  may be used to  acquire  fixed  assets  or to
increase  the  working  capital to expend on  production  and  operation  of the
business.  The Company's Board of Directors decided not to make an appropriation
to this reserve. According to Konzern's articles, Konzern should appropriate 10%
of the net  profit as  statutory  surplus  reserve  and 6% as  statutory  public
welfare. As of September 30, 2006, Konzern's statutory reserve did not reach 50%
of Konzern's  registered  capital due to the increase in  registered  capital of
$2.3 million and the reserve will be made at the end of 2006.

Note 16 - 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  $26,261 and $18,717 during the
nine months ended September 30, 2006 and 2005, respectively.

Note 17 - Stockholders' equity

Sale of preferred stock

Contemporaneously  with the  reverse  acquisition,  the Company  entered  into a
Preferred Stock Purchase Agreement, dated February 8, 2006, with Barron Partners
L.P.,  Ray and Amy Rivers,  JTROS,  Steve Mazur and William  Denkin  pursuant to
which the Company issued and sold an aggregate of 3,120,000 shares of its Series
A Convertible  Preferred  Stock, a newly-created  series of preferred stock, and
warrants to  purchase  3,694,738  shares of common  stock at $1.75 per share and
3,694,738 shares of common stock at $2.50 per share.

The Series A Convertible  Preferred Stock is  convertible,  at the option of the
holder and at any time, into 3,120,000  shares of common stock. No dividends are
payable on the preferred stock and dividends may not be paid on the common stock
while the preferred stock is outstanding.  The preferred stock is not redeemable
but has a liquidation  preference  of $1.25 per share.  Holders of the preferred
stock are not entitled to vote,  except on matters that would  adversely  affect
their rights.


                                       19
<PAGE>


The warrants have a term of five years and are  exercisable by the holder at any
time. With certain exceptions, if the Company issues common stock at a price, or
warrants or other  convertible  securities with an exercise or conversion price,
which is less than the exercise price of the warrants, the exercise price of the
warrants will be reduced to the sales price, exercise price or conversion price,
as the case maybe, of such other securities. However, in such circumstances, the
number of shares obtainable on exercise of the warrants is not changed.

The  conversion  rate of the Series A Preferred  Stock and the exercise price of
the warrants  (but not the number of shares  obtainable on exercise) are subject
to adjustment  in certain  events,  including  the failure to achieve  specified
levels  of  adjusted   earnings  before   interest,   taxes,   depreciation  and
amortization or fully diluted pre-tax income per share, computed as set forth in
the  applicable  agreements.  Further,  the Series A Preferred  Stock can not be
converted  and the warrants can not be exercised if such  conversion or exercise
would result in the holder and its affiliates  owning more than 4.9% of the then
outstanding number of shares of common stock.

The  Company  valued  the  warrants  at the time  they  were  issued  using  the
Cox-Ross-Rubinstein  binomial model, based on the exercise price and term of the
warrants  and the  following  assumptions:  fair value of common  stock - $0.81;
volatility - 50%;  interest  rate - 4.55%.  Because there is currently 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.


                                       20
<PAGE>


Note 17 - Stockholders' equity, (continued)

Sale of preferred stock (continued)

Under a  Registration  Rights  Agreement  with  the  investors  in the  Series A
Preferred  Stock,  the  Company is  required  to file a  registration  statement
registering  the resale of the common  stock  issuable  upon  conversion  of the
Series A Preferred  Stock and exercise of the warrants  purchased along with the
Series A Preferred Stock. The registration statement was filed on April 13, 2006
and was declared effective on October 17, 2006. Accordingly, effective August 8,
2006, the Company began to incur obligations to pay liquidated damages under the
Registration  Rights Agreement.  The Company is required to pay to the investors
liquidated  damages of 1,025  shares of Series A Preferred  Stock each day until
the  registration  statement  is declared  effective,  up to a maximum  total of
375,000 shares. After the registration statement becomes effective,  the Company
is required to maintain  its  effectiveness  until the  expiration  of two years
after the date of the Registration  Rights Agreement or until the investors hold
less than 10% of the  registrable  securities.  As of September  30,  2006,  the
Company  has  accrued  $44,003  for  the  liquidated  damages  pursuant  to that
agreement. This amount has been included in general and administrative expenses.

The Company reviewed the terms of the Series A Preferred Stock and the Warrants,
in accordance with FAS 133 and EITF Issue 00-19.  The conversion  option related
to the Series A Preferred  Stock is an embedded  derivative  instrument  but the
risks and rewards of that embedded  derivative  are considered to be clearly and
closely   related  to  the  risks  and  rewards  of  the  host  instrument  and,
accordingly,  the embedded  derivative  instrument has not been bifurcated.  The
Company has reviewed the requirements of EITF Issue 00-19 and concluded that the
Warrants  should be accounted for as equity  instruments.  Accordingly,  the net
proceeds  from the sale of the  preferred  stock  and  warrants  of  $3,783,000,
representing  the gross  proceeds  received  of  $3,900,000,  net of $117,000 of
commissions, has been credited to additional paid-in capital.

Common stock

The Company issued  750,000  shares of common stock to individuals  for services
performed  and of which  150,000  shares  were issued to Ms. Mary Xia and 37,500
shares were issued to Ms. Lin Li, who are officers of the  Company.  There is no
established market for the Company's common stock.  Accordingly,  the fair value
of the common stock of $0.81 has been  estimated by  determining  the fair value
that would equate the aggregate fair values of the Series A Preferred  Stock and
the Warrants to the gross cash proceeds received from the third-party investors,
keeping all other valuation factors constant.  Therefore, the Company valued the
common stock at $0.81 per share for a total of $607,500  for the 750,000  shares
issued,  which amount was expensed  during the nine months ended  September  30,
2006.


                                       21
<PAGE>


Note 18 - Subsequent event

The formation of the joint venture company,  Guangzhou Co-win Bioengineering Co.
Ltd.,  as  described  in  Note 6 was  approved  and  licensed  by the  Guangzhou
Industrial and Commerce  Bureau on October 30, 2006. The Company is still in the
development stage and no major activity has yet occurred.


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

         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

We are a holding company, and our business is conducted through our wholly owned
subsidiary, Guangzhou Konzern Medicine Co., Ltd. ("Konzern"), which is organized
under the laws of the People's  Republic of China (the "PRC",  or  "China").  We
acquired all the  outstanding  equity of Konzern in February 2006. In connection
therewith,  we raised an aggregate of $3,900,000 in gross  proceeds in a private
equity  financing  by certain  non-affiliated  accredited  investors in February
2006.

Through Konzern we distribute  approximately  1,100 medicine  products in China,
including traditional  pharmaceutical  medicines,  traditional Chinese medicines
(finished  medicines  made of  Chinese  herbs),  Chinese  herbs and  nutritional
supplements. These products include both prescription drugs and over-the-counter
drugs.  Our network  reaches 28  provinces  in China,  over 300  hospitals,  500
medicine companies and 1700 drug stores.

Our  business is  dependent  upon our ability  both to acquire our  products and
distribute  our products in the Chinese  markets.  We purchase our products from
Chinese drug  manufacturers,  and we are the manufacturers'  sole distributor in
the PRC for our five largest suppliers for certain products they produce.


                                       22
<PAGE>


Our five largest  suppliers,  which were the same in each period,  accounted for
63% and 68% of our  purchases  in the nine months ended  September  30, 2006 and
September 30, 2005,  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.  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.  Our advances to
suppliers  balance were $2,447,416 as of September 30, 2006. As of September 30,
2006,  we have  nationwide  exclusive  sales rights from our  suppliers  for six
products they produce, which accounted for $5,167,526,  or 37% of revenue in the
nine months ended September 30, 2006, and  $2,989,937,  or 36% of revenue in the
comparable period of 2005.

Our contracts with our customers do not provide for minimum  purchases,  and our
customers are not restricted from purchasing  competitive  products from others.
Our customers are typically wholesale medical products companies,  hospitals and
retail drug stores. Our five largest customers  accounted for 52% and 68% of our
revenue for the nine months ended  September  30, 2006 and  September  30, 2005,
respectively.

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

Because  a  substantial  portion  of our  sales  are made to a small  number  of
customers,  our  accounts  receivable  from a  small  number  of  customers  may
represent a large percentage of our accounts  receivable and assets. Our largest
account   receivable   at  September  30,  2006  was   approximately   $706,039,
representing  approximately 5.49% of our total assets and approximately 7.74% of
our  working   capital,   and  our  three  largest   accounts   receivable  were
approximately $1,255,425,  representing  approximately 9.76% of our total assets
and approximately 13.76% of our working capital.

The Drug  Administration  Law and the  Pricing Law of the PRC  provides  for the
government to rationally fix and adjust prices for pharmaceutical  products,  in
order to ensure  that  price is  commensurate  with  quality,  and to  eliminate
excessively  high price,  and  protect the  legitimate  interests  of users.  In
general,  the prices of our products are  determined  by us and our customers on
the  basis of  negotiation  due to the fact that our  customers  are not the end
user.  However,  commencing in 2006 some of our products became subject to price
controls,  which negatively  affected our gross margin for the nine months ended
September 30, 2006. It is possible that  additional  products may become subject
to price  controls.  However,  even  products that are not subject to government
price  control may be affected by the policy  reflected  in the price  controls,
including  a  desire  to  effect a  reduction  in drug  prices,  and it is often
difficult  to  increase  prices.  For these  products,  we may have to  maintain
existing  prices or reduce prices.  We aim to increase the  distribution  of the
medical  products  with our own  intellectual  property  rights  which  are less
influenced by governmental price controls.


                                       23
<PAGE>


We have four new medicines and products  currently under development by Konzern:
Yutian Capsule, a traditional Chinese medicine which is used in the treatment of
lung  cancer,  Dioscorea  Collettii  Hook F Extraction  for high blood  pressure
treatment,  EGFR Test kit for lung  cancer  testing,  Multi  Functional  Peptide
Derivative for intestine cancer treatment. We have been focusing on pre-clinical
studies for Yutian capsule in the first nine months of 2006.  These products are
designed  for   marketing  in  the  PRC  in  compliance   with  PRC   regulatory
requirements.

On July 7, 2006, Konzern entered into an agreement with Guangzhou Ji'nan Science
& Technology  Industrial  Group ("JSIG") and Dongsheng Yao to jointly form a new
Chinese company to develop applications of  Alfatoxin-Detoxifizyme  ("ADTZ"), an
enzyme that can eliminate  aflatoxin  from food and animal feed.  Aflatoxin is a
strong poisonous toxin which causes liver, stomach and lung cancers.  JSIG is an
agent for Ji'nan  University.  The agreement provides for us to set up a Chinese
joint venture  company in which we will be a 70% owner and JSIG and Mr. Yao will
each have a 15% interest.  The agreement provides that we are to invest at total
of approximately  $2.2 million,  of which $784,920 has been paid and the balance
is due within two years, based on the development  effort.  Ji'nan University is
the  holder  of the four  Chinese  patents  on ADTZ  for  which  Mr.  Yao is the
inventor.  JSIG is to transfer to the joint  venture the four  patents  covering
ADTZ.  The  agreement  provides  that the  joint  venture  entity  will have the
intellectual  property  rights to any products  developed  by the joint  venture
pursuant to the agreement. The formation of the joint venture company, Guangzhou
Co-win  Bioengineering  Co.,  Ltd.,  was approved and licensed by the  Guangzhou
Industrial and Commerce  Bureau on October 30, 2006. The Company is still in the
development stage and no major activity has yet occurred.

The joint  venture is to pay JSIG and Mr. Yao a technology  fee in the amount of
approximately $125,000.  Although we do not have any present plans to form other
joint ventures or enter into research and development agreements, it is possible
that we may enter into other agreements  relating to the development of medicine
products.

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.


                                       24
<PAGE>


Results of Operations

The following table sets forth our statements of operations for the three months
and nine months ended September 30, 2006 and 2005, in U.S. dollars:

<TABLE>
<CAPTION>
                                               Three Months Ended           Nine Months Ended
                                                  September 30,               September 30,
                                            -------------------------   -------------------------
                                                2006          2005         2006           2005
                                            -----------   -----------   -----------   -----------
<S>                                         <C>           <C>           <C>           <C>
Revenue                                     $ 6,366,619   $ 2,575,896   $13,856,558   $ 8,206,063

Costs of goods sold                           4,490,055     1,716,375     9,910,331     5,459,973

Gross profit                                  1,876,564       859,521     3,946,227     2,746,090

Other operating income                        1,229,912       452,024     1,589,136     1,555,693

R&D expenses                                     31,361       109,606       270,702       314,580

Selling, general and administrative costs       185,517       106,649     1,084,194       336,411

Reverse acquisition expenses                          0             0       931,270             0

Income from operations                        2,889,598     1,095,290     3,249,197     3,650,792

Other (expense) income, net                    (136,645)      410,203      (143,757)      410,175

Income before income taxes                    2,752,953     1,505,493     3,105,440     4,060,967

Provision for income taxes                      475,574             0       729,831             0

Net income                                    2,277,379     1,505,493     2,375,609     4,060,967

Other comprehensive income                      128,142        47,849       199,840        47,849

Comprehensive income                        $ 2,405,521   $ 1,553,342   $ 2,575,449   $ 4,108,816
</TABLE>

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

<TABLE>
<CAPTION>
                         Three Months Ended September 30,                Nine Months Ended September 30,
                           2006                    2005                   2006                     2005
                   --------------------    --------------------   ---------------------    --------------------
<S>                <C>            <C>      <C>            <C>      <C>            <C>      <C>            <C>
Traditional
 Pharmaceutical
 Medicine          $ 4,506,407    70.78%   $ 1,879,254    72.96%   $ 9,716,925    70.13%   $ 6,071,112    73.98%
Traditional
 Chinese Medicine    1,852,443    29.10%       657,092    25.51%     4,106,942    29.64%     1,999,264    24.36%
Chinese Herbs            7,769     0.12%        39,550     1.53%        32,691     0.24%       135,688     1.65%
Total              $ 6,366,619      100%   $ 2,575,896      100%   $13,856,558      100%   $ 8,206,063      100%
</TABLE>


                                       25
<PAGE>


QUARTER ENDED SEPTEMBER 30, 2006 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2005

Revenue  for the three  months  ended  September  30,  2006 was  $6,366,619,  an
increase of $3,790,723,  or 147%,  from revenue of $2,575,896 for the comparable
period in 2005.  Our  increased  revenue,  as compared to the three months ended
September 30, 2005,  resulted  primarily from distribution  rights for three new
products which we acquired in the second half of 2005 and fifty-nine new clients
which were added in the quarter ended September 30, 2006.

Cost of revenue for the three months ended September 30, 2006 was $4,490,055, an
increase of $2,773,680,  or 161%, from  $1,716,375 for the comparable  period in
2005. Gross profit for the three months ended September 30, 2006 was $1,876,564,
an increase of $1,017,043,  or 118%, from $859,521 for the comparable  period in
2005. Our gross margin for the three months ended  September 30, 2006 was 29% as
compared with 33% for the three months ended September 30, 2005. The drop in our
gross  margin was due to the  decrease  in medicine  prices  mandated by the PRC
government in early 2006.

Other  operating  income of  $1,229,912  and $452,024 for the three months ended
September  30, 2006 and 2005,  respectively,  represented  the proceeds from the
sale of certain pharmaceutical  technology and know-how to certain nonaffiliated
drug manufacturers. We bought the technology in its preliminary stage from other
companies  and  then  sold  the  improved  technology  to  other  pharmaceutical
companies.

Research  and  development  expenses  were  $31,361 for the three  months  ended
September  30,  2006 which was for the  pre-clinical  study of Yutian  capsules.
Research and development expenses for the same period in 2005 were $109,606.

Selling,  general and administrative expenses were $185,517 for the three months
ended  September  30,  2006,  an  increase  of  $78,868  from  $106,649  for the
comparable  period in 2005. The increase was principally the result of increased
transportation,  advertising,  and marketing expenses. Also, additional expenses
were  incurred  as a result of our  status  as a  reporting  company  in the US,
including the  maintenance  of the United States  office and  additional  legal,
accounting and other expenses relating to our status as a reporting company.

Provision for income taxes was $475,574 for the three months ended September 30,
2006 as compared with no tax provision for the  comparable  period in 2005. As a
foreign  invested company in China,  our subsidiary  Guangzhou  Konzern Medicine
Co.,  Ltd.  has an income tax  exemption  for 2004 and 2005 and a 50%  reduction
income tax rate for the years of 2006, 2007 and 2008.

Comprehensive  income  for  the  three  months  ended  September  30,  2006  was
$2,405,521, an increase of $852,179 from $1,553,342 for the comparable period in
2005.  The increase  was  principally  due to the  increase in  revenues,  other
operating income, and other comprehensive income.

THE NINE  MONTHS  ENDED  SEPTEMBER  30, 2006  COMPARED TO THE NINE MONTHS  ENDED
SEPTEMBER 30, 2005

Revenue  for the nine  months  ended  September  30,  2006 was  $13,856,558,  an
increase  of  $5,650,495,  or 68.86%,  from the  revenue of  $8,206,063  for the
comparable  period in 2005.  The  increase  was  principally  the  result of the
acquisition of distribution  rights for three new products in the second half of
2005 and the  development  of  fifty-nine  new clients  during the quarter ended
September 30, 2006.


                                       26
<PAGE>


Cost of revenue for the nine months ended September 30, 2006 was $9,910,331,  an
increase of $4,450,358,  or 81.51%, from $5,459,973 for the comparable period in
2005.  Gross profit for the nine months ended September 30, 2006 was $3,946,227,
an increase of $1,200,137,  or 43.7%,  from $2,746,090 for the comparable period
of 2005.  Our gross  margin for the nine  months  ended  September  30, 2006 was
28.48% as compared with 33.46% for the nine months ended September 30, 2005. The
drop in our gross margin was due to the decrease of the medicine prices mandated
by the Chinese government in early 2006.

Other  operating  income was $1,589,136 and $1,555,693 for the nine months ended
September 30, 2006 and 2005,  respectively,  which represented the proceeds from
the sale of  certain  pharmaceutical  technology  and  know-how.  We bought  the
technology  in its  development  stage  from other  companies  and then sold the
improved technology to other pharmaceutical companies.

Research  and  development  expenses  were  $270,702  for the nine months  ended
September  30,  2006 which was for the  pre-clinical  study of Yutian  capsules.
Research and development expenses for the same period in 2005 were $314,580.

Selling, general and administrative expenses were $1,084,194 for the nine months
ended  September  30,  2006,  an  increase  of $747,783  from  $336,411  for the
comparable  period  in 2005.  The  increase  was  principally  due to  increased
transportation,  advertising,  and  marketing  expenses  as well  as  additional
expenses  associated  with our  status as a  reporting  company,  including  the
establishment  of a United States office and  additional  legal,  accounting and
other expenses relating to our status as a reporting company.

Reverse  acquisition  expenses were $931,270 in the nine months ended  September
30, 2006. These expenses were one-time expenses which include the value of stock
issued to  employees,  including two of our  officers,  and a service  provider;
warrants issued to investors,  and legal, accounting and investment banking fees
paid during the first quarter of 2006.

Provision for income taxes was $729,831 for the nine months ended  September 30,
2006 as compared with no taxes accrued for the  comparable  period in 2005. As a
foreign  invested company in China,  our subsidiary  Guangzhou  Konzern Medicine
Co.,  Ltd.  has an income tax  exemption  for 2004 and 2005 and a 50%  reduction
income tax rate for the years of 2006, 2007 and 2008.

Comprehensive   income  for  the  nine  months  ended  September  30,  2006  was
$2,575,449,  a decrease of $1,533,367 from $4,108,816 for the comparable  period
in 2005. The decrease was principally  due to the increase on selling  expenses,
general and administrative  expenses,  reverse  acquisition  expenses and income
taxes.


Liquidity and Capital Resources

Prior to February 2006, we financed our  operations and met capital  expenditure
requirements  primarily through  short-term bank loans,  trade credit and equity
financing.  As of March 31,  2006,  as a result of our  February,  2006  private
placement  of $3.9  million  of  preferred  stock and  warrants,  from  which we
received net proceeds of approximately  $3.8 million,  we had working capital of
$8,138,564, an increase of $3,709,873 from $4,428,691 from December 31, 2005.

We received net proceeds of approximately  $3.8 million after deducting finders'
fees of $117,000  from our private  placement.  In  connection  with the private
placement,  we also paid  $167,602  to  Capital  Markets  Advisory  Group LLC to
purchase  928,000  shares of common  stock and  $32,398  to pay debt to  Capital
Markets,  and incurred legal and accounting expenses of $120,000,  a $50,000 due
diligence  fee  payable to Barron  Partners  and an  investment  banking  fee of
approximately  $102,000,  with the result that the total cash received by us was
approximately $3.3 million.


                                       27
<PAGE>


We used cash of $695,977 in our operations  for the nine months ended  September
30, 2006,  an increase of $1,752,608  from the cash required for the  comparable
period in 2005.  The increase in net cash used in operations  was largely due to
the increase in the accounts receivable and advances to suppliers.

The following  table sets forth the changes in certain  balance sheet items,  in
dollars  and  percentages,  from  December  31,  2004 to  December  31,  2005 to
September 30, 2006 (dollars in thousands).

<TABLE>
<CAPTION>
                              Change in dollars        Percentage Change     Change in dollars        Percentage Change
Balance Sheet Caption       12/31/04 to 12/31/05    12/31/04 to 12/31/05    12/31/05 to 9/30/06     12/31/05 to 9/30/06
---------------------       --------------------    --------------------    -------------------     -------------------
<S>                                       <C>                        <C>                 <C>                       <C>
Accounts receivable                       $1,050                     77%                 $3,158                    131%
Inventories                                  620                     81%                    127                      9%
Advances to suppliers                        637                    145%                  1,371                    127%
Accounts payable                            -307                    -64%                      6                      3%
Customer deposits                           -657                    -64%                     -3                     -8%
</TABLE>

The  change  in these  balance  sheet  items  reflects  the  nature  of the cash
requirements of our business.  The increase in accounts receivable reflected the
increase  in sales.  Because the  collection  period  typically  runs from three
months to one year,  the increase in accounts  receivable  reflects not only the
increase in sales but also the increased longer collection period.  During 2006,
we gave some of our important  customers a longer  collection period in order to
keep them. Because we require one to two months to receive products we order, we
have been increasing our  inventories in order to enable us to meet  anticipated
increases in sales. In addition,  our payment cycle is considerably shorter than
our receivable  cycle because we typically pay our suppliers all or a portion of
the purchase  price in advance and for some suppliers we must maintain a deposit
for future  orders.  However,  from December 31, 2005 to September 30, 2006, our
advances  suppliers  increased  127%  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  advances  suppliers  increase.  In
addition, our customer deposits decreased 8% from December 31, 2005 to September
30, 2006. We require our customers to pay certain  percentage of the sales price
as deposit before we ship products to the customers.  The percentage varies from
customer  to  customer.  During the course of  business,  we reduce the  deposit
requirement for some customers with good credit.

In January 2006, we repaid  $95,696  short term loans to CITIC  Industrial  Bank
with $1,582 interest payment. As of September 30, 2006, the Company did not have
long-term or short-term debt.

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

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


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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, 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 expenses 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 its products
and market conditions. If future demand and market conditions are less favorable
than management's assumptions,  additional reserve could be required.  Likewise,
favorable future demand and market  conditions  could  positively  impact future
operating results if previously reserved inventory is sold.

Item 3. Controls and Procedures

(a)   Disclosure Controls and Procedures.

Senshan Yang, our chief  executive  officer and Huizhen Yu, our chief  financial
officer,  evaluated  the  effectiveness  of  the  design  and  operation  of our
disclosure controls and procedures,  as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, as of the end of the nine months of 2006.  Based on that
evaluation,  our officers concluded that 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.

(b)   Changes in Internal Control

During the nine months ended  September  30,  2006,  there has been no change in
internal control over financial  reporting that has materially  affected,  or is
reasonably  likely to  materially  affect our internal  control  over  financial
reporting.

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PART II  OTHER INFORMATION

Item 6. Exhibits

(a)    Exhibits

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.


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                                   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.


                                                     CHINA MEDICINE CORPORATION



Date: November 13, 2006                            BY: /s/ Senshan Yang
                                                       ----------------
                                                       Senshan Yang
                                                       Chief Executive Officer




Date: November 13, 2006
                                                   BY: /s/ Huizhen Yu
                                                       ----------------
                                                       Huizhen Yu
                                                       Chief Financial Officer