**UNITED STATES**


**SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**





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


For
      the
      quarterly period ended June
      30, 2008





or





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


For
      the
      transition period from _______ to _________





*Commission
      File No. 000-51379*





**CHINA
      MEDICINE CORPORATION**


(Exact
      name of registrant as specified in its charter)




Delaware
            
            51-0539830(State
                or other jurisdiction of incorporation)
            
            I.R.S.
                Employer Identification Number




Guangri
      Tower, Suite 702


No.
      8
      Siyou South 1st Street


Yuexiu
      District


Guangzhou,
      China 510600


(Address
      of principal executive offices)





(86-20)
      8739-1718 and (86-20) 8737-8212


(Registrant's
      telephone number, including area code)








(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. x Yes o No





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “small
      reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer
            o
            
            Accelerated filer
            oNon-accelerated filer
            o
            (Do not check if a smaller reporting company)
            Smaller reporting company
            x





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





The
      number of shares outstanding of the Registrant's Common Stock, par value $.0001
      per share, outstanding at June 30, 2008 was 15,226,742.







**CHINA
      MEDICINE CORPORATION**





TABLE
      OF
      CONTENTS





PagePART
                I
            FINANCIAL
                INFORMATION
            3Item
                1.
            Financial
                Statements (unaudited)
            3Item
                2.
            Management’s
                Discussion and Analysis or Plan of Operation
            27Item
                4.
            Controls
                and Procedures
            37PART
                II
            OTHER
                INFORMATION
            38Item
                2.
            Unregistered
                Sales of Equity Securities
            38Item
                6.
            Exhibits
            38Signatures
            39Exhibits/Certifications




2


**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**


CHINA
                  MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED
                  BALANCE SHEETSAS
                  OF JUNE 30, 2008 AND DECEMBER 31,
                  2007
  ASSETS2008
              
              2007UnauditedCURRENT
                  ASSETSCash
              
              $
              2,771,459
              
              $
              5,767,774Accounts
                  receivable, trade, net of allowance for doubtful accountsof
                  $59,212 and $55,640 as of June 30, 2008 andDecember
                  31, 2007, respectively
              
              
              15,176,874
              
              
              13,626,347Notes
                  receivables
              
              
              1,718,702
              
              
              -Inventories
              
              
              5,029,693
              
              
              3,948,460Advances
                  to suppliers
              
              
              9,937,629
              
              
              5,983,277Other
                  current assets
              
              
              86,003
              
              
              81,221Total
                  current assets
              
              
              34,720,360
              
              
              29,407,079EQUIPMENT,
                  net
              
              
              1,296,716
              
              
              1,388,919OTHER
                  ASSETSDeferred
                  expenses
              
              
              541,328
              
              
              678,237Deposit
                  for patent
              
              
              622,993
              
              
              -Intangible
                  assets, net
              
              
              1,240,804
              
              
              1,166,003Total
                  other assets
              
              
              2,405,125
              
              
              1,844,240Total
                  assets
              
              $
              38,422,201
              
              $
              32,640,238LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIESAccounts
                  payable, trade
              
              $
              104,401
              
              $
              76,907Other
                  payables and accrued liabilities
              
              
              19,686
              
              
              70,343Customer
                  deposits
              
              
              221,401
              
              
              203,281Taxes
                  payable
              
              
              115,782
              
              
              468,184Liquidated
                  damages payable
              
              
              44,003
              
              
              44,003Total
                  liabilities
              
              
              505,273
              
              
              862,718MINORITY
                  INTEREST
              
              
              904,070
              
              
              893,337SHAREHOLDERS'
                  EQUITYPreferred
                  stock, $0.0001 par value; 10,000,000 shares authorized,0
                  and 111,649 shares issued and outstandingat
                  June 30, 2008 and December 31 2007, respectively
              
              
              -
              
              
              11Common
                  stock, $0.0001 par value; 100,000,000 shares authorized,15,226,742
                  and 14,821,641 shares issued and outstandingat
                  June 30, 2008 and December 31, 2007, respectively
              
              
              1,522
              
              
              1,482Paid-in
                  capital
              
              
              12,974,863
              
              
              12,560,078Statutory
                  reserves
              
              
              2,191,230
              
              
              2,191,230Retained
                  earnings
              
              
              17,650,624
              
              
              14,008,587Accumulated
                  other comprehensive income
              
              
              4,194,619
              
              
              2,122,795Total
                  shareholders' equity
              
              
              37,012,858
              
              
              30,884,183Total
                  liabilities and shareholders' equity
              
              $
              38,422,201
              
              $
              32,640,238




The
      accompanying notes are an integral part of this consolidated
      statement.




3


CHINA
                  MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME(Unaudited)
  Three
                  months ended
              
              Six
                  months endedJune,
                  30
              
              June,
                  302008
              
              2007
              
              2008
              
              2007REVENUESProduct
                  sales
              
              $
              11,067,074
              
              $
              7,764,535
              
              $
              17,918,458
              
              $
              12,647,744Medical
                  formula sales
              
              
              570,465
              
              
              499,433
              
              
              780,120
              
              
              709,219Total
                  revenues
              
              
              11,637,539
              
              
              8,263,968
              
              
              18,698,578
              
              
              13,356,963COST
                  OF GOOD SOLD
              
              
              7,481,170
              
              
              5,859,008
              
              
              12,230,189
              
              
              9,264,425GROSS
                  PROFIT
              
              
              4,156,369
              
              
              2,404,960
              
              
              6,468,389
              
              
              4,092,538OPERATING
                  EXPENSESResearch
                  and development
              
              
              107,824
              
              
              543
              
              
              196,216
              
              
              100,655Selling,
                  general and administrative
              
              
              1,060,082
              
              
              960,924
              
              
              1,872,590
              
              
              1,604,770Total
                  operating expenses
              
              
              1,167,906
              
              
              961,467
              
              
              2,068,806
              
              
              1,705,425INCOME
                  FROM OPERATIONS
              
              
              2,988,463
              
              
              1,443,493
              
              
              4,399,583
              
              
              2,387,113OTHER
                  INCOME (EXPENSE), NET
              
              
              32,104
              
              
              (7,118
              )
              
              38,087
              
              
              (10,090
              )INCOME
                  BEFORE INCOME TAXESAND
                  MINORITY INTEREST
              
              
              3,020,567
              
              
              1,436,375
              
              
              4,437,670
              
              
              2,377,023PROVISION
                  FOR INCOME TAXES
              
              
              572,176
              
              
              338,326
              
              
              840,943
              
              
              538,285INCOME
                  BEFORE MINORITY INTEREST
              
              
              2,448,391
              
              
              1,098,049
              
              
              3,596,727
              
              
              1,838,738MINORITY
                  INTEREST
              
              
              17,833
              
              
              29,085
              
              
              45,310
              
              
              52,117NET
                  INCOME
              
              
              2,466,224
              
              
              1,127,134
              
              
              3,642,037
              
              
              1,890,855OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation adjustment
              
              
              744,658
              
              
              302,836
              
              
              2,071,824
              
              
              559,325COMPREHENSIVE
                  INCOME
              
              $
              3,210,882
              
              $
              1,429,970
              
              $
              5,713,861
              
              $
              2,450,180EARNINGS
                  PER SHAREBasic
              
              $
              0.16
              
              $
              0.09
              
              $
              0.24
              
              $
              0.18Diluted
              
              $
              0.16
              
              $
              0.08
              
              $
              0.23
              
              $
              0.15WEIGHTED
                  AVERAGE SHARES OUTSTANDINGBasic
              
              
              15,206,124
              
              
              12,160,111
              
              
              15,118,595
              
              
              10,692,414Diluted
              
              
              15,634,713
              
              
              14,232,457
              
              
              15,547,183
              
              
              12,764,759


The
        accompanying notes are an integral part of this consolidated
        statement.




4


CHINA
                  MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF SHAREHOLDERS' EQUITYFOR
                  SIX MONTHS ENDED JUNE 30, 2008 AND
                  2007
  Accumulated**Retained
                  Earnings**
              
              other**Preferred
                  Stock**
              
              **Common
                  Stock**
              
              Paid-in
              
              Contribution
              
              Statutory
              
              
              
              comprehensiveShares
              
              Par
                  Value
              
              Shares
              
              Par
                  Value
              
              capital
              
              receivable
              
              reserves
              
              Unrestricted
              
              income
              
              **Totals**BALANCE,
                  December 31, 2006
              
              
              2,340,000
              
              $
              234
              
              
              8,160,000
              
              $
              816
              
              $
              4,396,971
              
              $
              (961,500
              )
              $
              1,345,206
              
              $
              7,979,242
              
              $
              372,923
              
              $
              13,133,892Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,890,855
              
              
              
              
              
              1,890,855Preferred
                  stock converted to common stock
              
              
              (1,733,745
              )
              
              (173
              )
              
              1,773,448
              
              
              177
              
              
              (4
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Warrants
                  exercised for cash @ $1.75
              
              
              
              
              
              
              
              
              1,621,750
              
              
              162
              
              
              2,837,900
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,838,062Warrants
                  exercised for cash @ $1.70
              
              
              
              
              
              
              
              
              1,694,040
              
              
              169
              
              
              2,879,699
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,879,868Stock
                  option granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              49,888
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              49,888Common
                  stock issued for services
              
              
              
              
              
              
              
              
              57,500
              
              
              6
              
              
              179,394
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              179,400Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              559,325
              
              
              559,325BALANCE,
                  June 30, 2007 (Unaudited)
              
              
              606,255
              
              $
              61
              
              
              13,306,738
              
              $
              1,330
              
              $
              10,343,848
              
              $
              (961,500
              )
              $
              1,345,206
              
              $
              9,870,097
              
              $
              932,248
              
              $
              21,531,290Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,984,514
              
              
              
              
              
              4,984,514Adjustment
                  of statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              846,024
              
              
              (846,024
              )
              
              
              
              
              -Preferred
                  stock converted to common stock
              
              
              (494,606
              )
              
              (50
              )
              
              509,903
              
              
              51
              
              
              (1
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Warrants
                  exercised for cash @ $2.43
              
              
              
              
              
              
              
              
              725,000
              
              
              73
              
              
              1,761,677
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,761,750Stock
                  options exercised for cash @ $1.25
              
              
              
              
              
              
              
              
              280,000
              
              
              28
              
              
              349,972
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              350,000Stock
                  option granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              104,582
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              104,582Common
                  stock issued for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Contribution
                  receivable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              961,500
              
              
              
              
              
              
              
              
              
              
              
              961,500Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,190,547
              
              
              1,190,547BALANCE,
                  December 31, 2007
              
              
              111,649
              
              $
              11
              
              
              14,821,641
              
              $
              1,482
              
              $
              12,560,078
              
              $
              -
              
              $
              2,191,230
              
              $
              14,008,587
              
              $
              2,122,795
              
              $
              30,884,183Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,642,037
              
              
              
              
              
              3,642,037Preferred
                  stock converted to common stock
              
              
              (111,649
              )
              
              (11
              )
              
              115,101
              
              
              11
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Stock
                  options exercised for cash @ $1.25
              
              
              
              
              
              
              
              
              290,000
              
              
              29
              
              
              362,471
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              362,500Compensation
                  for options and warrants granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              52,314
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              52,314Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,071,824
              
              
              2,071,824BALANCE,
                  June 30, 2008 (Unaudited)
              
              
              -
              
              $
              -
              
              
              15,226,742
              
              $
              1,522
              
              $
              12,974,863
              
              $
              -
              
              $
              2,191,230
              
              $
              17,650,624
              
              $
              4,194,619
              
              $
              37,012,858




The
      accompanying notes are an integral part of this
      consolidated statement.




5


CHINA
                  MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF CASH FLOWSFOR
                  THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007(Unaudited)




2008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              3,642,037
              
              $
              1,890,855Adjustments
                  to reconcile net income to cashused
                  in operating activities:Minority
                  interest
              
              
              (45,310
              )
              
              (52,117
              )Depreciation
                  and amortization
              
              
              193,572
              
              
              130,330Bad
                  debt expense
              
              
              -
              
              
              876Stock
                  issued for services
              
              
              -
              
              
              134,550Amortization
                  of stock option and warrant compensation
              
              
              52,314
              
              
              50,258Amortization
                  of deferred expenses
              
              
              175,421
              
              
              -Loss
                  on currency exchange
              
              
              -
              
              
              19,620Change
                  in operating assetsAccounts
                  receivable, trade
              
              
              (657,089
              )
              
              521,256Notes
                  receivables
              
              
              (1,670,875
              )
              
              -Inventories
              
              
              (804,759
              )
              
              (2,500,265
              )Advances
                  to suppliers
              
              
              (3,473,818
              )
              
              (3,356,149
              )Other
                  current assets
              
              
              420
              
              
              (15,919
              )Change
                  in operating liabilitiesAccounts
                  payable, trade
              
              
              21,928
              
              
              30,328Other
                  payables and accrued liabilities
              
              
              (52,364
              )
              
              (67,809
              )Other
                  payables-related parties
              
              
              -
              
              
              30,772Customer
                  deposits
              
              
              4,931
              
              
              (157,245
              )Taxes
                  payable
              
              
              (371,810
              )
              
              245,048Liquidated
                  damages payable
              
              
              -
              
              
              1,133Net
                  cash used in operating activities
              
              
              (2,985,402
              )
              
              (3,094,478
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Deposit
                  for patent
              
              
              (605,657
              )
              
              -Purchase
                  of equipment
              
              
              (17,226
              )
              
              (214,162
              )Purchase
                  of intangible asset
              
              
              -
              
              
              (132,011
              )Net
                  cash used in investing activities
              
              
              (622,883
              )
              
              (346,173
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from exercise of warrants and options
              
              
              362,500
              
              
              5,717,789Net
                  cash provided by financing activities
              
              
              362,500
              
              
              5,717,789EFFECT
                  OF EXCHANGE RATE ON CASH
              
              
              249,470
              
              
              54,060(DECREASE)
                  INCREASE IN CASH
              
              
              (2,996,315
              )
              
              2,331,198CASH,
                  beginning of period
              
              
              5,767,774
              
              
              371,480CASH,
                  end of period
              
              $
              2,771,459
              
              $
              2,702,678




The
      accompanying notes are an integral part of this consolidated
      statement.




6


**CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
        30, 2008**
 **(Unaudited)**
  **Note
        1 - Organization**
 
 Organization
 
 China
        Medicine Corporation (the "Company") is a Delaware corporation, incorporated
        on
        February 10, 2005 . The Company, through its subsidiaries in the China, engages
        the wholesale of prescription and over the counter medicines, traditional
        Chinese medicines, which are medicines derived from Chinese herbs, dietary
        supplements, medical instruments and the sale of medical formula.
 
 On
        July
        7, 2006, Konzern entered into a Joint Cooperation Agreement with Guangzhou
        Ji'nan Science & Technology Industrial Group Co., Ltd. ("JSIG") and Mr.
        Dongsheng Yao, an unrelated third party, to jointly form Guangzhou Co-win
        Bioengineering Co., Ltd. (“Co-win”) for the purpose of development and
        application of aflatoxin-detoxifizyme ("ADTZ"). Mr. Dongsheng Yao became
        a
        member of the board of directors of Co-win. Konzern does not have any material
        relationship with JSIG or Mr. Yao other than this Agreement. The business
        licenses were approved by Guangzhou Commercial and Administrative Bureaus
        on
        October 27, 2006, which was expired in June 2008. Co-win is currently in
        the
        process of renewing its business license for an extended 20 year term. The
        registered capital is RMB 25,000,000, approximately $3,200,000 with a 2-year
        term from June 5, 2006 to June 5, 2008; however, the Company hasn’t fully
        contributed as of June 30, 2008 and plans to contribute the outstanding balance
        in August 2008. As of June 30, 2008, Konzern owns a 70% ownership in
        Co-win.
   **Note
        2 - Summary of significant accounting policies**
 
 Basis
        of presentation
 
 The
        consolidated financial statements of the Company reflect its wholly-owned
        subsidiary, Konzern, its 70% owned subsidiary, Co-win, both located in the
        PRC,
        and its wholly-owned subsidiary Konzern US Holding.
 
 The
        accompanying financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        All
        material intercompany transactions and balances have been eliminated in the
        consolidation.
 
 Management
        has included all normal recurring adjustments considered necessary to give
        a
        fair presentation of operating results for the periods presented. Interim
        results are not necessarily indicative of results for a full year. The
        information included in this Form 10-Q should be read in conjunction with
        information included in the 2007 annual report filed on Form
        10-KSB.
 
 7
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 
 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 PRC state owned banks and banks in 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 banks that are located in the Unites States, no deposits with the state
        owned banks within the PRC are covered by insurance. As of June 30, 2008
        and
        December 31, 2007, the Company had deposits in excess of federally insured
        limits total of $1,681,231 and $4,987,180, 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.
 
 Five
        suppliers accounted for approximately 55% and 63% of the Company’s purchases for
        the six months ended June 30, 2008 and 2007 and approximately 52% and 63%
        for
        the three months ended June 30, 2008 and 2007, respectively. Advances to
        these
        five suppliers represent 32% and 36% of the Company’s total advances to
        suppliers as of June 30, 2008 and 2007, respectively.
 
 Five
        customers accounted for approximately 40% and 45% of the Company's total
        sales
        for the six months ended June 30, 2008 and 2007 and 46% and 44% for the three
        months ended June 30, 2008 and 2007, respectively. The accounts receivable
        balance of these five customers amounted $8,269,469, representing 54% of
        the
        total accounts receivable as of June 30, 2008, and $2,584,274, representing
        39%
        of the total accounts receivable as of June 30, 2007,
        respectively.
  8
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 The
        top
        three products accounted for approximately 23% and 26% of the Company’s total
        sales for the six months ended June 30, 2008 and 2007 and 28% and 24% for
        the
        three months ended June 30, 2008 and 2007, respectively.
 
 Accounts
        receivable, trade
 
 The
        Company extends unsecured credit to its customers. Management reviews accounts
        receivable on a regular basis to determine if the bad debt allowance is adequate
        for potential uncollectible amounts due to deterioration of customer operations.
 
 June 30,
                2008
              
              December 31,
                2007Trade
                  accounts receivable
              
              $
              15,236,086
              
              $
              13,681,987Allowance
                  for bad debts
              
              
              (59,212
              )
              
              (55,640
              )Trade
                  accounts receivable, net
              
              $
              15,176,874
              
              $
              13,626,347
 
 
 June 30,
                2008Beginning
                  allowance for doubtful accounts
              
              $
              55,640Additions
                  charged to bad debt expense
              
              
              -Foreign
                  currency translation adjustments
              
              
              3,572Ending
                  allowance for doubtful accounts
              
              $
              59,212
  Notes
        receivables
 
 Notes
        receivables represents trade accounts receivable due from various customers
        where the customers’ banks have guaranteed the payment of the receivables. This
        amount is non-interest bearing and is normally paid within three to six months.
        The Company has the ability to submit a request for payment to the customer’s
        bank earlier than the scheduled payment date, but will incur an interest
        charge
        and a processing fee when it submits the early payment request. The Company
        had
        $1,718,702 and $-0- outstanding as of June 30, 2008 and December 31, 2007,
        respectively.
 
 Inventories
 
 Inventories
        are stated at the lower of cost or market value, cost is determined using
        the
        weighted average method.
 
 9
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 
 Equipment
 
 Equipment
        is stated at the actual cost of acquisition less accumulated depreciation
        and
        amortization. Depreciation and amortization are provided in amounts sufficient
        to relate the cost of depreciation of assets to operations over their estimated
        service lives, principally on a straight-line basis. The estimated lives
        used in
        determining depreciation are:
 
 Leasehold
                  improvements
              5
                  yearsEquipment
              5
                  yearsFurniture
              5
                  yearsMotor
                  vehicles
              5
                  -
                  8 years
 
 The
        residual value is estimated to be 5% of the actual cost.
 
 The
        cost
        and related accumulated depreciation of assets sold or otherwise retired
        are
        eliminated from the accounts and any gain or loss is included in the statement
        of operations. Maintenance, repairs and minor renewals are expensed as
        incurred.
 
 Intangibles
 
 Under
        the
        Statement of Accounting Standards ("SFAS") No.142, "Goodwill and Other
        Intangible Assets", all goodwill and certain intangible assets determined
        to
        have indefinite lives will not be amortized but will be tested for impairment
        at
        least annually. Intangible assets other than goodwill will be amortized over
        their useful lives and reviewed for impairment in accordance with SFAS No.
        144,
        "Accounting for Impairment or Disposal of Long-Lived Assets".
 
 The
        Company acquired technology during 2007 to manufacture aflatoxin-detoxifizyme
        ("ADTZ") totaling $1,028,250. The Company will begin amortizing costs once
        manufacturing begins. The Company is still undertaking the preparation for
        starting manufacture as of June 30, 2008.
  The
        intangible assets as of June 30, 2008 and December 31, 2007, net of
        amortization, amounted to $1,240,804 and $1,166,003, respectively.
 
 Impairment
        of long-lived assets
 
 Per
        SFAS
        No. 144, long-lived assets are analyzed for impairment. The Company tests
        for
        impairment of long-lived assets at least annually or more often whenever
        there
        is an indication that the carrying amount of the asset may not be recovered.
        Recoverability of these assets is determined by comparing the forecasted
        undiscounted cash flows generated by those assets to the assets' net carrying
        value. The amount of impairment loss, if any, is measured as the difference
        between the net book value of the assets and the estimated fair value of
        the
        related assets.
 
 Management
        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. As of June 30, 2008, the Company believes
        that
        there were no significant impairments of long-lived assets.
  10
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 Revenue
        recognition
 
 The
        Company recognizes revenue when all four of the following criteria are met:
        (1)
        persuasive evidence has been received that an arrangement exists; (2) delivery
        of the products and/or services has occurred; (3) the selling price is fixed
        or
        determinable; and (4) collectibility is reasonably assured. The Company follows
        the provisions of SAB No. 104 which sets forth guidelines in the timing of
        revenue recognition based upon factors such as passage of title, installation,
        payments and customer acceptance. Any amounts received prior to satisfying
        the
        Company's revenue recognition criteria is recorded as deferred
        revenue.
 
 Sales
        revenue represents the invoiced value of goods, net of a value-added tax
        (VAT).
        All of the Company's products that are sold in the PRC are subject to a Chinese
        value-added tax at a rate of 17% of the gross sales price. This VAT may be
        offset by VAT paid by the Company on raw materials and other materials included
        in the cost of producing their finished product.
 
 VAT
        on
        sales and VAT on purchases amounted to $3,133,033 and $2, 281,444 for the
        six
        months ended June 30, 2008 and $2,149,918 and $1,757,395 for the six months
        ended June 30, 2007 and $1,943,339 and $1,310,364 for the three months ended
        June 30, 2008 and $1,316,717 and $987,368 for the three months ended June
        30,
        2007, respectively. Sales and purchases are recorded net of VAT collected
        and
        paid as the Company acts as an agent for the government. VAT taxes are not
        impacted by the income tax holiday.
  Shipping
        and handling
  Shipping
        and handling costs related to costs of goods sold are included in selling,
        general and administrative costs and totaled $247,454 and $94,583 for the
        six
        months ended June 30, 2008 and 2007 and totaled $138,509 and $77,158 for
        the
        three months ended June 30, 2008 and 2007.
  Advertising
        costs
 
 The
        Company expenses the cost of advertising as incurred in selling, general
        and
        administrative costs. Advertising costs were immaterial for the six months
        and
        three months ended June 30, 2008 and 2007.
 
 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.
  11
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 Foreign
        currency translation
  The
        reporting currency of the Company is the US dollar. The Company uses their
        local
        currency, Renminbi (RMB), as its functional currency. Results of operations
        and
        cash flow are translated at average exchange rates during the period, and
        assets
        and liabilities are translated at the unified exchange rate as quoted by
        the
        People’s Bank of China at the end of the period. Because cash flows are also
        translated at average translation rates, amounts reported on the statement
        of
        cash flows will not necessarily agree with changes in the corresponding balances
        on the balance sheet. Translation adjustments resulting from this process
        are
        included in accumulated other comprehensive income in the statement of
        shareholders’ equity.
  Translation
        adjustments amounted to $4,194,619 and $932,248 as of June 30, 2008 and June
        30,
        2007, respectively. Asset and liability accounts at June 30, 2008 were
        translated at 6.85 RMB to $1.00 USD as compared to 7.30 RMB at December 31,
        2007. Equity accounts were stated at their historical rate. The average
        translation rates applied to income statements accounts for the six months
        ended
        June 30, 2008 and 2007 were 7.05 RMB and 7.71 RMB, respectively.
 
 Transaction
        gains and losses that arise from exchange rate fluctuations on transactions
        denominated in a currency other than the functional currency are included
        in the
        results of operations as incurred. No material transaction gains and losses
        were
        recognized during the six and three months ended June 30, 2008, and 2007.
        Historically, the Company has not entered into any currency trading or hedging
        transactions, although there is no assurance that the Company will not enter
        into such transactions in the future.
 
 Income
        taxes
 
 The
        Company records income taxes pursuant to Statement of Financial Accounting
        Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires
        the recognition of deferred income tax liabilities and assets for the expected
        future tax consequences of temporary differences between income tax basis
        and
        financial reporting basis of assets and liabilities. Provision for income
        taxes
        consist of taxes currently due plus deferred taxes. There are no deferred
        tax
        amounts at June 30, 2008 and December 31, 2007.
 
 The
        charge for taxation is based on the results for the year as adjusted for
        items,
        which are non-assessable or disallowed. It is calculated using tax rates
        that
        have been enacted or substantially enacted by the balance sheet
        date.
  Deferred
        tax is accounted for using the balance sheet liability method in respect
        of
        temporary differences arising from differences between the carrying amount
        of
        assets and liabilities in the financial statements and the corresponding
        tax
        basis used in the computation of assessable tax profit. In principle, deferred
        tax liabilities are recognized for all taxable temporary differences, and
        deferred tax assets are recognized to the extent that it is probably that
        taxable profit will be available against which deductible temporary differences
        can be utilized. Deferred tax is calculated at the tax rates that are expected
        to apply to the period when the asset is realized or the liability is settled.
        Deferred tax is charged or credited in the income statement, except when
        it is
        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.
  12
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 The
        Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
        Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
        benefit only if it is “more likely than not” that the tax position would be
        sustained in a tax examination, with a tax examination being presumed to
        occur.
        The amount recognized is the largest amount of tax benefit that is greater
        than
        50% likely of being realized on examination. For tax positions not meeting
        the
“more likely than not” test, no tax benefit is recorded. The adoption had no
        affect on the Company’s financial statements.
 
 China
        Medicine Corporation was incorporated in the United States and has incurred
        net
        operating losses for income tax purposes for the six months ended June 30,
        2008
        and 2007. The net operating loss carry forwards for United States income
        taxes
        amounted to $2,902,168 which may be available to reduce future years’ taxable
        income. These carry forwards will expire, if not utilized, through 2027.
        Management believes that the realization of the benefits from these losses
        appears uncertain due to the Company’s limited operating history and continuing
        losses for United States income tax purposes. Accordingly, the Company has
        provided a 100% valuation allowance on the deferred tax asset benefit to
        reduce
        the asset to zero. The valuation allowance at June 30, 2008 was $987,000.
        The
        net change in the valuation allowance for the six months ended June 30, 2008
        was
        an increase of $375,000. Management will review this valuation allowance
        periodically and make adjustments as warranted.
  Fair
        value of financial instruments
 
 On
        January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements.
        SFAS
        No. 157 defines fair value, establishes a three-level valuation hierarchy
        for
        disclosures of fair value measurement and enhances disclosures requirements
        for
        fair value measures. The carrying amounts reported in the balance sheets
        for
        receivables and current liabilities each qualify as financial instruments
        and
        are a reasonable estimate of fair value because of the short period of time
        between the origination of such instruments and their expected realization
        and
        their current market rate of interest. The three levels are defined as
        follow:
  ·
              Level
                  1 inputs to the valuation methodology are quoted prices (unadjusted)
                  for
                  identical assets or liabilities in active
                  markets.
 
 ·
              Level
                  2 inputs to the valuation methodology include quoted prices for
                  similar
                  assets and liabilities in active markets, and inputs that are observable
                  for the asset or liability, either directly or indirectly, for
                  substantially the full term of the financial
                  instrument.
  13
  **CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
        30, 2008**
 **(Unaudited)**
  ·
              Level
                  3 inputs to the valuation methodology are unobservable and significant
                  to
                  the fair value measurement.
 
 As
        of
        June 30, 2008 the Company did not identify any assets and liabilities that
        are
        required to be presented on the balance sheet at fair value.
 
 Stock-based
        compensation
 
 The
        Company adopted the Statement of Financial Accounting Standards No. 123 (revised
        2004), "Share-Based Payments," ("FAS 123R"), which established standards
        for the
        accounting for transactions in which an entity exchanges its equity instruments
        for goods or services. This statement requires a public entity to measure
        the
        cost of employee services received in exchange for an award of equity
        instruments based on the grant-date fair value of the award (with limited
        exceptions). That cost will be recognized over the period during which an
        employee is required to provide service in exchange for the award.
 
 Earnings
        per share
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share is computed
        by dividing income available to common stockholders by the weighted average
        common shares outstanding during the period. Diluted earnings per share takes
        into account the potential dilution that could occur if securities or other
        contracts to issue common stock were exercised and converted into common
        stock.
  The
        following is a reconciliation of the basic and diluted earnings per share
        computations for the six months and three months ended June 30:
 
 For
                  the six months ended
              
              2008
              
              2007Net
                  income
              
              $
              3,642,037
              
              $
              1,890,855Shares
                  of common stock and common stock equivalents:Weighted
                  average shares used in basic computation
              
              
              15,118,595
              
              
              10,692,414Diluted
                  effect of stock options, warrants, and preferred stocks
              
              
              428,588
              
              
              2,072,345Weighted
                  average shares used in diluted computation
              
              
              15,547,183
              
              
              12,764,759Earnings
                  per share:Basic
              
              $
              0.24
              
              $
              0.18Diluted
              
              $
              0.23
              
              $
              0.15
 
 14
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 For
                  the three months ended
              
              2008
              
              2007Net
                  income
              
              $
              2,466,224
              
              $
              1,127,134Shares
                  of common stock and common stock equivalents:Weighted
                  average shares used in basic computation
              
              
              15,206,124
              
              
              12,160,111Diluted
                  effect of stock options, warrants, and preferred stocks
              
              
              428,589
              
              
              2,072,346Weighted
                  average shares used in diluted computation
              
              
              15,634,713
              
              
              14,232,457Earnings
                  per share:Basic
              
              $
              0.16
              
              $
              0.09Diluted
              
              $
              0.16
              
              $
              0.08
  For
        the
        six months ended June 30, 2008, 2,969,738 warrants whose exercise price is
        $2.43
        and 14,000 options whose exercise price is $3.00 are excluded from the
        calculation because of their antidilutive nature and all options and warrants
        have been included in the calculation of diluted earnings per share for three
        months ended June 30, 2008.. For the six and three months ended June 30,
        2007,
        7,500 options whose exercise price is $3.00 are excluded from the calculation
        because of their antidilutive nature
 
 Minority
        interest
 
 Minority
        interest consists of the 30% interest of minority shareholders in Guangzhou
        Co-win Bioengineering Co., Ltd. As of June 30, 2008 and December 31, 2007,
        minority interest amounted to $904,070 and $893,337, respectively.
 
 Recently
        issued accounting pronouncements
 
 In
        February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
        Assets and Financial Liabilities—including an amendment of FASB Statement No.
        115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
        instruments and certain other items at fair value that are not currently
        required to be measured at fair value. The objective of FAS 159 is to provide
        opportunities to mitigate volatility in reported earnings caused
        by measuring related assets and liabilities differently without having to
        apply hedge accounting provisions. FAS 159 also establishes presentation
        and
        disclosure requirements designed to facilitate comparisons between
        companies that choose different measurement attributes for similar types
        of
        assets and liabilities. SFAS No. 159 is effective as of the beginning of
        an
        entity’s first fiscal year that begins after November 15, 2007. The Company
        adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect the
        option to measure the fair value of eligible financial assets and
        liabilities.
  15
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 In
        June
        2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
        Nonrefundable Advance Payments for Goods or Services Received for use in
        Future
        Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
        nonrefundable advance payments for goods or services that used or rendered
        for
        research and development activities should be expensed when the advance payment
        is made or when the research and development activity has been performed.
        The
        Company adopted FSP EITF 07-3 and expensed the research and development as
        incurred.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements - an amendment of Accounting Research Bulletin
        No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
        ownership interests in subsidiaries held by parties other than the parent,
        the
        amount of consolidated net income attributable to the parent and to the
        noncontrolling interest, changes in a parent’s ownership interest and the
        valuation of retained non-controlling equity investments when a subsidiary
        is
        deconsolidated. The Statement also establishes reporting requirements that
        provide sufficient disclosures that clearly identify and distinguish between
        the
        interests of the parent and the interests of the non-controlling owners.
        SFAS
        160 is effective for fiscal years beginning after December 15, 2008. The
        Company
        has not determined the effect that the application of SFAS 160 will have
        on its
        consolidated financial statements.
 
 In
        December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
        Combinations* ,
        was
        issued. SFAS No. 141R replaces SFAS No. 141, *Business
        Combinations.* SFAS
        141R
        retains the fundamental requirements in SFAS 141 that the acquisition method
        of
        accounting (which SFAS 141 called the *purchase
        method* )
        be used
        for all business combinations and for an acquirer to be identified for each
        business combination. SFAS 141R requires an acquirer to recognize the assets
        acquired, the liabilities assumed, and any noncontrolling interest in the
        acquiree at the acquisition date, measured at their fair values as of that
        date,
        with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
        required the cost of an acquisition to be allocated to the individual assets
        acquired and liabilities assumed based on their estimated fair values. SFAS
        141R
        also requires the acquirer in a business combination achieved in stages
        (sometimes referred to as a step acquisition) to recognize the identifiable
        assets and liabilities, as well as the noncontrolling interest in the acquiree,
        at the full amounts of their fair values (or other amounts determined in
        accordance with SFAS 141R). SFAS 141R applies prospectively to business
        combinations for which the acquisition date is on or after the beginning
        of the
        first annual reporting period beginning on or after December 15, 2008. An
        entity
        may not apply it before that date. The Company believes adopting SFAS No.
        141R
        will significantly impact its financial statements for any business combination
        completed after December 31, 2008.
 
 In
        June
        2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
        an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
        No. 07-5”). This Issue is effective for financial statements issued for fiscal
        years beginning after December 15, 2008, and interim periods within those
        fiscal
        years. Early application is not permitted. Paragraph 11(a) of Statement of
        Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
        Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
        definition of a derivative but is both (a) indexed to the Company’s own
        stock and (b) classified in stockholders’ equity in the statement of
        financial position would not be considered a derivative financial instrument.
        EITF No.07-5 provides a new two-step model to be applied in determining whether
        a financial instrument or an embedded feature is indexed to an issuer’s own
        stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
        The Company believes adopting this statement will have a material impact
        on the
        financial statements because among other things, any option or warrant
        previously issued and all new issuances denominated is US dollars will be
        required to be carried as a liability and marked to market each reporting
        period.
  16
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 In
        April
        2008, the FASB issued 142-3 “Determination of the useful life of Intangible
        Assets”, which amends the factors a company should consider when developing
        renewal assumptions used to determine the useful life of an intangible asset
        under SFAS142. This Issue is effective for financial statements issued for
        fiscal years beginning after December 15, 2008, and interim periods within
        those
        fiscal years. SFAS 142 requires companies to consider whether renewal can
        be
        completed without substantial cost or material modification of the existing
        terms and conditions associated with the asset. FSP 142-3 replaces the previous
        useful life criteria with a new requirement—that an entity consider its own
        historical experience in renewing similar arrangements. If historical experience
        does not exist then the Company would consider market participant assumptions
        regarding renewal including 1) highest and best use of the asset by a market
        participant, and 2) adjustments for other entity-specific factors included
        in
        SFAS 142. The Company is currently evaluating the impact that adopting SFAS
        No.142-3 will have on its financial statements
   **Note
        3 - Contribution receivable**
 
 On
        July
        7, 2006, Konzern, entered into a Joint Cooperation Agreement (the “Agreement”)
        with JSIG and an individual, Mr. Dongsheng Yao, to jointly form a new Chinese
        company for the purpose of development and application of aflatoxin-detoxifizyme
        ("ADTZ"). Konzern has no material relationships with JSIG or Mr. Yao other
        than
        the Agreement.
 
 Pursuant
        to the Agreement, JSIG and Mr. Yao will transfer four patents relating to
        ADTZ
        into the joint venture company for which they will each hold a 15% equity
        interest in the joint venture company. In addition, JSIG and Mr. Yao will
        be
        paid a total of approximately $125,000, as a technology contribution fee
        from
        the joint venture company. The agreement provides that the Company will invest
        a
        total of approximately $2.2 million, of which $840,000 has been paid and
        the
        balance, according to the Chinese government requirements, is due within
        two
        years. However, the Company hasn’t fully contributed as of June 30, 2008 and
        plans to contribute the full balance in August 2008. Based on the agreement
        the
        Company will receive a 70% equity interest in the joint venture company.
 
 The
        contribution receivable represented the technology required to be contributed
        by
        JSIG and Mr. Yao to Co-win based on the agreement. The four patents’ application
        and ownership were transferred to Co-win in 2007 for the value of $1.02 million
        (RMB 7.5 million).
 
 The
        agreement provides that the joint venture entity will have the intellectual
        property rights to any products developed by the joint venture pursuant to
        the
        agreement. The Company requires government approval as to the organization
        and
        business license for the joint venture company. The business license for
        the
        operation of the joint venture was issued by Guangzhou Commercial and
        Administrative Bureaus on October 27, 2006.
  17
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 **Note
        4 - Inventories**
 
 Inventories
        consisted of only finished goods as of June 30, 2008 and December 31, 2007,
        as
        follows:
 
 June 30,
                2008
                (unaudited)
              
              December 31,
                2007Chemical
                  Medicine
              
              $
              5,029,693
              
              $
              3,948,460Totals
              
              $
              5,029,693
              
              $
              3,948,460
   **Note
        5 - Equipment**
 
 Equipment
        consisted of the following:
 
 June 30,
                2008
                (unaudited)
              
              December 31,
                2007Furniture
                  and fixtures
              
              $
              185,637
              
              $
              174,086Equipment
              
              
              1,357,616
              
              
              1,259,434Motor
                  vehicles
              
              
              431,402
              
              
              405,382Leasehold
                  improvement
              
              
              192,646
              
              
              181,027Total
              
              
              2,167,301
              
              
              2,019,929Less
                  accumulated depreciation
              
              
              (870,585
              )
              
              (631,010
              )Equipment,
                  net
              
              $
              1,296,716
              
              $
              1,388,919
  Depreciation
        expense amounted to $193,533, and $130,293 for the six months ended June
        30,
        2008 and 2007 and $96,807 and $74,365 for the three months ended June 30,
        2008
        and 2007, respectively.
   **Note
        6 - Customer deposits**
 
 The
        Company requires its customers to deposit monies with the Company when they
        place an order. The Company does not pay interest on these amounts. Customer
        deposits amounted to $221,401 and $203,281 as of June 30, 2008 and December
        31,
        2007, respectively.
  18
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 **Note
        7 - Taxes**
 
 The
        Company is organized in the United States and no tax benefit is expected
        from
        tax credits in the future.
 
 Beginning
        January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the existing
        laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).
  The
        key
        changes are:
 
 a.
              The
                  new standard EIT rate of 25% replaced the 33% rate currently applicable
                  to
                  both DES and FIEs, except for High Tech companies who pays a reduced
                  rate
                  of 15%;
 
 b.
              Companies
                  established before March 16, 2007 will continue to enjoy tax holiday
                  treatment approved by local government for a grace period of either
                  for
                  the next 5 years or until the tax holiday term is completed, whichever
                  is
                  sooner. These companies will pay the standard tax rate as defined
                  in point
                  “a” above when the grace period expires.
 
 The
        Company and its subsidiaries were established before March 16, 2007 and
        therefore are qualified to continue enjoying the reduced tax rate as described
        above. Since the detailed guidelines of the new tax law were not publicized
        yet,
        the Company can not determine what the new tax rate (15% or 25%) will be
        applicable to the Company and its subsidiaries after the end of their respective
        tax holiday terms.
  Under
        the
        Income Tax Laws of PRC, the Company is generally subject to income tax at
        an
        effective rate of 33% (30% state income taxes plus 3% local income taxes)
        on
        income reported in the statutory financial statements after appropriate tax
        adjustments, unless the enterprise is located in a specially designated region
        where it allows foreign enterprises a two-year income tax exemption and a
        50%
        income tax reduction for the following three years.
 
 The
        Company’s two subsidiaries, Konzern and Co-win are located and are doing
        business in China. Konzern was approved as a foreign Joint-venture enterprise
        in
        2004 and as a wholly-owned foreign enterprise in 2006. Konzern has an income
        tax
        exemption for 2004 and 2005 and a 50% reduction on the income tax rate for
        2006,
        2007 and 2008. Co-win has not obtained the approval for the tax exemption
        in
        2006, and was subjected to an effective rate of 33%.
  The
        estimated tax savings for the six months ended June 30, 2008 and 2007 amounted
        $840,943 and $538,285 and amounted $572,176 and $338,326 for the three months
        ended June 30, 2008 and 2007 respectively. The net effect on earnings per
        share
        if the income tax had been applied would decrease earnings per share from
        $0.24
        to $0.19 for the six months and from $0.16 to $0.13 for three months ended
        June
        30, 2008 and from $0.18 to $0.12 for the six months and from $0.10 to $0.06
        for
        three months ended June 30, 2007, respectively.
  19
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 The
        provision for income taxes for the six months ended June 30, 2008 and 2007
        consisted of the following:
  2008
              
              2007Provision
                  for China Income Tax
              
              $
              764,494
              
              $
              489,350Provision
                  for Local Tax
              
              
              76,449
              
              
              48,935Total
              
              $
              840,943
              
              $
              538,285
 
 The
        following table reconciles the U.S. statutory rates to the Company's effective
        tax rate for the six months ended June 30:
 
 2008
              
              2007U.S.
                  Statutory rates
              
              
              34.0
              %
              
              34.0
              %Foreign
                  income not recognized in USA
              
              
              (34.0
              )
              
              (34.0
              )China
                  income taxes
              
              
              25.0
              
              
              33.0Income
                  tax exemption
              
              
              (8.5
              )
              
              (16.5
              )Effective
                  tax rate
              
              
              16.5
              %
              
              16.5
              %
 
 Taxes
        payable consisted of the following:
 
 June 30,
                2008
              
              December 31,
                2007Income
                  taxes payable
              
              $
              74,330
              
              $
              61,908Value
                  added tax
              
              
              39,538
              
              
              405,264Other
                  income tax
              
              
              1,914
              
              
              1,012Total
              
              $
              115,782
              
              $
              468,184
   **Note
        8 - Commitments and contingencies**
 
 The
        Company entered into a non-cancelable purchase commitment with a vendor.
        As of
        June 30, 2008, the Company was obligated under the non-cancelable commitment
        to
        purchase products amounting to $1,750,800. The Company has experienced no
        losses
        on these purchase commitments over the years.
 
 Total
        contribution payable to Co-win amounted approximately $1.3 million (RMB 9.4
        million) will be contributed to the joint venture in August 2008. Since Co-win
        is a consolidated entity, contribution payable is eliminated on the consolidated
        financial statements.
  The
        Company leases its facilities under short-term and long-term, non-cancelable
        operating lease agreements expiring through June 2010. The non-cancelable
        operating lease agreement states that the Company pays certain operating
        expenses applicable to the leased premises.
  20
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 As
        of
        June 30, 2008, the future minimum annual lease payments required are as
        follows:
 
 Year Ending June 30,
              
              Amount2008
              
              $
              115,5292009
              
              
              51,6302010
              
              
              5,787Thereafter
              
              
              -
 
 Total
        rent expense for the six months ended June 30, 2008 and 2007 amounted to
        $58,864
        and $52,156, respectively. For the three months ended June 30, 2008 and 2007,
        total rental expense amounted to $29,282 and $14,066, respectively.
   **Notes
        9 - Supplemental disclosure of cash flows**
 
 The
        Company received four patents for the value of $1.02 million (RMB 7.5 million)
        from its minority shareholders and has been offset to the contribution
        receivable.
 
 For
        the
        period ended June 30, 2008, holders of preferred stock converted 111,649
        shares
        of Series A Convertible Preferred Stock into 115,101 shares of common stock,
        par
        value $0.0001 per share.
 
 The
        Company paid $891,358 and $504,503 income taxes for the six months ended
        June
        30, 2008 and 2007, respectively.
   **Note
        10 - Statutory reserves**
 
 The
        laws
        and regulations of the People’s Republic of China require that before an
        enterprise distributes profits to its partners, it must first satisfy all
        tax
        liabilities, provide for losses in previous years, and make allocations,
        in
        proportions determined at the discretion of the board of directors, after
        the
        statutory reserve. The statutory reserves include surplus reserve fund and
        the
        enterprise fund and represent restricted retained earnings.
 
 Surplus
        reserve fund
 
 The
        Company is required to transfer 10% of its net income, as determined in
        accordance with the PRC accounting rules and regulations, to a statutory
        surplus
        reserve fund until such reserve balance reaches 50% of the Company’s registered
        capital.
 
 The
        transfer to this reserve must be made before distribution of any dividend
        to
        shareholders. For the six months ended June 30, 2008 and 2007, the Company
        did
        not transfer any fund to this reserve. The surplus reserve fund is
        non-distributable other than during liquidation and can be used to fund previous
        years’ losses, if any, and may be utilized for business expansion or converted
        into share capital by issuing new shares to existing shareholders in proportion
        to their shareholding or by increasing the par value of the shares currently
        held by them, provided that the remaining reserve balance after such issue
        is
        not less than 25% of the registered capital.
 
 21
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
  Enterprise
        fund
 
 The
        enterprise fund may be used to acquire plant and equipment or to increase
        the
        working capital to expend on production and operation of the business. No
        minimum contribution is required and the Company did not make any contribution
        to this fund for the six months ended June 30, 2008 and 2007.
   **Note
        11 - 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 $30,015 and $20,236 for the six months
        ended June 30, 2008 and 2007 and $15,742 and $7,834 for the three months
        ended
        June 30, 2008 and 2007, respectively.
   **Note
        12 - Shareholders’ equity**
 
 Sale
        of preferred stock
 
 Contemporaneously
        with the reverse acquisition, the Company entered into a Preferred Stock
        Purchase Agreement (“PSPA”), dated February 8, 2006, with Barron Partners L.P.,
        Ray and Amy Rivers, JTROS, Steve Mazur and William Denkin pursuant to which
        the
        Company issued and sold an aggregate of 3,120,000 shares of its Series A
        Convertible Preferred Stock, a newly-created series of preferred stock, and
        warrants to purchase 3,694,738 shares of common stock at $1.75 per share
        and
        3,694,738 shares of common stock at $2.50 per share.
  The
        Series A Convertible Preferred Stock is convertible at the option of the
        holder
        at any time, into 3,120,000 shares of common stock, subject to adjustment
        set
        forth in the PSPA. No dividends are payable on the preferred stock and dividends
        may not be paid on the common stock while the preferred stock is outstanding.
        The preferred stock is not redeemable but has a liquidation preference of
        $1.25
        per share. Holders of the preferred stock are not entitled to vote, except
        on
        matters that would adversely affect their rights.
 
 The
        warrants have a term of five years and are exercisable by the holder at any
        time
        within the term. With certain exceptions, if the Company issues common stock
        at
        a price, or warrants or other convertible securities with an exercise or
        conversion price, which is less than the exercise price of the warrants,
        the
        exercise price of the warrants will be reduced to the sales price, exercise
        price or conversion price, as the case maybe, of such other securities. However,
        in such circumstances, the number of shares obtainable on exercise of the
        warrants is not changed.
 
 22
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 The
        conversion rate of the Series A Preferred Stock and the exercise price of
        the
        warrants (but not the number of shares obtainable on exercise) are subject
        to
        adjustment in certain events, including the failure to achieve specified
        levels
        of adjusted earnings before interest, taxes, depreciation and amortization
        or
        fully diluted pre-tax income per share, computed as set forth in the applicable
        agreements. Because pre-tax targets were not met, the conversion price of
        the
        preferred stock has been reduced from $1.25 to $1.22 resulting in approximately
        80,000 additional common shares to be issued. The exercise price of the warrants
        has been reduced from $1.75 to $1.70. There has been no effect on the financial
        statements for this change.
 
 On
        April
        23, 2007, the Company and the holders of the preferred shares and warrants
        executed a Waiver and Agreement that reduced the conversion price for preferred
        stock and the exercise price of the warrants by 3% of the original conversion
        amounts. The new agreement also requires the Company to redistribute the
        750,000
        shares issued to AiDi Financial Investment LLC, if recovered, as follows:
        50% to
        the Company’s senior executives and 50% to the holders of preferred shares.
        Further, the Series A Preferred Stock cannot be converted and the warrants
        cannot be exercised if such conversion or exercise would result in the holder
        and its affiliates owning more than 4.9% of the then outstanding number of
        shares of common stock. The Company evaluated the impact of this amendment
        and
        determined there is no effect on the financial statements, given that both
        instruments were originally accounted for as equity instruments and that
        a
        variation in the conversion and exercise prices was contemplated under the
        original terms of the instruments, the implementation of that condition does
        not
        require any separate accounting recognition.
 
 The
        Company valued the warrants at the time they were issued using the
        Cox-Ross-Rubinstein binomial model, based on the exercise price and term
        of the
        warrants and the following assumptions: fair value of common stock - $0.81;
        volatility - 50%; interest rate - 4.55%. Because there was no public market
        for
        the Company's common stock, the Company estimated the expected volatility
        of the
        Company's common stock over the term of the warrants based on a review of
        the
        historical volatility of other publicly-traded companies considered by
        management to be comparable to the Company. The fair value of the common
        stock
        and the Series A Preferred Stock was estimated based on the implicit value
        paid
        by the investors. As a result, based on these factors, the Series A Preferred
        Stock was valued at $2,518,615 and the warrants were valued at $1,381,385,
        reflecting the aggregate gross proceeds paid by the investors of
        $3,900,000.
 
 Under
        a
        Registration Rights Agreement with the investors, the Company was required
        to
        file a registration statement registering the common stock issuable upon
        conversion of the series A preferred stock and exercise of the warrants.
        The
        registration statement was filed on April 13, 2006, and was declared effective
        October 17, 2006. The Company incurred liquidated damages under the Registration
        Rights Agreement of $44,003 for the period from August 8, 2006 through October
        17, 2006; these amounts are accrued liabilities and were recorded as interest
        expense. Additionally, the Company is required to maintain its effectiveness
        until the expiration of two years after the date of the agreement or until
        the
        investors hold less than 10% of the registerable securities or more liquidated
        damages of approximately $19,000 per month will be incurred.
 
 23
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 The
        Company reviewed the terms of the Series A Preferred Stock and the Warrants,
        in
        accordance with FAS 133 and EITF Issue 00-19. The conversion option related
        to
        the Series A Preferred Stock is an embedded derivative instrument but the
        risks
        and rewards of that embedded derivative are considered to be clearly and
        closely
        related to the risks and rewards of the host instrument and, accordingly,
        the
        embedded derivative instrument has not been bifurcated. The Company has reviewed
        the requirements of EITF Issue 00-19 and concluded that the Warrants should
        be
        accounted for as equity instruments. Accordingly, the net proceeds from the
        sale
        of the preferred stock and warrants totaling $3,783,000, representing the
        gross
        proceeds received of $3,900,000, net of $117,000 of commissions, was recorded
        as
        equity.
 
 Common
        stock
  For
        the
        year ended December 31, 2007, 1,621,750 shares of warrants were exercised
        at
        $1.75 per share, 1,694,040 shares of warrants were exercised at $1.70 per
        share,
        and 725,000 shares of warrants were exercised at 2.43 per share for the year
        ended December 31, 2007. The Company received total of $7,479,681 cash from
        the
        exercise of warrants as of December 31, 2007.
 
 The
        Company entered into Investor Relations Consulting Agreement with Hayden
        Communication International, Inc. (“HC”) dated October 11, 2006, pursuant to
        which HC is to provide the Company public relations consulting services for
        certain consideration including the issuance of 43,125 shares of the Company’s
        common stock. On July 19, 2007, these shares have been issued to HC. The
        issuance of the shares is exempt from registration pursuant to Section 4(2)
        and
        regulation D promulgated under the Securities Act of 1933, as amended (the
‘1933
        Act”) and should contain a standard 1933 Act restrictive legend. Therefore, the
        Company valued the common stock at $3.12 per share for a total of $179,400
        for
        the 43,125 shares issued; $179,400 was expensed for the year ended December
        31,
        2007.
 
 During
        the period ended June 30, 2008, holders of Series A Convertible Preferred
        Stock
        converted 111,649 shares into 115,101 shares of common stock, par value $0.0001
        per share. For the year ended December 31, 2007, holders converted
        3,008,351shares of Series A Convertible Preferred Stock into 3,063,351 shares
        of
        common stock, par value $0.0001 per share.
 
 Stock
        options and warrants
 
 For
        the
        year ended December 31, 2007, 280,000 shares of stock options were exercised
        at
        $1.25 per share. The Company received a total of $350,000 cash from the stock
        options that were exercised.
 
 On
        April
        2, 2007, the Company granted a total of 15,000 stock options to three of
        its
        independent directors. The Options become exercisable for 7,500 shares of
        common
        stock six months from the grant date and the remaining 7,500 options, eighteen
        months from the grant date. For the year ended December 31, 2007, the Company
        expensed $16,492 related to these stock options.
 
 On
        November 22, 2007, the Company granted a total of 70,000 warrants to a third
        party for investor relations services. The Company valued these warrants
        at
        $71,753 using the Black Scholes model with the following factors: market
        price
        of $2.37; volatility of 50%; risk free rate of 3.4%; exercise price of $2.26;
        and an estimated life of 3.86 years. For the period ended June 30, 2008,
        the
        Company expensed $41,002 related to these warrants.
  24
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
 For
        the
        period ended June 30, 2008, 290,000 options were exercised at $1.25 per share.
        The Company received a total of $362,500 cash from the exercise of stock
        options.
 
 SFAS
        No.
        123R requires that compensation expense related to the options granted be
        calculated based on the fair value of the options as of the date of grant.
        The
        fair value calculations take into account the exercise prices and expected
        lives
        of the options, the current price of the underlying stock, its expected
        volatility, the expected dividends on the stock, and the current risk-free
        interest rate for the expected life of the option. Because there is no trading
        market for the Company's common stock, no historical data on which to base
        an
        estimate of volatility. The Company has considered the volatility that might
        be
        expected to occur for companies comparable to the Company and, selected three
        publicly-traded companies whose business are similar to the Company's and
        who
        are classified in the same SIC code as the Company, have assumed a volatility
        of
        50% as being reasonably representative of the volatility that could be expected
        to occur in the future over the relevant periods. The risk-free rates used
        are
        based on Treasury Constant Maturity rates, published by the U.S. Federal
        Reserve.
 
 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 expensed $11,312 and $42,558 for the six months ended
        June 30, 2008 and 2007 and $5,656 and $21,219 for the three months ended
        June
        30, 2008 and 2007, respectively, for stock-based compensation.
 
 The
        Company used the Cox-Ross-Rubinstein binomial model to value the options,
        Warrants and the embedded conversion option of the Series A Preferred Stock.
        The
        following assumptions were used in the preparation of the above valuations
        at
        inception:
  Assumption
              
              Preferred Stock
              
              Warrants A
              
              Warrants B
              
              Stock optionsCommon
                  stock -fair value
              
              $
              0.81
              
              $
              0.81
              
              $
              0.81
              
              $
              0.81Expected
                  life
              
              
              Perpetual
              
              
              5
                  years
              
              
              5
                  years
              
              
              2.5
                  yearsVolatility
              
              
              
              
              
              50
              %
              
              50
              %
              
              50
              %Risk-free
                  rate
              
              
              
              
              
              4.55
              %
              
              4.55
              %
              
              4.65
              %
 
 25
 **CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
          30, 2008**
 **(Unaudited)**
  Summary of option
                  activity:
              
              Outstanding
              
              Exercisable
              
              Weighted-AverageExercisePrice
              
              Weighted-AverageRemainingContractualTerm (years)
              
              IntrinsicValueDecember
                  31, 2006
              
              
              1,370,000
              
              
              944,000
              
              
              1.25
              
              
              1.48
              
              $
              2,479,700Granted
              
              
              15,000
              
              
              7,500
              
              
              3.00
              
              
              5.00Exercised
              
              
              (280,000
              )
              
              (280,000
              )
              
              1.25Forfeited
              
              
              -
              
              
              -December
                  31, 2007
              
              
              1,105,000
              
              
              671,500
              
              
              1.91
              
              
              0.53
              
              $
              1,041,750Granted
              
              
              -
              
              
              
              
              
              -Exercised
              
              
              (290,000
              )
              
              (290,000
              )
              
              1.25Forfeited
              
              
              -June
                  30, 2008 (unaudited)
              
              
              815,000
              
              
              381,500
              
              
              1.28
              
              
              0.20
              
              $
              503,500
 
 WarrantsSummary of
                  warrant activity:
              
              Outstanding
              
              Fair MarketValue
              
              Weighted-Average ExercisePrice
              
              Weighted-AverageRemainingContractual Term(years)December
                  31, 2006
              
              
              7,389,476
              
              
              0.81
              
              
              2.13
              
              
              4.17Granted
              
              
              70,000
              
              
              2.37
              
              
              2.26
              
              
              3.86Exercised
              
              
              (4,040,790
              )
              
              3.18
              
              
              1.85Forfeited
              
              
              -December
                  31, 2007
              
              
              3,418,686
              
              
              2.85
              
              
              2.35
              
              
              3.17Granted
              
              
              -Exercised
              
              
              -Forfeited
              
              
              -June
                  30, 2008 (unaudited)
              
              
              3,418,686
              
              
              2.85
              
              
              2.35
              
              
              2.68
  26


**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 the results
      anticipated in 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 its
      medicine products requirements; competition in the medical product market;
      the
      granting of new rights to distribute medical products in the PRC; governmental
      price policy on medical products; the impact of such factors on pricing,
      revenues and margins; and the cost of attracting and retaining highly skilled
      personnel.*





**Overview**





China
      Medicine Corporation (“we,” “us” or the “Company”), through Guangzhou Konzern
      Medicine Co., Ltd. (“Konzern”), our wholly owned subsidiary organized under the
      laws of the People’s Republic of China (the “PRC” or “China”), is a distributor
      of approximately 2,300 pharmaceutical products in China. Also as a developer
      of
      innovative pharmaceutical products, the Company currently has four patents
      registered with the PRC State Food and Drug Administration (the “SFDA”), and has
      seven other patents pending for approval. Co-win Bio-Engineering Ltd.
      (“Co-Win”), a PRC joint-venture company we created together with another entity
      (Konzern owns 70% ), has three patents related to ADTZ, an enzyme designed
      to
      eliminate a harmful toxin from food and animal feed. Co-Win also applied for
      patents in 13 different countries and regions in 2007 (including Australia,
      Canada, the European Union, Indonesia, Israel, Japan, South Korea, Mexico,
      Russia, South Africa, the U.S., Hong Kong and India), all of which are under
      review as of the date of this report.





We
      generate revenue in two ways, the distribution of pharmaceutical products
      obtained from suppliers and the sale of intellectual property, including drug
      formulas and technology, to third parties including manufacturing
      companies.





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





We
      believe that our unique competitive advantages include our ownership of good
      research and development facilities, our excellent after-sale customer service,
      and the sole nationwide or region-wide distribution rights to certain medical
      products. Our competitive pricing and our ability to provide timely delivery
      are
      also important factors to attract and retain our customers.





Our
      distribution business depends on our ability to acquire and distribute our
      products in the Chinese markets. Typically, exclusive nationwide or regional
      distribution rights yield higher profit margins than non-exclusive distribution
      rights. In addition to our exclusive rights to nationwide distribution of seven
      products made by our suppliers, we also have obtained distribution rights
      throughout Guangdong Province of 774 products made by our suppliers through
      that
      province’s on-line bidding system, called the Guangdong Sunshine Bid Program. We
      expect to obtain additional distribution rights through that system in the
      future.





In
      the
      six months ended June 30, 2008, sales of the seven products as to which we
      had
      nationwide exclusive sales rights from our suppliers accounted for $6,414,922,
      or 34.3%, of our sales as compared to sales of those products (as to which
      we
      had the same rights) of $3,518,437, or 26.3% of sales in the six months ended
      June 30, 2008. Sales revenue related to the seven products increased $2,896,485.
      Sales revenue from products that we distribute in Guangdong province at June
      30,
      2008, amounted to $6,740,763, or 36.1% of sales in that period; an increase
      of
      $1,885,689 as compared to the period ended June 30, 2007.





27




Our
      contracts with our customers do not require minimum purchases, and our customers
      are not restricted from purchasing competitive products from others. Our
      customers are typically wholesale medical product companies, hospitals and
      retail drug stores. Our five largest customers accounted for 40.5% and 45.1%
      of
      our sales for the six months ended June 30, 2008 and 2007, respectively.





Our
      largest account receivable at June 30, 2008 was approximately $4,324,817,
      representing approximately 11.3% of our total assets and approximately 12.6%
      of
      our working capital. Our three largest accounts receivable were approximately
      $7,076,498, representing approximately 18.4% of our total assets and
      approximately 20.7% of our working capital. 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. This concentration of accounts receivable represents
      a
      significant credit risk. We will continue to explore more customer groups in
      an
      effort to reduce our reliance on our major customers.





Our
      five
      largest suppliers accounted for 54.5% and 62.7% of our purchases for the six
      months ended June 30, 2008 and June 30, 2007, respectively. Our agreements
      with
      our suppliers generally have a term of one year and state that the suppliers
      will provide us with the products we order. None of our supply agreements have
      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. The
      balance of our advances to suppliers was $9,937,629 and $5,983,277 as of June
      30, 2008 and December 31, 2007, 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. Furthermore, 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.





We
      passed
      a milestone in research and development (R&D) on June 12, 2008, when we
      obtained a patent from the Australia Patent Office for recombinant Aflatoxin
      Detoxifizyme (rADTZ). The patent is valid through January 13, 2025. In addition,
      we have performed laboratory experiments on rADTZ and have gathered important
      data to address technological challenges related to its development. We are
      currently testing rADTZ on animal feed and are scheduled to begin working with
      the Chinese Department of Agriculture on a large scale experiment in order
      to
      meet national standards and apply for production permits.





In
      2008,
      in order to enhance security in connection with the 2008 Beijing Olympic Games,
      the Chinese government issued guidance limiting the production and handling
      of
      toxic chemicals including Aflatoxin, a highly toxic substance used in our
      testing of ADTZ. Therefore, our suppliers in Beijing ceased supplying Aflatoxin
      and our R&D staff temporarily ceased testing of ADTZ in the second quarter
      of 2008. We expect that testing of ADTZ will be suspended for nearly three
      months; therefore, we may be unable to begin trials before December 31,
      2008.





Looking
      forward to the second half of 2008, the third quarter is vital for the Company’s
      overall performance in 2008. We expect to generate revenue growth in the second
      half of 2008 by focusing on the following:





·
            We
                will participate in the Guangdong Sunshine Bid Program auction for
                2009
                distribution rights, which will occur in August and we expect will
                promote
                the sales of our main products.


·
            We
                plan to expand our distribution of OTC products to large chain drugstores
                in Guangzhou.


·
            In
                the third quarter, we intend to invest in total approximately
                $292,000 in Xiao Jing Ling and Fu Shou Xian, medicines designed to
                enhance
                immune system function in children and the elderly, to promote their
                sales.




28




Other
      important aspects of our operations in the second half of 2008 are the
      following:





·
            We
                will continue to pursue expanded distribution into rural and municipal
                areas in Guangdong Province.


·
            We
                will continue to seek out and evaluate potential pharmaceutical
                manufacturing facilities for
                acquisition.


·
            We
                will work toward the launch of our new proprietary weight loss supplement,
                Bethin, in the U.S.





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, depend on the applicable currency
      exchange rate, which can change significantly from period to period and may
      be
      affected by the relationship between the United States and the PRC.




**Results
      of Operations**





The
      following table sets forth our statements of operations for the three months
      and
      six months ended June 30, 2008 and 2007, in U.S. dollars:
      (unaudited)




Three Months Ended
                June 30,
            
            Six Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Product
                sales
            
            $
            11,067,074
            
            $
            7,764,535
            
            $
            17,918,458
            
            $
            12,647,744Medical
                formula sales
            
            
            570,465
            
            
            499,433
            
            
            780,120
            
            
            709,219Revenue
            
            
            11,637,539
            
            
            8,263,968
            
            
            18,698,578
            
            
            13,356,963Costs
                of goods sold
            
            
            7,481,170
            
            
            5,859,008
            
            
            12,230,189
            
            
            9,264,425Gross
                profit
            
            
            4,156,369
            
            
            2,404,960
            
            
            6,468,389
            
            
            4,092,538R&D
                expenses
            
            
            107,824
            
            
            543
            
            
            196,216
            
            
            100,655Selling,
                general and administrative costs
            
            
            1,060,082
            
            
            960,924
            
            
            1,872,590
            
            
            1,604,770Income
                from operations
            
            
            2,988,463
            
            
            1,443,493
            
            
            4,399,583
            
            
            2,387,113Other
                (expense) income, net
            
            
            32,104
            
            
            (7,118
            )
            
            38,087
            
            
            (10,090
            )Income
                before income taxes & Minority interest
            
            
            3,020,567
            
            
            1,436,375
            
            
            4,437,670
            
            
            2,377,023Provision
                for income taxes
            
            
            572,176
            
            
            338,326
            
            
            840,943
            
            
            538,285Income
                before minority interest
            
            
            2,448,391
            
            
            1,098,049
            
            
            3,596,727
            
            
            1,838,738Minority
                interest
            
            
            17,833
            
            
            29,085
            
            
            45,310
            
            
            52,117Net
                income
            
            
            2,466,224
            
            
            1,127,134
            
            
            3,642,037
            
            
            1,890,855Other
                comprehensive income(Foreign
                currency translation adjustment)
            
            
            744,658
            
            
            302,836
            
            
            2,071,824
            
            
            559,325Comprehensive
                income
            
            $
            3,210,882
            
            $
            1,429,970
            
            $
            5,713,861
            
            $
            2,450,180





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




29




**Six Months Ended June
                30,****2008**
            
            **2007****Drugs**
            
            $
            17,528,450
            
            
            93.74
            %
            $
            12,400,964
            
            
            92.84
            %**Dietary
                Supplements**
            
            
            113,802
            
            
            0.61
            %
            
            28,090
            
            
            0.21
            %**Medical
                Equipment**
            
            
            262,636
            
            
            1.41
            %
            
            45,897
            
            
            0.34
            %**Other**
            
            
            13,570
            
            
            0.07
            %
            
            167,821
            
            
            1.26
            %**Herbs
                & Medicine materials**
            
            
            0
            
            
            0
            %
            
            4,972
            
            
            0.04
            %**Medical
                Formula**
            
            
            780,120
            
            
            4.17
            %
            
            709,219
            
            
            5.31
            %**Total**
            
            $
            18,698,578
            
            
            100
            %
            $
            13,356,963
            
            
            100
            %




**Six Months Ended June
                30,****Drugs**
            
            **2008**
            
            **2007****Western
                Prescription Products**
            
            $
            11,135,885
            
            
            59.55
            %
            $
            7,302,881
            
            
            54.67
            %**Western
                Over-the-Counter Products**
            
            
            652,366
            
            
            3.49
            %
            
            390,338
            
            
            2.92
            %**TCM
                Prescription Products**
            
            
            3,509,692
            
            
            18.77
            %
            
            1,526,370
            
            
            11.43
            %**TCM
                Over-the-Counter Products**
            
            
            2,230,507
            
            
            11.93
            %
            
            3,181,375
            
            
            23.82
            %**Total
                Drugs**
            
            $
            17,528,450
            
            
            93,74
            %
            $
            12,400,964
            
            
            92.84
            %




**THE
      THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
      2007**





Sales





Total
      revenue for the three months ended June 30, 2008 was $11,637,539, an increase
      of
      $3,373,571, or 40.82%, from the total revenues of $8,263,968 for the comparable
      period in 2007.




Revenue
      from Product Sales for the three months ended June 30, 2008 was $11,067,074,
      an
      increase of $3,302,539, or 42.53%, from $7,764,535 for the comparable period
      in
      2007. Sales revenue from products for which we won distribution rights through
      the online bidding system of Guangdong Province for the three months ended
      June
      30, 2008 were $4,018,044, an increase of $601,238 from $3,416,806 for the
      comparable period in 2007.




30




Revenue
      from sales of products for which we hold a manufacturing license for the three
      months ended June 30, 2008 was $647,594, an increase of $289,948 from $357,646
      for the comparable period in 2007. (Products for which we hold a manufacturing
      license are products for which we own the intellectual property, and which
      we
      have manufactured by other companies.) Revenues from sales of products for
      which
      we hold exclusive distribution rights for the three months ended June 30, 2008
      were $10,419,480, an increase of $3,012,591 from $7,406,889 for the comparable
      period in 2007.





Revenue
      from Medical Formula Sales for the three months ended June 30, 2008 was
      $570,465, an increase of $71,032, or 14.22%, from $499,433 for the comparable
      period in 2007. Medical Formula Sales revenues represented the proceeds from
      the
      sale of certain technology and know-how relating to the production of medicines.
      We improve and develop the technology in its preliminary stage and then sell
      the
      improved technology to other pharmaceutical companies.




Cost
      of Sales





Cost
      of
      sales for the three months ended June 30, 2008 was $7,481,170, an increase
      of
      $1,622,162, or 27.69%, from $5,858,008 for the comparable period in 2007. Gross
      profit for the three months ended June 30, 2008 was $4,156,369, an increase
      of
      $1,751,409, or 72.82 %, from $2,404,960 for the comparable period of 2007.
      Our
      gross margin for the three months ended June 30, 2008 was 35.72% as compared
      with 29.10% for the three months ended June 30, 2007, a increase of 6.62%.




Research
      and Development





Research
      and development expenses were $107,824, which accounted for 0.93% of total
      revenue for the three months ended June 30, 2008, which was for the further
      study of molecular structure and technology improvement of the Yutian capsule.
      Research and development expenses for the same period of 2007 were $543, or
      approximately 0% of total revenue. The R&D expense for the whole year 2007
      was $651,989.14, or 1.55% of total revenue. We expect our R & D expense as a
      percentage of revenues will remain consistent for 2008 as compared to
      2007.




Selling,
      General and Administrative Expenses





Selling,
      general and administrative expenses were $1,060,082 for the three months ended
      June 30, 2008, an increase of $99,158, or 10.32%, from $960,924 for the
      comparable period in 2007. Selling, general and administrative expenses include
      transportation expenses, travel fees and salaries, which increased $60,877
      for
      the three months ended June 30, 2008 as compared to the same period in
      2007.





Income
      Taxes





Provision
      for income taxes was $572,176 for the three months ended June 30, 2008 as
      compared with $338,326 for the comparable period in 2007. The increase was
      due
      to the increase of product sales and operating income.




Comprehensive
      Income





Comprehensive
      income for the three months ended June 30, 2008, was $3,210,882,
      an increase of $1,524,423 from $1,429,970 for the comparable period in 2007.
      The
      increase was mainly due to the increase in revenues of our product sales
      compared to the same period in 2007.




31




**THE
      SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
      2007**





Sales





Total
      revenue for the six months ended June 30, 2008 was $18,698,578, an increase
      of
      $5,341,615, or 39.99%, from total revenue of $13,356,963 for the comparable
      period in 2007.





Revenue
      from Product Sales for the six months ended June 30, 2008 was $17,918,458,
      an
      increase of $5,270,714, or 41.67%, from $12,647,744 for the comparable period
      in
      2007. Overall there are three main factors which contributed to the increase.
      First, 35% of the total increase is from sales of products for which we won
      the
      distribution rights in the Guangdong Province Sunshine Bid Program. Revenues
      from sales of those products for the six months ended June 30, 2008 were
      $6,740,763, an increase of $1,885,689 from $4,855,074 for the comparable period
      in 2007. (The bid program of 2007 started in May 2007.) Second, 46% of the
      total
      increase is from sales of products that we distribute nationwide. Third, the
      increase in sales of products for which we hold a manufacturing license accounts
      for 8.7% of the total increase.





Revenue
      from sales of products for which we hold a manufacturing license for the six
      months ended June 30, 2008 was $1,288,422, an increase of $459,540 from $828,882
      for the comparable period in 2007. Revenues from sales of products for which
      we
      have exclusive distribution rights for the six months ended June 30, 2008 were
      $16,630,036, an increase of $4,811,174 from $11,818,862 for the comparable
      period in 2007.




Revenues
      from Medical Formula Sales for the six months ended June 30, 2008 were 780,120,
      an increase of $70,901, or 10%, from $709,219 for the comparable period in
      2007.




Cost
      of Sales





Cost
      of
      sales for the six months ended June 30, 2008 was $12,230,189, an increase of
      $2,965,764, or 32.01%, from $9,264,425 for the first six months of 2007. Gross
      profit for the six months ended June 30, 2008 was $6,468,389, an increase of
      $2,375,851, or 58.05 %, from $4,092,538 for the comparable period of 2007.
      Our
      gross margin for the six months ended June 30, 2008 was 34.61% as compared
      with
      30.64% for the six months ended June 30, 2007, an increase of 3.97%. From the
      first half of 2007 to the first half of 2008, the increase in our sales revenue,
      which was 39.99%, exceeded the increase in our cost of sales, which was 32.01%..
      The increase in gross margin for the six months ended June 30, 2008 is due
      to an
      improvement in our mix of products sold. In the 2008 period, we increased our
      focus and spending on the sales of products that have higher gross margins,
      such
      as new medicines and prescription products, and we decreased our investment
      in
      sales of OTC products which have lower gross margins.





Research
      and Development





Research
      and development expense was $196,216, which accounted for 1.05% of total revenue
      for the six months ended June 30, 2008. It was used for the further study of
      molecular structure and technology improvement of the Yutian capsule. Research
      and development expense for the same period of 2007 was $100,655, or 0.75%
      of
      total revenue. R&D expense for the whole year 2007 was $651,989.14, or 1.55%
      of total revenue. We expect our R&D expense as a percentage of revenues will
      remain consistent for 2008 compared to 2007.




32




Selling,
      General and Administrative Expenses




Selling,
      general and administrative expenses were $1,872,590, which accounted for 10%
      of
      total revenue for the six months ended June 30, 2008, an increase of $267,820,
      or 16.69%, from $1,604,770, which accounted for 12% of total revenue for the
      comparable period in 2007. Selling, general and administrative expenses included
      transportation, salary, and advertising expense, which increased $267,820 for
      the six months ended June 30, 2008 as compared to the same period in
      2007.





The
      increase of selling, general and administrative expense is primarily due to
      the
      increase in international oil prices in the six months ended June 30, 2008,
      causing our fuel costs and transportation costs to increase greatly. The
      increase in salary expenses also contributed to the increase in selling, general
      and administrative expenses. The primary reasons for this increase are that
      China is experiencing nationwide inflation, which we believe requires us to
      increase salaries in order to remain competitive, and that the Guangzhou
      Municipality Board of Labor and Social Security recently published guidance
      encouraging private enterprises to increase their salaries by 14%. .





Income
      Taxes




Provision
      for income taxes was $840,943 for the six months ended June 30, 2008 as compared
      with $538,285 for the comparable period in 2007. The increase was due to the
      increase of product sales and operating income.




Comprehensive
      Income





Comprehensive
      income for the six months ended June 30, 2008, was $5,713,861, an increase
      of
      $3,263,681 from $2,450,180 for the comparable period in 2007. The increase
      was
      mainly due to the increase in revenues from our Product Sales compared with
      those of the same period last year.





**Liquidity
      and Capital Resources**





As
      of
      June 30, 2008, we had working capital of $34,215,087, an increase of $5,670,726
      from $28,544,361 as of December 31, 2007.




We
      used
      cash of $2,985,402 in our operations for the six months ended June 30, 2008,
      a
      decrease of $109,076 from $3,094,478 of cash used for the comparable period
      of
      2007.





The
      following table sets forth the changes in certain balance sheet items, in
      dollars and percentages, from December 31, 2007 to June 30, 2008 (dollars).





Balance Sheet Caption
            
            Change in dollars
              12/31/07 to 06/30/08
            
            Percentage Change
              12/31/07 to 06/30/08Accounts
                receivable
            
            $
            1,550,527
            
            
            11.38
            %Notes
                receivables
            
            
            1,718,702
            
            
            100
            %Inventories
            
            
            1,081,233
            
            
            27.38
            %Advances
                to suppliers
            
            
            3,954,352
            
            
            66.09
            %Accounts
                payable
            
            
            27,494
            
            
            35.75
            %Customer
                deposits
            
            
            18,120
            
            
            8.91
            %




The
      change in these balance sheet captions reflects the nature of the cash
      requirements of our business. In the six months ended June 30, 2008, due to
      both
      increasing inflation rates and cash flow pressures from our clients, our
      receivables collection cycle was extended to 146 days in the comparison of
      90
      days for the comparable period in 2007. 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. From December 31, 2007 to
      June
      30, 2008, our inventories increased 27.38%. The increase of inventory reflects
      the increase of our purchase of goods compared with our sales. In addition,
      it
      is our practice and, we believe, a standard industry practice in the PRC to
      increase supply purchases in the second quarter of the year and increase sales
      in the third quarter. Therefore we expect our inventories to fall in the third
      quarter.




33




Our
      advances to suppliers increased 66.09% in the first half of 2008 because of
      an
      increase in our purchases resulting from increased sales and our payment
      policies, whereby we try to pay our suppliers in advance. In addition, our
      customer deposits increased 8.91% from December 31, 2007 to June 30, 2008,
      reflecting increased sales. Because of the significant increase in sales, we
      have managed to maintain the cash turnover cycle. We expect that the advances
      we
      pay to our suppliers will decrease gradually in the end of the fiscal year
      ended
      Dec 31, 2008. We require our customers to pay a certain percentage of the sales
      price as deposit before we ship products to the customers. During the period
      ended June 30, 2008, we received $1.7 million in notes receivable from our
      customers. Notes receivable are guarantees of payment from the customers’ banks.
      In addition, we paid $622,993 as a deposit on a patent for a method of
      manufacturing BCG (Bacillus Calmette-Guerin) vaccine, which was developed as
      a
      vaccine for tuberculosis and is now used as a treatment for bladder
      cancer.





The
      increase in accounts payable for the six months ended June 30, 2008 is mainly
      due to our increasing investment of the following two areas:





·
            Investment
                in production of herbal tea. We have entered into a 10-year contract
                with
                a reliable manufacturer for the production of herbal tea meeting
                our own
                specifications, to be marketed and sold under our own proprietary
                brand
                name. We believe this step will enable us to achieve significant
                production volume, reduce long-term production cost, and increase
                profits
                from our herbal tea products beyond the levels achieved in prior
                years.





·
            Investment
                in advertising. We have entered into a one-year advertising contract
                with
                Zhujiang TV Station for the promotion of the immune function-enhancing
                medications Xiao Jing Ling and Fu Shou Xian. We believe this advertising
                may increase profits by boosting sales of these
                products.





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.





**Recently
      Issued Accounting Pronouncements**




In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities—including an amendment of FASB Statement No.
      115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
      instruments and certain other items at fair value that are not currently
      required to be measured at fair value. The objective of FAS 159 is to provide
      opportunities to mitigate volatility in reported earnings caused
      by measuring related assets and liabilities differently without having to
      apply hedge accounting provisions. FAS 159 also establishes presentation and
      disclosure requirements designed to facilitate comparisons between
      companies that choose different measurement attributes for similar types of
      assets and liabilities. SFAS No. 159 is effective as of the beginning of an
      entity’s first fiscal year that begins after November 15, 2007. The Company
      adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect the
      option to measure the fair value of eligible financial assets and
      liabilities.




In
      June
      2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
      Nonrefundable Advance Payments for Goods or Services Received for use in Future
      Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
      nonrefundable advance payments for goods or services that used or rendered
      for
      research and development activities should be expensed when the advance payment
      is made or when the research and development activity has been performed. The
      Company adopted FSP EITF 07-3 and expensed the research and development as
      incurred.




34




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements - an amendment of Accounting Research Bulletin
      No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
      ownership interests in subsidiaries held by parties other than the parent,
      the
      amount of consolidated net income attributable to the parent and to the
      noncontrolling interest, changes in a parent’s ownership interest and the
      valuation of retained non-controlling equity investments when a subsidiary
      is
      deconsolidated. The Statement also establishes reporting requirements that
      provide sufficient disclosures that clearly identify and distinguish between
      the
      interests of the parent and the interests of the non-controlling owners. SFAS
      160 is effective for fiscal years beginning after December 15, 2008. The Company
      has not determined the effect that the application of SFAS 160 will have on
      its
      consolidated financial statements.





In
      December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
      Combinations* ,
      was
      issued. SFAS No. 141R replaces SFAS No. 141, *Business
      Combinations.* SFAS
      141R
      retains the fundamental requirements in SFAS 141 that the acquisition method
      of
      accounting (which SFAS 141 called the *purchase
      method* )
      be used
      for all business combinations and for an acquirer to be identified for each
      business combination. SFAS 141R requires an acquirer to recognize the assets
      acquired, the liabilities assumed, and any noncontrolling interest in the
      acquiree at the acquisition date, measured at their fair values as of that
      date,
      with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
      required the cost of an acquisition to be allocated to the individual assets
      acquired and liabilities assumed based on their estimated fair values. SFAS
      141R
      also requires the acquirer in a business combination achieved in stages
      (sometimes referred to as a step acquisition) to recognize the identifiable
      assets and liabilities, as well as the noncontrolling interest in the acquiree,
      at the full amounts of their fair values (or other amounts determined in
      accordance with SFAS 141R). SFAS 141R applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. An entity
      may not apply it before that date. The Company believes adopting SFAS No. 141R
      will significantly impact its financial statements for any business combination
      completed after December 31, 2008.





In
      June
      2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
      an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
      No. 07-5”). This Issue is effective for financial statements issued for fiscal
      years beginning after December 15, 2008, and interim periods within those fiscal
      years. Early application is not permitted. Paragraph 11(a) of Statement of
      Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
      Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
      definition of a derivative but is both (a) indexed to the Company’s own
      stock and (b) classified in stockholders’ equity in the statement of
      financial position would not be considered a derivative financial instrument.
      EITF No.07-5 provides a new two-step model to be applied in determining whether
      a financial instrument or an embedded feature is indexed to an issuer’s own
      stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
      The Company believes adopting this statement will have a material impact on
      the
      financial statements because among other things, any option or warrant
      previously issued and all new issuances denominated is US dollars will be
      required to be carried as a liability and marked to market each reporting
      period.





In
      April
      2008, the FASB issued 142-3 “Determination of the useful life of Intangible
      Assets”, which amends the factors a company should consider when developing
      renewal assumptions used to determine the useful life of an intangible asset
      under SFAS142. This Issue is effective for financial statements issued for
      fiscal years beginning after December 15, 2008, and interim periods within
      those
      fiscal years. SFAS 142 requires companies to consider whether renewal can be
      completed without substantial cost or material modification of the existing
      terms and conditions associated with the asset. FSP 142-3 replaces the previous
      useful life criteria with a new requirement—that an entity consider its own
      historical experience in renewing similar arrangements. If historical experience
      does not exist then the Company would consider market participant assumptions
      regarding renewal including 1) highest and best use of the asset by a market
      participant, and 2) adjustments for other entity-specific factors included
      in
      SFAS 142. The Company is currently evaluating the impact that adopting SFAS
      No.142-3 will have on its financial statements




35




**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:




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





Use
      of
      estimates





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





Inventories




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




36




**Item
      4.** **Controls
      and Procedures**





***Disclosure
      Controls and Procedures***





We
      maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under
      the Exchange Act). Disclosure controls and procedures refer to controls and
      other procedures designed to ensure that information required to be disclosed
      in
      the reports we file or submit under the Securities Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      rules and forms of the SEC and that such information is accumulated and
      communicated to our management, including our chief executive officer and chief
      financial officer, as appropriate, to allow timely decisions regarding required
      disclosure. In designing and evaluating our disclosure controls and procedures,
      management recognizes that any controls and procedures, no matter how well
      designed and operated, can provide only reasonable assurance of achieving the
      desired control objectives, and management is required to apply its judgment
      in
      evaluating and implementing possible controls and procedures.





As
      required by Rule 13a-15(e) and 15d-15(e) under the Exchange Act, our management
      carried out an evaluation, with the participation and under the supervision
      of
      our Chief Executive Officer, Mr. Senshan Yang, and our Chief Financial Officer,
      Ms. Huizhen Yu, assessing the effectiveness of the design and operation of
      our
      disclosure controls and procedures as of June 30, 2008. Management conducted
      its
      evaluation of disclosure controls and procedures and determined that as of
      June
      30, 2008, and as of the date of this Report, our disclosure controls and
      procedures contained
      a significant deficiency, described below, and were otherwise
      effective.




A
          material weakness (within the meaning of PCAOB Auditing Standard No. 5)
          is a
          deficiency, or a combination of deficiencies, in internal control over
          financial
          reporting, such that there is a reasonable possibility that a material
          misstatement of our annual or interim financial statements will not be
          prevented
          or detected on a timely basis. A significant deficiency is a deficiency,
          or a
          combination of deficiencies, in internal control over financial reporting
          that
          is less severe than a material weakness, yet important enough to merit
          attention
          by those responsible for oversight of the company's financial
          reporting.
 
 During
          our assessment of the effectiveness of internal control over financial
          reporting
          as of June 30, 2008, management identified significant deficiencies in
          U.S. GAAP
          expertise and internal audit functions. The current staff in the accounting
          department of the subsidiaries is relatively new to U.S. GAAP and internal
          control procedures and requires additional training. This significant deficiency
          in internal audit function is due to the Company’s lacking of qualified
          resources to perform internal audit functions.
  We
          have
          taken measures and plan to continue to take measures to remediate this
          deficiency as soon as practicable, including the following measures:
  (i)  We
          have
          committed to engage a senior financial executive from the U.S., who has
          extensive experience in internal control and US GAAP reporting compliance,
          to
          take charge of the financial reporting process and training of the accounting
          staff. In addition, we have also committed to recruit an experienced accounting
          manager from the U.S. to strengthen the Company’s financial reporting and
          internal control functions; and
  (ii)  We
          have
          committed to establish effective internal audit functions; however, due
          to the
          scarcity of qualified candidates with extensive experience in U.S. GAAP
          reporting and accounting in the region, we have not been able to hire sufficient
          internal audit resources as of the date of this report. However, we intend
          to
          continue our search for qualified candidates with assistance from recruiters
          and
          through referrals.
  Our
          management does not believe that this significant deficiency is a material
          weakness or that it had a material effect on our financial condition or
          results
          of operations or caused our financial statements as of and for the three
          and six
          months ended June 30, 2008 to contain a material
          misstatement.


37




**PART
      II OTHER INFORMATION**








**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.**





On
      or
      about May 5, 2008, we issued 61,855 shares of our common stock to Ray and Amy
      Rivers upon conversion by Ray and Amy Rivers of 60,000 shares of our Series
      A
      Preferred Stock. We received no consideration for the issuance. The issuance
      was
      exempt from registration under Section 4(2) of the Securities Act of 1933 and
      Regulation D thereunder because it was part of a transaction that did not
      involve a public offering, did not involve any general solicitation, and
      involved only a small number of purchasers, each of whom was capable of
      evaluating the merits and risks of the investment.




**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.





99.1
      -
      Press release issued August 13, 2008.




99.2
      - Transcript of conference call held August 13,
      2008.




38





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 CORPORATIONDate:
                August 13, 2008
            BY:
            /s/ Senshan
                YangSenshan
                YangChief
                Executive Officer
              (principal
                executive officer)BY:
            /s/ Huizhen
                YuHuizhen
                YuChief
                Financial Officer
              (principal
                financial officer and accounting
                officer)





39