**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**





(Mark
      One)





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





FOR
      THE
      QUARTERLY PERIOD ENDED JUNE 30, 2007




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





For
      the
      transition period from ____________ to ____________





Commission
      File Number 000-51379





CHINA
      MEDICINE CORPORATION


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




DELAWARE
            51-0539830(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)





24A
      JEFFERSON PLAZA,


PRINCETON,
      NJ 08540


(Address
      of principal executive offices)





(732)
      438 8866


(Issuer's
      telephone number)







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





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




APPLICABLE
      ONLY TO CORPORATE ISSUERS





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: 13,306,738 shares of Common Stock,
      $.0001 par value, were outstanding as of August 10, 2007.





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







TABLE
      OF
      CONTENTS




PART
                  I
              FINANCIAL
                  INFORMATION
              PageItem
                  1.
              Financial
                  Statements
              3Consolidated
                  Balance Sheets
                As
                  of June 30, 2007 (Unaudited) and December 31, 20063Consolidated
                  Statements of Income and Other Comprehensive Income
                For
                  the Three Months Ended June 30, 2007 and 2006
                and
                  For the Six Months Ended June 30, 2007 (Unaudited)4Consolidated
                  Statements of Shareholders’ Equity
                For
                  the Six Months Ended June 30, 2007 and 2006 (Unaudited)5Consolidated
                  Statements of Cash Flows
                For
                  the Six Months Ended June 30, 2007 and 2006 (Unaudited)6Notes
                  to Consolidated Financial Statements
                June
                  30, 2007 (Unaudited)7Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation.
              25Item
                  3.
              Controls
                  and Procedures
              32PART
                  II
              OTHER
                  INFORMATIONItem
                  2.
              Unregistered
                  Sales of Equity Securities and Use of proceeds.
              32Item
                  6.
              Exhibits
              33Signatures
              
              35Exhibits/Certifications




2




**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**


CHINA
                    MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED
                    BALANCE SHEETSAS
                    OF JUNE 30, 2007 AND DECEMBER 31,
                    2006
 ASSETSJune
                    30,
                
                December
                    31,2007
                
                2006UnauditedCURRENT
                    ASSETSCash
                
                $
                2,702,678
                
                $
                371,480Accounts
                    receivable, trade, net of allowance for doubtful accountsof
                    $34,897 and $34,021 as of June 30, 2007 andDecember
                    31, 2006, respectively
                
                
                6,694,741
                
                
                7,034,911Inventories
                
                
                4,449,652
                
                
                1,900,467Advances
                    to suppliers
                
                
                7,538,518
                
                
                4,077,412Other
                    current assets
                
                
                59,140
                
                
                42,136Total
                    current assets
                
                
                21,444,729
                
                
                13,426,406EQUIPMENT,
                    net
                
                
                1,340,984
                
                
                1,215,311OTHER
                    ASSETS - Intangible assets
                
                
                132,711
                
                
                682Total
                    assets
                
                $
                22,918,424
                
                $
                14,642,399LIABILITIES 
                    AND  SHAREHOLDERS' EQUITYCURRENT
                    LIABILITIESAccounts
                    payable, trade
                
                $
                163,411
                
                $
                188,877Other
                    payables - related parties
                
                
                -
                
                
                30,000Other
                    payables and accrued liabilities
                
                
                91,673
                
                
                23,265Customer
                    deposits
                
                
                175,688
                
                
                17,980Taxes
                    payable
                
                
                58,471
                
                
                295,902Liquidated
                    damages payable
                
                
                44,003
                
                
                44,003Total
                    liabilities
                
                
                533,246
                
                
                600,027MINORITY
                    INTEREST
                
                
                898,547
                
                
                908,480SHAREHOLDERS'
                    EQUITYPreferred
                    stock, $0.0001 par value; 10,000,000 shares authorized,606,255
                    shares issued and outstanding at June 30, 2007 and2,340,000
                    shares issued and outstanding at December 31, 2006
                
                
                61
                
                
                234Common
                    stock, $0.0001 par value; 90,000,000 shares authorized,13,306,738
                    shares issued and outstanding at June 30, 2007 and8,160,000
                    shares issued and outstanding at December 31, 2006
                
                
                1,331
                
                
                816Paid-in
                    capital
                
                
                10,344,038
                
                
                4,396,971Deferred
                    Compensation
                
                
                (44,850
                )
                
                -Contribution
                    receivable
                
                
                (961,500
                )
                
                (961,500
                )Statutory
                    reserves
                
                
                1,345,206
                
                
                1,345,206Retained
                    earnings
                
                
                9,870,097
                
                
                7,979,242Accumulated
                    other comprehensive income
                
                
                932,248
                
                
                372,923Total
                    shareholders' equity
                
                
                21,486,631
                
                
                13,133,892Total
                    liabilities and shareholders' equity
                
                $
                22,918,424
                
                $
                14,642,399
 
 3
  CHINA
                        MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED
                        STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME(Unaudited)
  FOR
                        THREE MONTHS ENDED
                    
                    
                    FOR
                        SIX MONTHS ENDED2007
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2006REVENUESProduct
                        sales
                    
                    $
                    7,764,535
                    
                    $
                    3,977,960
                    
                    $
                    12,647,744
                    
                    $
                    7,489,939Medical
                        formula sales
                    
                    
                    499,433
                    
                    
                    63,121
                    
                    
                    709,219
                    
                    
                    359,224Total
                        revenues
                    
                    
                    8,263,968
                    
                    
                    4,041,081
                    
                    
                    13,356,963
                    
                    
                    7,849,163COST
                        OF GOOD SOLD
                    
                    
                    5,859,008
                    
                    
                    2,960,726
                    
                    
                    9,264,425
                    
                    
                    5,420,276GROSS
                        PROFIT
                    
                    
                    2,404,960
                    
                    
                    1,080,355
                    
                    
                    4,092,538
                    
                    
                    2,428,887OPERATING
                        EXPENSESResearch
                        and development
                    
                    
                    543
                    
                    
                    184,677
                    
                    
                    100,655
                    
                    
                    239,341Selling,
                        general and administrative
                    
                    
                    960,924
                    
                    
                    546,287
                    
                    
                    1,604,770
                    
                    
                    1,049,755Reverse
                        acquisition
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    323,770Total
                        operating expenses
                    
                    
                    961,467
                    
                    
                    730,964
                    
                    
                    1,705,425
                    
                    
                    1,612,866INCOME
                        FROM OPERATIONS
                    
                    
                    1,443,493
                    
                    
                    349,391
                    
                    
                    2,387,113
                    
                    
                    816,021OTHER
                        INCOME (EXPENSE), NET
                    
                    
                    (7,118
                    )
                    
                    2,380
                    
                    
                    (10,090
                    )
                    
                    (7,112
                    )INCOME
                        BEFORE INCOME TAXES
                    
                    
                    1,436,375
                    
                    
                    351,771
                    
                    
                    2,377,023
                    
                    
                    808,909AND
                        MINORITY INTERESTPROVISION
                        FOR INCOME TAXES
                    
                    
                    338,326
                    
                    
                    88,676
                    
                    
                    538,285
                    
                    
                    254,257INCOME
                        BEFORE MINORITY INTEREST
                    
                    
                    1,098,049
                    
                    
                    263,095
                    
                    
                    1,838,738
                    
                    
                    554,652MINORITY
                        INTEREST
                    
                    
                    29,085
                    
                    
                    -
                    
                    
                    52,117
                    
                    
                    -NET
                        INCOME
                    
                    
                    1,127,134
                    
                    
                    263,095
                    
                    
                    1,890,855
                    
                    
                    554,652OTHER
                        COMPREHENSIVE INCOMEForeign
                        currency translation adjustment
                    
                    
                    559,325
                    
                    
                    26,858
                    
                    
                    559,325
                    
                    
                    71,623COMPREHENSIVE
                        INCOME
                    
                    $
                    1,686,459
                    
                    $
                    289,953
                    
                    $
                    2,450,180
                    
                    $
                    626,275Earning
                        per share - basic
                    
                    $
                    0.09
                    
                    $
                    0.04
                    
                    $
                    0.18
                    
                    $
                    0.08Earning
                        per share - diluted
                    
                    
                    0.08
                    
                    
                    0.04
                    
                    $
                    0.15
                    
                    $
                    0.07Weighted
                        average number of shares outstanding - basic
                    
                    
                    12,160,111
                    
                    
                    7,186,389
                    
                    
                    10,692,414
                    
                    
                    7,186,389Weighted
                        average number of shares outstanding - diluted
                    
                    
                    14,232,457
                    
                    
                    7,471,339
                    
                    
                    12,764,759
                    
                    
                    7,471,339
  
  4
  CHINA
                      MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED
                      STATEMENTS OF SHAREHOLDERS' EQUITYFOR
                      THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
  Preferred
                      Stock
                  
                  Common
                      Stock
                  
                  
                  
                  
                  
                  
                  
                  Retained
                      Earnings
                  
                  Accumulated
                      otherShares
                  
                  Par
                      Value
                  
                  Shares
                  
                  Par
                      Value
                  
                  Paid-in capital
                  
                  Deferred 
                      Compensation
                  
                  Contribution
                    receivable
                  
                  Statutory
                      reserves
                  
                  Unrestricted
                  
                  comprehensive
                    income
                  
                  TotalsBALANCE,
                      December 31, 2005
                  
                  -
                  
                  $
                  -
                  
                  
                  6,530,000
                  
                  $
                  653
                  
                  $
                  120,347
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  722,909
                  
                  $
                  3,813,665
                  
                  $
                  101,132
                  
                  $
                  4,758,706Net
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  554,652
                  
                  
                  
                  
                  
                  554,652Reverse
                      acquisition, February 8, 2006
                  
                  
                  
                  
                  
                  
                  
                  1,028,000
                  
                  
                  103
                  
                  
                  (32,501
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (32,398
                  )Shares
                      redeemed in connection with
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -reverse
                      acquisition
                  
                  
                  
                  
                  
                  
                  
                  (928,000
                  )
                  
                  (93
                  )
                  
                  (167,509
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (167,602
                  )Shares
                      issued for acquisition services
                  
                  
                  
                  
                  
                  
                  
                  750,000
                  
                  
                  75
                  
                  
                  238,694
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  238,769Issuance
                      of preferred stock
                  
                  3,120,000
                  
                  
                  312
                  
                  
                  
                  
                  
                  
                  
                  
                  3,782,688
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,783,000Foreign
                      currency translation adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  71,623
                  
                  
                  71,623BALANCE,
                      June 30, 2006 (Unaudited)
                  
                  3,120,000
                  
                  $
                  312
                  
                  
                  7,380,000
                  
                  $
                  738
                  
                  $
                  3,941,719
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  722,909
                  
                  $
                  4,368,317
                  
                  $
                  172,755
                  
                  $
                  9,206,750Net
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,233,222
                  
                  
                  
                  
                  
                  4,233,222Adjustment
                      of statutory reserve
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  622,297
                  
                  
                  (622,297
                  )
                  
                  
                  
                  
                  -Re-evaluation
                      of fair value of
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -shares
                      issued for acquisition services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  368,731
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  368,731Preferred
                      stock converted to common stock
                  
                  (780,000
                  )
                  
                  (78
                  )
                  
                  780,000
                  
                  
                  78
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Stock
                      options granted
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  86,521
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  86,521Contribution
                      receivable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (961,500
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (961,500
                  )Foreign
                      currency translation adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  200,168
                  
                  
                  200,168BALANCE,
                      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
                  
                  
                  
                  
                  
                  
                  
                  3,315,790
                  
                  
                  332
                  
                  
                  5,717,789
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,718,121Stock
                      option granted
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  49,888
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  49,888Common
                      stock issued for services
                  
                  
                  
                  
                  
                  
                  
                  57,500
                  
                  
                  6
                  
                  
                  179,394
                  
                  
                  (44,850
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  134,550Foreign
                      currency translation adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  559,325
                  
                  
                  559,325BALANCE,
                      June 30, 2007 (Unaudited)
                  
                  606,255
                  
                  $
                  61
                  
                  
                  13,306,738
                  
                  $
                  1,331
                  
                  $
                  10,344,038
                  
                  $
                  (44,850
                  )
                  $
                  (961,500
                  )
                  $
                  1,345,206
                  
                  $
                  9,870,097
                  
                  $
                  932,248
                  
                  $
                  21,486,631
 5
  CHINA
                      MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED
                      STATEMENTS OF CASH FLOWSFOR
                      THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006(Unaudited)2007
                  
                  2006CASH
                      FLOWS FROM OPERATING ACTIVITIES:Net
                      income
                  
                  $
                  1,890,855
                  
                  $
                  554,652Adjustments
                      to reconcile net income to cashused
                      in operating activities:Minority
                      interest
                  
                  
                  (52,117
                  )
                  
                  -Depreciation
                      and amortization
                  
                  
                  130,330
                  
                  
                  66,355Provision
                      for doubtful accounts
                  
                  
                  876
                  
                  
                  -Loss
                      on sale of assets
                  
                  
                  -
                  
                  
                  15,613Stock
                      issued for services
                  
                  
                  134,550
                  
                  
                  238,769Employee
                      stock option
                  
                  
                  50,258
                  
                  
                  -Loss
                      on currency exchange
                  
                  
                  19,620
                  
                  
                  -Change
                      in operating assets and liabilities:(Increase)
                      decrease in assets:Accounts
                      receivable, trade
                  
                  
                  521,256
                  
                  
                  (1,110,262
                  )Inventories
                  
                  
                  (2,500,265
                  )
                  
                  (1,328,887
                  )Other
                      receivables
                  
                  
                  -
                  
                  
                  (284,807
                  )Advances
                      to suppliers
                  
                  
                  (3,356,149
                  )
                  
                  (771,322
                  )Other
                      current assets
                  
                  
                  (15,919
                  )
                  
                  -Increase
                      (decrease) in liabilities:Accounts
                      payable, trade
                  
                  
                  30,328
                  
                  
                  567,786Other
                      payables and accrued liabilities
                  
                  
                  (67,809
                  )
                  
                  (83,195
                  )Other
                      payables - related parties
                  
                  
                  30,772
                  
                  
                  (32,398
                  )Customer
                      deposits
                  
                  
                  (157,245
                  )
                  
                  764Taxes
                      payable
                  
                  
                  245,048
                  
                  
                  273,054Liquidated
                      damages payable
                  
                  
                  1,133
                  
                  
                  -Net
                      cash used in operating activities
                  
                  
                  (3,094,478
                  )
                  
                  (1,893,878
                  )CASH
                      FLOWS FROM INVESTING ACTIVITIES:Purchase
                      of equipment
                  
                  
                  (214,162
                  )
                  
                  (594,121
                  )Deposit
                      for investment
                  
                  
                  -
                  
                  
                  (625,000
                  )Purchase
                      of intangible asset
                  
                  
                  (132,011
                  )
                  
                  -Net
                      cash used in investing activities
                  
                  
                  (346,173
                  )
                  
                  (1,219,121
                  )CASH
                      FLOWS FROM FINANCING ACTIVITIES:Payments
                      on short-term loans
                  
                  
                  -
                  
                  
                  (95,696
                  )Proceeds
                      from issuance of preferred stock
                  
                  
                  -
                  
                  
                  3,783,000Proceeds
                      from exercise of warrants
                  
                  
                  5,717,789
                  
                  
                  -Cash
                      paid on shares redeemed
                  
                  
                  -
                  
                  
                  (167,602
                  )Net
                      cash provided by financing activities
                  
                  
                  5,717,789
                  
                  
                  3,519,702EFFECT
                      OF EXCHANGE RATE ON CASH
                  
                  
                  54,060
                  
                  
                  9,630INCREASE
                      IN CASH
                  
                  
                  2,331,198
                  
                  
                  416,333CASH,
                      beginning of period
                  
                  
                  371,480
                  
                  
                  91,964CASH,
                      end of period
                  
                  $
                  2,702,678
                  
                  $
                  508,297SUPPLEMENTAL
                      DISCLOSURE OF CASH FLOW INFORMATION:Cash
                      paid for income taxes
                  
                  $
                  504,503
                  
                  $
                  2,900Cash
                      paid for interest expense
                  
                  $
                  -
                  
                  $
                  1,582
  
  6
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
 **Note
        1 - Organization**
 
 Organization
 
 China
        Medicine Corporation (the "Company") is a Delaware corporation, incorporated
        on
        February 10, 2005 under the name Lounsberry Holdings III, Inc., for the purpose
        of acquiring, or merging with, an operating business. On May 10, 2006, the
        Company changed its corporate name to China Medicine Corporation.
 
 Effective
        February 8, 2006, the Company entered into a Stock Exchange Agreement ("Exchange
        Agreement") with Guangzhou Konzern Medicine Co., Ltd. ("Konzern"). Pursuant
        to
        the Exchange Agreement, the Company, at closing, acquired all of the capital
        of
        Konzern from Konzern’s three principal shareholders (“Konzern Stockholders”) in
        exchange for 6,530,000 shares of the Company's common stock. For accounting
        purposes, the acquisition of Konzern was treated as a recapitalization of
        Konzern with Konzern as the acquirer. The historical financial statements
        prior
        to February 8, 2006 are those of Konzern. Contemporaneously with the reverse
        acquisition, the Company redeemed 928,000 shares of common stock from its
        then
        principal stockholder who is not affiliated with the Konzern Stockholders
        or any
        member of the investor group for $167,602 and paid off loans from a related
        party for $32,398. The 928,000 shares purchased constituted approximately
        90.3%
        of the 1,028,000 shares of common stock outstanding prior to the issuance
        of the
        shares of common stock pursuant to the Exchange Agreement. We issued 750,000
        shares of common stock as disclosed in Note 15.
 
 Konzern
        was privatized from a state-owned medicine company on July 25, 2000 in
        Guangzhou, People's Republic of China (PRC). The registered capital was
        $121,000. The Company has increased Konzern's registered capital by $2,300,000
        with the proceeds received from the sale of preferred stock (see Note 15).
        The
        business license provides for a 24 year term and will end on September 2,
        2024.
 
 On
        July 7, 2006, Konzern entered into a Joint Cooperation Agreement with Guangzhou
        Ji'nan Science & Technology Industrial Group Co., Ltd. ("JSIG") and an
        individual, Mr. Dongsheng Yao, to jointly form Guangzhou Co-win Bioengineering
        Co., Ltd. (“Co-win”) for the purpose of development and application of
        aflatoxin-detoxifizyme ("ADTZ"). Konzern does not have any material relationship
        with JSIG or Mr. Yao other than this Agreement. The business licenses were
        approved by Guangzhou Commercial and Administrative Bureaus on October 27,
        2006.
        The registered capital is RMB 25,000,000, approximately $3,200,000 with a
        2-year
        term from June 5, 2006 to June 5, 2008. As of June 30, 2007, Konzern owns
        a 70%
        ownership in Co-win.
 
 Operating
        Activities
 
 The
        Company’s business operations consist of the wholesale of prescription and over
        the counter medicines, traditional Chinese medicines, which are medicines
        derived from Chinese herbs, dietary supplements, medical instruments and
        the
        sale of medical formula.
 
 7
 CHINA
              MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
              30,
              2007
 (Unaudited)
  **Note
        2 - Summary of significant accounting policies**
 
 Basis
        of presentation
 
 The
        consolidated financial statements of the Company reflect its wholly-owned
        subsidiary, Konzern, and its 70% owned subsidiary, Co-win, both are located
        in
        the PRC. The consolidated financial statements have been presented as if
        the
        equity Exchange Agreement of the subsidiary (Konzern) occurred at the beginning
        of 2006 due to common management and ownership.
 
 The
        accompanying financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        All
        material transactions and balances have been eliminated in the
        consolidation.
 
 Use
        of estimates
 
 In
        preparing financial statements in conformity with generally accepted accounting
        principles, management is required to make estimates and assumptions that
        affect
        the reported amounts of assets and liabilities and the disclosure of contingent
        assets and liabilities at the date of the financial statements and revenues
        and
        expenses during the reported period. Actual results could differ from those
        estimates.
 
 Cash
        and concentration of risk
 
 For
        purposes of the cash flow statements, the Company considers all highly liquid
        investments with original maturities of three months or less at the time
        of
        purchase to be cash equivalents. Cash includes cash on hand and demand deposits
        in accounts maintained with state owned banks within PRC and the United
        States.
 
 The
        Company's operations may be adversely affected by significant political,
        economic and social uncertainties in China. Although the Chinese government
        has
        pursued economic reform policies in the past, there is no assurance that
        the
        Chinese government will continue to pursue such policies or that such policies
        may not be significantly altered, especially in the event of a change in
        leadership, social or political disruption or unforeseen circumstances affect
        China's political, economic and social conditions. There is also no guarantee
        that the Chinese government's pursuit of economic reforms will be consistent
        or
        effective.
 
 Financial
        instruments, which subject the Company to concentration of credit risk, consist
        of cash. The Company maintains balances at financial institutions which,
        from
        time to time, may exceed Federal Deposit Insurance Corporation insured limits
        for the bank that is located in the Unites States, no deposits with the state
        owned banks within the PRC are covered by insurance. As of June 30, 2007
        and
        December 31, 2006, the Company had deposits in excess of federally insured
        limits total of $1,937,773 and $225,467 ,
        respectively. The Company has not experienced any losses in such accounts
        and
        believes it is not exposed to any significant risks on its cash in bank
        accounts.
 8
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  Accounts
        receivable, trade
 
 The
        Company extends unsecured credit to its customers. Management reviews its
        accounts receivable on a regular basis to determine if the bad debt allowance
        is
        adequate for potential uncollectible amounts due to deterioration of customer
        operations. The allowance for doubtful accounts as of June 30, 2007 and December
        31, 2006 amounted to $34,366 and $34,021 ,
        respectively.
 
 Inventories
 
 Inventories
        are stated at the lower of cost or market value, cost is determined using
        the
        weighted average method.
 
 Equipment
 
 Equipment
        is stated at the actual cost of acquisition less accumulated depreciation
        and
        amortization. Depreciation and amortization are provided for in amounts
        sufficient to relate the cost of depreciation of assets to operations over
        their
        estimated service lives, principally on a straight-line basis. The estimated
        lives used in determining depreciation are:
  Furniture
              3
                  - 5 yearsEquipment
              3
                  - 5 yearsMotor
                  vehicles
              4
                  - 10 years
 
 The
        residual value is estimated to be 5% of the actual cost.
 
 The
        cost and related accumulated depreciation of assets sold or otherwise retired
        are eliminated from the accounts and any gain or loss is included in the
        statement of operations. Maintenance, repairs and minor renewals are expensed
        as
        incurred.
 
 Intangibles
 
 Under
        the Statement of Accounting Standards ("SFAS") No.142, "Goodwill and Other
        Intangible Assets", all goodwill and certain intangible assets determined
        to
        have indefinite lives will not be amortized but will be tested for impairment
        at
        least annually. Intangible assets other than goodwill will be amortized over
        their useful lives and reviewed for impairment in accordance with SFAS No.
        144,
        "Accounting for Impairment or Disposal of Long-Lived Assets".
 
 The
        Company acquired the technology to manufacture aflatoxin-detoxifizyme ("ADTZ")
        amounted $131,500. The Company will begin amortizing costs once manufacturing
        begins.
 9
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  Impairment
        of long-lived assets
 
 Per
        SFAS No. 144, long-lived assets will be analyzed for indications of impairment.
        Impairment of long-lived assets is assessed by the Company whenever there
        is an
        indication that the carrying amount of the asset may not be recovered.
        Recoverability of these assets is determined by comparing the forecasted
        undiscounted cash flows generated by those assets to the assets' net carrying
        value. The amount of impairment loss, if any, is measured as the difference
        between the net book value of the assets and the estimated fair value of
        the
        related assets.
 
 The
        Company periodically evaluates the recoverability of long-lived assets by
        measuring the carrying amount of the assets against the estimated undiscounted
        future cash flows associated with them. At the time such flows of certain
        long-lived assets are not sufficient to recover the carrying value of such
        assets, the assets are adjusted to their fair values.
 
 Revenue
        recognition
 
 The
        Company recognizes revenue when all four of the following criteria are met:
        (1)
        persuasive evidence has been received that an arrangement exists; (2) delivery
        of the products and/or services has occurred; (3) the selling price is fixed
        or
        determinable; and (4) collectibility is reasonably assured. The Company follows
        the provisions of SAB No. 104 which sets forth guidelines in the timing of
        revenue recognition based upon factors such as passage of title, installation,
        payments and customer acceptance. Any amounts received prior to satisfying
        the
        Company's revenue recognition criteria is recorded as deferred
        revenue.
 
 Sales
        revenue represents the invoiced value of goods, net of a value-added tax
        (VAT).
        All of the Company's products that are sold in the PRC are subject to a Chinese
        value-added tax at a rate of 0% to 17% of the gross sales price. This VAT
        may be
        offset by VAT paid by the Company on raw materials and other materials included
        in the cost of producing their finished product.
 
 VAT
        on
        sales and VAT on purchases amounted to $2,149,918 and $1,757,395 for the
        six
        months ended June 30, 2007 and $1,140,594 and $1,063,415 for the six months
        ended June 30, 2006, respectively. Sales and purchases are recorded net of
        VAT
        collected and paid as the Company acts as an agent for the government. VAT
        taxes
        are not impacted by the income tax holiday.
 
 Shipping
        and handling costs related to costs of goods sold are included in selling,
        general and administrative costs and totaled $94,583 and $126,766 for the
        six
        months ended June 30, 2007 and 2006 and totaled $77,158 and $85,394 for the
        three months ended June 30, 2007 and 2006.
 10
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  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, 2007 and 2006.
 
 Research
        and development costs
 
 Research
        and development costs are expensed as incurred. The costs of material and
        equipment that are acquired or constructed for research and development
        activities, and have alternative future uses, either in research and
        development, marketing, or sales, are classified as property and equipment
        or
        depreciated over their estimated useful lives. Research
        and development expense amounted to $100,655 and $239,341 for the six months
        ended June 30, 2007 and 2006, respectively. Research and development expense
        amounted to $543 and $184,677 for the three months ended June 30, 2007 and
        2006,
        respectively.
  Foreign
        currency translation
  The
        reporting currency of the Company is the US dollar. The Company uses their
        local
        currency, Renminbi (RMB), as their functional currency. Results of operations
        and cash flow are translated at average exchange rates during the period,
        and
        assets and liabilities are translated at the unified exchange rate as quoted
        by
        the People’s Bank of China at the end of the period. Translation adjustments
        resulting from this process are included in accumulated other comprehensive
        income in the statement of shareholders’ equity.
  Translation
        adjustments amounted to $932,248 and $372,923 as of June 30, 2007 and December
        31, 2006, respectively. Asset and liability accounts at June 30, 2007 were
        translated at 7.60 RMB to $1.00 USD as compared to 7.80 RMB at December 31,
        2006. Equity accounts were stated at their historical rate. The average
        translation rates applied to income statements accounts for the six months
        ended
        June 30, 2007 and 2006 were 7.71 RMB and 8.05 RMB, respectively. Cash flows
        are
        also translated at average translation rates for the period, therefore, amounts
        reported on the statement of cash flows will not necessarily agree with changes
        in the corresponding balances on the balance sheet.
 
 Transaction
        gains and losses that arise from exchange rate fluctuations on transactions
        denominated in a currency other than the functional currency are included
        in the
        results of operations as incurred. Historically, the Company has not entered
        any
        currency trading or hedging transactions, although there is no assurance
        that
        the Company will not enter into such transactions in the future.
 
 Income
        taxes
 
 The
        Company adopted Statement of Financial Accounting Standards No. 109, "Accounting
        for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of deferred
        income tax liabilities and assets for the expected future tax consequences of
        temporary differences between income tax basis and financial reporting basis
        of
        assets and liabilities. Provision for income taxes consist of taxes currently
        due plus deferred taxes. There are no deferred tax amounts at June 30, 2007
        and
        December 31, 2006.
 11
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  The
        Charge for taxation is based on the results for the year as adjusted for
        items,
        which are non-assessable or disallowed. It is calculated using tax rates
        that
        have been enacted or substantially enacted by the balance sheet
        date.
  Deferred
        tax is accounted for using the balance sheet liability method in respect
        of
        temporary differences arising from differences between the carrying amount
        of
        assets and liabilities in the financial statements and the corresponding
        tax
        basis used in the computation of assessable tax profit. In principle, deferred
        tax liabilities are recognized for all taxable temporary differences, and
        deferred tax assets are recognized to the extent that it is probably that
        taxable profit will be available against which deductible temporary differences
        can be utilized. Deferred tax is calculated at the tax rates that are expected
        to apply to the period when the asset is realized or the liability is settled.
        Deferred tax is charged or credited in the income statement, except when
        it
        related to items credited or charged directly to equity, in which case the
        deferred tax is also dealt with in equity. Deferred tax assets and liabilities
        are offset when they relate to income taxes levied by the same taxation
        authority and the Company intends to settle its current tax assets and
        liabilities on a net basis.
 
 The
        Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
        Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
        benefit only if it is “more likely than not” that the tax position would be
        sustained in a tax examination, with a tax examination being presumed to
        occur.
        The amount recognized is the largest amount of tax benefit that is greater
        than
        50% likely of being realized on examination. For tax positions not meeting
        the
“more likely than not” test, no tax benefit is recorded. The adoption had no
        affect on the Company’s financial statements.
 
 China
        Medicine Corporation was incorporated in the United States and has incurred
        net
        operating losses for income tax purposes for the six months ended June 30,
        2007
        and 2006. The net operating loss carry forwards for United States income
        taxes
        amounted to $1,051,354 which may be available to reduce future years’ taxable
        income. These carry forwards will expire, if not utilized, through 2027 and
        2025. Management believes that the realization of the benefits from these
        losses
        appears uncertain due to the Company’ limited operating history and continuing
        losses for United States income tax purposes. Accordingly, the Company has
        provided a 100% valuation allowance on the deferred tax asset benefit to
        reduce
        the asset to zero. The valuation allowance at June 30, 2007 was $357,000.
        The
        net change in the valuation allowance for the six months ended June 30, 2007
        was
        an increase of $357,000. Management will review this valuation allowance
        periodically and make adjustments as warranted .
  Fair
        value of financial instruments
 
 The
        carrying amounts of the Company's financial instruments (including accounts
        receivable, shareholder loans and notes payable) approximate fair value due
        to
        the relatively short period to maturity of these instruments.
 12
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  Stock-based
        compensation
 
 The
        Company adopted the Statement of Financial Accounting Standards No. 123 (revised
        2004), "Share-Based Payments," ("FAS123R"), which established standards for
        the
        accounting for transactions in which an entity exchange its equity instruments
        for goods or services. This statement require a public entity to measure
        the
        cost of employee services received in exchange for an award of equity
        instruments based on the grant-date fair value of the award (with limited
        exceptions). That cost will be recognized over the period during which an
        employee is required to provide service in exchange for the award.
  Major
        suppliers
 
 For
        the six months ended June 30, 2007 and 2006, five suppliers accounted for
        approximately 57 %
        and 68%, respectively, of the Company's purchases. These five suppliers
        represent 31% of the Company’s total advances to suppliers as of June 30, 2007.
 
 Major
        customers
 
 For
        the six months ended June 30, 2007 and 2006, five customers accounted for
        approximately 39% and 60%, respectively, of the Company's sales. The accounts
        receivable balance of these six customers amounted $2,941,835 as of June
        30,
        2007.
 
 Earnings
        per share
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share is computed
        by dividing income available to common stockholders by the weighted average
        common shares outstanding during the period. Diluted earnings per share takes
        into account the potential dilution that could occur if securities or other
        contracts to issue common stock were exercised and converted into common
        stock.
 
 The
        following is a reconciliation of the basic and diluted earnings per share
        computations for the six and three months ended June 30:
 13
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  2007
                
                2006Unaudited
                
                UnauditedFor
                    the six months ended June 30:Net
                    income for earnings per share
                
                $
                1,890,855
                
                $
                554,652Shares
                    of common stock and commonstock
                    equivalents:Weighted
                    average shares used in basic computation
                
                
                10,692,414
                
                
                7,186,389Diluted
                    effect of stock options, warrants,and
                    preferred stocks
                
                
                2,072,345
                
                
                284,950Weighted
                    average shares used in diluted computation
                
                
                12,764,759
                
                
                7,471,339Earnings
                    per share:Basic
                
                $
                0.18
                
                $
                0.08Diluted
                
                $
                0.15
                
                $
                0.07For
                    the three months ended June 30:Net
                    income for earnings per share
                
                $
                1,127,134
                
                $
                263,095Shares
                    of common stock and commonstock
                    equivalents:Weighted
                    average shares used in basic computation
                
                
                12,160,111
                
                
                7,186,389Diluted
                    effect of stock options, warrants,and
                    preferred stocks
                
                
                2,072,346
                
                
                284,950Weighted
                    average shares used in diluted computation
                
                
                14,232,457
                
                
                7,471,339Earnings
                    per share:Basic
                
                $
                0.09
                
                $
                0.04Diluted
                
                $
                0.08
                
                $
                0.04
  On
        April 2, 2007, the Company granted a total of 15,000 stock options to three
        of
        its independent directors. The Options will become exercisable for 7,500
        shares
        of commons stock six months from the date of grant and the remaining 7,500
        options, eighteen months from the date of grant. The options are anti-dilutive
        and are not included in the calculation.
 
 Reclassifications
 
 Certain
        prior period amounts have been reclassified to conform to current period
        presentation. These reclassifications have no effect on net income or cash
        flows.
 
 Recently
        issued accounting pronouncements
 
 In
        June
        2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF No.
        06-3, How Taxes Collected from Customers and Remitted to Governmental
        Authorities Should Be Presented in the Income Statement (EITF No. 06-3).
        EITF
        No. 06-3 permits that such taxes may be presented on either a gross basis
        or a
        net basis as long as that presentation is used consistently. The adoption
        of
        EITF No. 06-3 on January 1, 2007 did not impact our consolidated financial
        statements. We present the taxes within the scope of EITF No. 06-3 on a net
        basis.
 14
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  In
        July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
        Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”
(“FIN 48”). The Company adopted Interpretation No. 48 on January 1, 2007. (See
        Note 2 - Income taxes)
 
 In
        September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
        which
        addresses the measurement of fair value by companies when they are required
        to
        use a fair value measure for recognition or disclosure purposes under GAAP.
        SFAS
        No. 157 provides a common definition of fair value to be used throughout
        GAAP
        which is intended to make the measurement of fair value more consistent and
        comparable and improve disclosures about those measures. SFAS No. 157 will
        be
        effective for an entity's financial statements issued for fiscal years beginning
        after November 15, 2007. The Company is currently evaluating the effect SFAS
        No.
        157 will have on its consolidated financial position, liquidity, or results
        of
        operations.
 
 In
        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 (“SFAS 159”). SFAS 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 SFAS
        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. SFAS 159 also establishes presentation and
        disclosure  requirements
        designed to facilitate comparisons between companies that choose different
        measurement attributes for similar types of assets and liabilities.
        SFAS  159
        will be effective in the first quarter of fiscal 2009. The Company is evaluating
        the impact that this statement will have on its consolidated
        financial  statements.
 
 In
        June 2007, the
        FASB
        issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
        Payments for Goods or Services Received for use in Future Research and
        Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
        advance payments for goods or services that used or rendered for research
        and
        development activities should be expensed when the advance payment is made
        or
        when the research and development activity has been performed. Management
        is
        currently evaluating the effect of this pronouncement on financial
        statements.
  **Note
        3 - Contribution receivable**
 
 On
        July 7, 2006, Konzern, entered into a Joint Cooperation Agreement (the
“Agreement”) with JSIG and an individual, Mr. Dongsheng Yao, to jointly form a
        new Chinese company for the purpose of development and application of
        aflatoxin-detoxifizyme ("ADTZ"). Konzern has no material relationships with
        JSIG
        or Mr. Yao other than the Agreement.
 15
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
 Ji'nan
        University, for whom JSIG is the agent, is the holder of the four Chinese
        patents on ADTZ of which Mr. Yao is the inventor. JSIG and Mr. Yao contributed
        the four patents into the joint venture company for which they will each
        hold a
        15% equity interest in the joint venture company. In addition, JSIG and Mr.
        Yao
        are to be paid a total of approximately $125,000, as a technology contribution
        fee from the joint venture company. The agreement provides that the Company
        is
        to invest a total of approximately $2.2 million, of which $625,000 has been
        paid
        and the balance is due within two years, based on the development effort,
        for
        which the Company will receive a 70% equity interest in the joint venture
        company. JSIG is to transfer to the joint venture four patents covering
        ADTZ.
 
 The
        contribution receivable represents the capital contribution to be made by
        Guangzhou Jinan Keji Chanyu Group Ltd. and Dongsheng Yang to Co-win by June
        30,
        2007. The contribution receivable amounted $872,371 as of June 30,
        2007.
 
 The
        agreement provides that the joint venture entity will have the intellectual
        property rights to any products developed by the joint venture pursuant to
        the
        agreement. The Company requires government approval as to the organization
        and
        business license for the joint venture company. The business license for
        the
        operation of the joint venture was issued by Guangzhou Commercial and
        Administrative Bureaus on October 27, 2006.
 
 **Note
        4 - Inventories**
 
 Inventories
        consisted of the following:
  June
                    30,
                
                December
                    31,2007
                
                2006UnauditedChemical
                    Medicine
                
                $
                3,004,380
                
                $
                1,897,789Traditional
                    Chinese Medicine
                
                
                1,445,272
                
                
                2,678Totals
                
                $
                4,449,652
                
                $
                1,900,467
  **Note
        5 - Advances to suppliers**
 
 Advances
        to suppliers for inventory purchases and future research and development
        service
        as of June 30, 2007 and December 31, 2006 amounted to $7,538,518 and $4,077,412,
        respectively.
 
 **Note
        6 - Equipment**
 
 Equipment
        consisted of the following:
 16
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
 June
                    30,
                
                December
                    31,2007
                
                2006UnauditedFurniture
                    and fixtures
                
                $
                296,660
                
                $
                205,182Equipment
                
                
                1,200,147
                
                
                1,076,368Motor
                    vehicles
                
                
                268,642
                
                
                227,933Total
                
                
                1,765,449
                
                
                1,509,483Less
                    accumulated depreciation
                
                
                (424,465
                )
                
                (294,172
                )Equipment,
                    net
                
                $
                1,340,984
                
                $
                1,215,311
  Depreciation
        expense for the six months ended June 30, 2007 and 2006 amounted to $130,293
        and
        $21,478 respectively.
 
 **Note
        7 - Customer deposits**
 
 The
        Company requires their customers to deposit monies with the Company when
        they
        place an order for their products. The Company does not pay interest on these
        amounts. Customer deposits amounted to $175,688 and $17,980 as of June 30,
        2007
        and December 31, 2006, respectively.
 
 **Note
        8 - Taxes**
 
 The
        Company is organized in the United States and no tax benefit is expected
        from
        tax credits in the future.
 
 Beginning
        January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
        existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
        (“FIEs”).
 The
        key
        changes are:
 
 a.
              The
                  new standard EIT rate of 25% will replace the 33% rate currently
                  applicable to both DES and FIEs, except for High Tech companies
                  who pays a
                  reduced rate of 15%;
 
 b.
              Companies
                  established before March 16, 2007 will continue to enjoy tax holiday
                  treatment approved by local government for a grace period of either
                  for
                  the next 5 years or until the tax holiday term is completed, whichever
                  is
                  sooner. These companies will pay the standard tax rate as defined
                  in point
                  “a” above when the grace period expires.
 
 The
        Company and its subsidiaries were established before March 16, 2007 and
        therefore are qualified to continue enjoying the reduced tax rate as described
        before. Since the detailed guidelines of the new tax law were not publicized
        yet, the Company can not determine what the new tax rate (15% or 25%) will
        be
        applicable to the Company and its subsidiaries after the end of their respective
        tax holiday terms.
 
 Under
        the
        existing Income Tax Laws of PRC, the Company is generally subject to an income
        tax at an effective rate of 33% (30% state income taxes plus 3% local income
        taxes) on income reported in the statutory financial statements after
        appropriate tax adjustments, unless the enterprise is located in a specially
        designated region where it allows foreign enterprises a two-year income tax
        exemption and a 50% income tax reduction for the following three years.
 17
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  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-month periods ending June 30, 2007 and
        2006
        amounted $538,285 and $254,257 respectively. The net effect on earnings per share if the income tax had
        been
        applied would decrease earnings per share from $0.18 to $0.12 for the six months ended June 30, 2007 and from $0.08 to $0.04 for the six months ended June 30, 2006, respectively.
 
 The
        provision for income taxes at June 30 consisted of the following:
  2007
                
                2006Unaudited
                
                UnauditedProvision
                    for China Income Tax
                
                $
                484,456
                
                $
                254,257Provision
                    for Local Tax
                
                
                53,829
                
                
                -Total
                
                $
                538,285
                
                $
                254,257
 
 The
        following table reconciles the U.S. statutory rates to the Company's effective
        tax rate for the six months ended June 30:
  2007
                
                2006U.S.
                    Statutory rates
                
                
                34.0
                %
                
                34.0
                %Foreign
                    income not reognized in USA
                
                
                (34.0
                )
                
                (34.0
                )China
                    income taxes
                
                
                33.0
                
                
                33.0Income
                    tax exemption
                
                
                (16.5
                )
                
                (16.5
                )Effective
                    tax rate
                
                
                16.5
                %
                
                16.5
                %
  Taxes
        payable consisted of the following at June 30:
  June
                    30,
                
                December
                    31,2007
                
                2006UnauditedIncome
                    taxes payable
                
                $
                29,215
                
                $
                (15,380
                )Individual
                    income tax
                
                
                999
                
                
                487Value
                    added tax
                
                
                28,257
                
                
                310,795Total
                
                $
                58,471
                
                $
                295,902
 18
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  **Note
        9 - Related party transactions**
 
 In
        2006,
        amounts due to related parties totaled $30,000. Those amounts were generated
        from making cash advances to or from the shareholders for ordinary business
        expenses. Total of $30,000 has been paid back to shareholders in April,
        2007.
 
 **Note
        10 - Minority interest**
 
 Minority
        interest consists of the interest of minority shareholders in Co-win. The
        Company’s wholly owned subsidiary Konzern owns 70% ownership interest in
        Co-win.
 
 **Note
        11 - Commitments and contingencies**
 
 The
        Company leases its facilities under short-term and long-term, non-cancelable
        operating lease agreements expiring through August 2009. The non-cancelable
        operating lease agreement states that the Company pays certain operating
        expenses applicable to the leased premises.
 
 As
        of June 30, 2007, the future minimum annual lease payments required are as
        follows:
 
 Year
                  Ending December 31,
              
              Amount2007
              $
              130,9152008
              
              134,0112009
              
              134,011Thereafter
              
              
              ---
 
 Total
        rental expense for the six months ended June 30, 2007 and 2006 amounted to
        $52,156 and $20,886, respectively. For the three months ended June 30, 2007
        and
        2006, total rental expense amounted to $14,066 and $9,271,
        respectively.
 
 **Notes
        12 - Supplemental disclosure of cash flows**
 
 In
        the six months ended June 30, 2007, non-cash financial activities include
        1,733,745 shares of preferred stock converted to 1,773,448 shares of common
        stock.
 
 57,500
        shares of common stock was issued for consulting services to be delivered
        over
        one year.
 
 During
        the period ended June 30, 2007, the Company issued 49,888 shares of stock
        options to employees and independent directors.
 19
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  **Note
        13 - 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, 2007 and
        2006, the Company did not transfer any fund to this reserve. The surplus
        reserve
        fund is non-distributable other than during liquidation and can be used to
        fund
        previous years’ losses, if any, and may be utilized for business expansion or
        converted into share capital by issuing new shares to existing shareholders
        in
        proportion to their shareholding or by increasing the par value of the shares
        currently held by them, provided that the remaining reserve balance after
        such
        issue is not less than 25% of the registered capital.
 
 Enterprise
        fund
 
 The
        enterprise fund may be used to acquire plant and equipment or to increase
        the
        working capital to expend on production and operation of the business. No
        minimum contribution is required and the company did not make any contribution
        to this fund for the six months ended June 30, 2007.
  **Note
        14 - 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 $20,236 and $12,258 for the six months
        ended June 30, 2007 and 2006, respectively.
 
 **Note
        15 - 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.
 20
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  The
        Series A Convertible Preferred Stock is convertible at the option of the
        holder
        at any time, into 3,120,000 shares of common stock, subject to adjustment
        set
        forth in the PSPA. No dividends are payable on the preferred stock and dividends
        may not be paid on the common stock while the preferred stock is outstanding.
        The preferred stock is not redeemable but has a liquidation preference of
        $1.25
        per share. Holders of the preferred stock are not entitled to vote, except
        on
        matters that would adversely affect their rights.
  The
        warrants have a term of five years and are exercisable by the holder at any
        time
        within the term. With certain exceptions, if the Company issues common stock
        at
        a price, or warrants or other convertible securities with an exercise or
        conversion price, which is less than the exercise price of the warrants,
        the
        exercise price of the warrants will be reduced to the sales price, exercise
        price or conversion price, as the case maybe, of such other securities. However,
        in such circumstances, the number of shares obtainable on exercise of the
        warrants is not changed.
 
 The
        conversion rate of the Series A Preferred Stock and the exercise price of
        the
        warrants (but not the number of shares obtainable on exercise) are subject
        to
        adjustment in certain events, including the failure to achieve specified
        levels
        of adjusted earnings before interest, taxes, depreciation and amortization
        or
        fully diluted pre-tax income per share, computed as set forth in the applicable
        agreements. Because pre-tax targets were not met, the conversion price of
        the
        preferred stock would have 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 would have been reduced from $1.75 to $1.70. There would
        have
        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. The
        Company is currently evaluating the impact of this amendment.. 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 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.
 21
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
  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 registrable securities or more liquidated
        damages of approximately $19,000 per month will be incurred.
 
 The
        Company reviewed the terms of the Series A Preferred Stock and the Warrants,
        in
        accordance with FAS 133 and EITF Issue 00-19. The conversion option related
        to
        the Series A Preferred Stock is an embedded derivative instrument but the
        risks
        and rewards of that embedded derivative are considered to be clearly and
        closely
        related to the risks and rewards of the host instrument and, accordingly,
        the
        embedded derivative instrument has not been bifurcated. The Company has reviewed
        the requirements of EITF Issue 00-19 and concluded that the Warrants should
        be
        accounted for as equity instruments. Accordingly, the net proceeds from the
        sale
        of the preferred stock and warrants totaling $3,783,000, representing the
        gross
        proceeds received of $3,900,000, net of $117,000 of commissions, was recorded
        as
        equity.
 
 Common
        stock
 
 The
        Company issued 750,000 shares of common stock to individuals for services
        performed and of which 150,000 shares were issued to Ms. Meiyi Xia and 37,500
        shares were issued to Ms. Lin Li, who are officers of the Company. There
        is no
        established market for the Company's common stock. The value of the stocks
        was
        originally estimated $0.32 per share, totaled of $238,769. The Company
        re-evaluated the fair value of the common stock by determining the fair value
        that would equate the aggregate fair values of the Series A Preferred Stock
        and
        the Warrants to the gross cash proceeds received from the third-party investors,
        keeping all other valuation factors constant. Therefore, the Company valued
        the
        common stock at $0.81 per share for a total of $607,500 for the 750,000 shares
        issued, which amount was expensed during the year ended December 31, 2006.
 
 For
        the
        six months ended June 30, 2007, holders of preferred stock converted 1,733,745
        shares of Series A Convertible Preferred Stock into 1,773,448 shares of common
        stock, par value $0.0001 per share. 1,621,750 shares of warrants were exercised
        at $1.75 per share and 1,694,040 shares of warrants were exercised at $1.70
        per
        share for the six months ended June 30, 2007. The Company received total
        of
        $5,717,789 cash from the exercise of warrants as of June 30, 2007.
 
 The
        company entered into Investor Relations Consulting Agreement with Hayden
        Communication International, Inc. (“HC”) dated October 11, 2006, pursuant to
        which HC is to provide the company public relations consulting services for
        certain consideration including the issuance of 43,125 shares of the Company’s
        common stock. On July 19, 2007, these shares have been issued to HC. Upon
        issuance the shares will be validly issued, fully paid and non-assessable.
        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, $134,550 was expensed for the six months ended
        June 30, 2007.
 22
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
 Stock
        options
 
 On
        February 8, 2006, contemporaneously with the reverse acquisition, the Company
        granted options to purchase 430,000 shares of common stock; 390,000 shares
        were
        granted to officers and other key employees of Konzern. On March 22, 2006,
        the
        Company granted options to purchase an additional 850,000 shares of common
        stock
        to two officers. The options all have an exercise price of $1.25 per share,
        which was the conversion price of the series A preferred stock and not less
        than
        the fair market value on the date of grant, and were granted pursuant to
        the
        Company's 2006 Long-Term Incentive Plan. The 2006 Long-Term Incentive Plan,
        which covers 1,575,000 shares of common stock, and all options granted under
        the
        plan are subject to stockholder approval of the plan. The Company estimated
        that
        the value of the options is between $0.17 and $0.23 per share subject to
        the
        exercise of options. The plan was approved by the stockholders of the Company
        in
        July 2006 .
 
 On
        April 2, 2007, the Company granted a total of 15,000 stock options to three
        of
        its independent directors. The Options become exercisable for 7,500 shares
        of
        commons stock six months from the grant date and the remaining 7,500 options,
        eighteen months from the grant date. For the six months ended June 30, 2007,
        the
        Company expensed $7,330 for the stock options.
 
 SFAS
        No. 123 requires that compensation expense related to options granted be
        calculated based on the fair value of the options as of the date of grant.
        The
        fair value calculations take into account the exercise prices and expected
        lives
        of the options, the current price of the underlying stock, its expected
        volatility, the expected dividends on the stock, and the current risk-free
        interest rate for the expected life of the option. Because there is no trading
        market for the Company's common stock, no historical data on which to base
        an
        estimate of volatility. The Company has considered the volatility that might
        be
        expected to occur for companies comparable to the Company and, selected three
        publicly-traded companies whose business are similar to the Company's and
        who
        are classified in the same SIC code as the Company, have assumed a volatility
        of
        50% as being reasonably representative of the volatility that could be expected
        to occur in the future over the relevant periods. The risk-free rates used
        are
        based on Treasury Constant Maturity rates, published by the U.S. Federal
        Reserve. The weighted average risk-free rate was 4.65%.
 
 Since
        the Company does not have a history of employee stock options, the estimated
        life is based on one half of the sum of the vesting period and the contractual
        life of the option .
        For the six months ended June 30, 2007, the Company expensed $42,558 for
        stock-based compensation.
 23
 CHINA
                MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
                TO
                CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
                30,
                2007
 (Unaudited)
 The
        Company used the Cox-Ross-Rubinstein binomial model to value the options,
        Warrants and the embedded conversion option of the Series A Preferred Stock.
        The
        following assumptions were used in the preparation of the above valuations
        at
        inception:
 
 Assumption
                
                Preferred
                    Stock
                
                Warrants
                    A
                
                Warrants
                    B
                
                Stock
                    optionsCommon
                    stock - fair value
                
                $
                0.81
                
                $
                0.81
                
                $
                0.81
                
                $
                0.81Expected
                    life
                
                
                Perpetual
                
                
                5
                    years
                
                
                5
                    years
                
                
                2.5
                    yearsVolatility
                
                
                
                
                
                50
                %
                
                50
                %
                
                50
                %Risk-free
                    rate
                
                
                
                
                
                4.55
                %
                
                4.55
                %
                
                4.65
                %
 
 OptionsSummary
                    of stock option activities:
                
                Outstanding
                
                Exercisable
                
                Unvested
                
                Weighted-Average
                    Exercise Price
                
                Weighted-Average
                    Remaining Contractual Term (years)Outstanding
                    as of 12/31/06
                
                
                1,370,000
                
                
                516,000
                
                
                854,000
                
                
                1.25
                
                
                1.48Granted
                
                
                15,000
                
                
                -
                
                
                15,000
                
                
                3.00
                
                
                4.75Exercised
                
                
                -
                
                
                -
                
                
                -Forfeited
                
                
                -
                
                
                -
                
                
                -Outstanding
                    as of 6/30/07
                
                
                1,385,000
                
                
                516,000
                
                
                869,000
                
                
                1.23
                
                
                1.52
  WarrantsSummary
                    of warrants activities:
                
                Outstanding
                
                Fair
                    Market Vaue
                
                Weighted-Average
                    Exercise Price
                
                Weighted-Average
                    Remaining Contractual Term (years)Outstanding
                    as of December 31, 2006
                
                
                7,389,476
                
                
                0.81
                
                
                2.13
                
                
                4.17Exercised
                
                
                (1,621,750
                )
                
                3.15
                
                
                1.75(1,694,040
                )
                
                3.05
                
                
                1.70Forfeited
                
                
                -Outstanding
                    as of June 30, 2007
                
                
                4,073,686
                
                
                3.05
                
                
                2.46
  24




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





**Forward
      looking statements**





The
      following is a discussion and analysis of our results of operations and
      should be read in conjunction with our financial statements and related notes
      contained in this Form 10-QSB. This Form 10-QSB contains forward looking
      statements that involve risks and uncertainties. You can identify these
      statements by the use of forward-looking words such as "may", "will", "expect",
      "anticipate", "estimate", "believe", "continue", or other similar words. You
      should read statements that contain these words carefully because they discuss
      our future expectations, contain projections of our future results of operation
      or financial condition or state other "forward-looking" information. We believe
      that it is important to communicate our future expectations to our investors.
      However, there may be events in the future that we are unable to accurately
      predict or control, ** especially,
      the prospects for future acquisition, the possibility that a current customer
      could be acquired or otherwise be affected by a future event that would diminish
      their medicine products requirements, the competition in the medical product
      market and governmental price policy on medical products and the impact of
      such
      factors on pricing, revenues and margins, and the cost of attracting and
      retaining highly skilled personnel. Those events as well as any cautionary
      language in this Form 10-QSB provide examples of risks, uncertainties
      and events that may cause our actual results to differ materially from the
      expectations we describe in our forward-looking statements. You should be aware
      that the occurrence of the events described in this Form 10-QSB could have
      a
      material adverse effect on our business, operating results and financial
      condition. Actual results may differ materially from current expectations.





**Overview**





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





The
      pharmaceutical products we distribute include prescription and over-the-counter
      pharmaceutical products, traditional Chinese medicines (finished medicines
      made
      of Chinese herbs), Chinese herbs, nutritional supplements, dietary supplements
      and medical instruments (Konzern obtained the approval for the distribution
      of
      medical supply and medical devices in November 2006. It began to sell and
      distribute medical supply such as bandages and cotton swabs in the first quarter
      of 2007). In addition, we sell improved medical formulations, which we had
      acquired when they were at an early stage of development and developed
      therefrom.





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





Beginning
      in calendar 2007, in an effort by the Guangdong government to help consolidate
      the provincial medicine acquisition market and promote a transparent bidding
      process, an on-line bidding system called “Guangdong Sunshine Medicine Public
      Internet Bidding System” was established. The new system provides us with more
      opportunities to compete for medicine distribution rights. We obtained the rights to sell and distribute a total of 774 new products in
      2007, which brings the total products we have rights to sell and distribute
      to
      2,200.





25


Our
      five largest suppliers, which were the same in each period, accounted for 57%
      and 68% of our purchases in the six months ended June 30, 2007 and June 30,
      2006, respectively. Our agreements with our suppliers generally have a term
      of
      one year and provide that the suppliers will supply us with the products we
      order. None of our supply agreements has any minimum purchase requirements
      on
      our part. However, we are frequently required to make significant down-payments
      when we place an order. These down payments are made pursuant to contracts
      with
      the suppliers, and to the extent that we reduce the size of the order, we will
      receive a credit from the supplier. Our advances to suppliers balance was
      $7,538,518 as of June 30, 2007, an increase of $ 3,461,106
      or 85% from
      December 31, 2006. As of June 30, 2007, we had nationwide exclusive sales rights
      from our suppliers for seven products they produce, which accounted for $3,272,905 ,
      or 25% of our sales in the six months ended June 30, 2007, as compared to the
      nationwide exclusive sales rights we had for six products for the same period
      in
      2006 which accounted for $3,281,397, or 44% of sales in that period. As of
      June
      30, 2007, we had region-wide exclusive sales rights from our suppliers in the
      Guangdong Province of PRC for 103 products they produce, which accounted for $2,024,800 ,
      or 15% of our sales in the six months ended June 30, 2007. As compared to the
      same period in 2006, we had no region-wide exclusive sales rights from our
      suppliers.





Our
      contracts with our customers do not provide for minimum purchases, and our
      customers are not restricted from purchasing competitive products from others.
      Our customers are typically wholesale medical products companies, hospitals
      and
      retail drug stores. Our five largest customers accounted for 39% and 60% of
      our
      sales for the six months ended June 30, 2007 and 2006, 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 enough
      products available to meet anticipated orders. Also, we must pay our suppliers
      in advance, and in some cases we must maintain funds on deposit with the
      supplier. These factors require us to use significant cash in our
      operations.





Because
      a substantial portion of our sales are made to a small number of customers,
      our
      accounts receivable from a small number of customers may represent a large
      percentage of our accounts receivable and assets. Our largest account receivable
      at June 30, 2007 was approximately $907,970, representing approximately 4%
      of
      our total assets and approximately 4% of our working capital, and our three
      largest accounts receivable were approximately $1,891,292, representing
      approximately 8% of our total assets and approximately 9% of our working
      capital. This concentration of accounts receivable represents a significant
      credit risk.




Because
      our business is conducted in the PRC, all of our transactions are accounted
      for
      in Chinese Yuan or “Renminbi”. Our financial condition and the results of our
      operations, expressed in terms of United States dollars, is dependent upon
      the
      applicable currency exchange rate, which can change significantly from period
      to
      period and may be affected by the relationship between the United States and
      the
      PRC.




**Results
      of Operations**




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




26
 
  CHINA
                      MEDICINE CORPORATION AND SUBSIDIARIESCONSOLIDATED
                      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME(Unaudited)
 
 FOR
                      THREE MONTHS ENDED
                  
                  FOR
                      SIX MONTHS ENDED2007
                  
                  2006
                  
                  2007
                  
                  2006REVENUESProduct
                      sales
                  
                  $
                  7,764,535
                  
                  $
                  3,977,960
                  
                  $
                  12,647,744
                  
                  $
                  7,489,939Medical
                      formula sales
                  
                  
                  499,433
                  
                  
                  63,121
                  
                  
                  709,219
                  
                  
                  359,224Total
                      revenues
                  
                  
                  8,263,968
                  
                  
                  4,041,081
                  
                  
                  13,356,963
                  
                  
                  7,849,163COST
                      OF GOOD SOLD
                  
                  
                  5,859,008
                  
                  
                  2,960,726
                  
                  
                  9,264,425
                  
                  
                  5,420,276GROSS
                      PROFIT
                  
                  
                  2,404,960
                  
                  
                  1,080,355
                  
                  
                  4,092,538
                  
                  
                  2,428,887OPERATING
                      EXPENSESResearch
                      and development
                  
                  
                  543
                  
                  
                  184,677
                  
                  
                  100,655
                  
                  
                  239,341Selling,
                      general and administrative
                  
                  
                  960,924
                  
                  
                  546,287
                  
                  
                  1,604,770
                  
                  
                  1,049,755Reverse
                      acquisition
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  323,770Total
                      operating expenses
                  
                  
                  961,467
                  
                  
                  730,964
                  
                  
                  1,705,425
                  
                  
                  1,612,866INCOME
                      FROM OPERATIONS
                  
                  
                  1,443,493
                  
                  
                  349,391
                  
                  
                  2,387,113
                  
                  
                  816,021OTHER
                      INCOME (EXPENSE), NET
                  
                  
                  (7,118
                  )
                  
                  2,380
                  
                  
                  (10,090
                  )
                  
                  (7,112
                  )INCOME
                      BEFORE INCOME TAXES
                  
                  
                  1,436,375
                  
                  
                  351,771
                  
                  
                  2,377,023
                  
                  
                  808,909AND
                      MINORITY INTERESTPROVISION
                      FOR INCOME TAXES
                  
                  
                  338,326
                  
                  
                  88,676
                  
                  
                  538,285
                  
                  
                  254,257INCOME
                      BEFORE MINORITY INTEREST
                  
                  
                  1,098,049
                  
                  
                  263,095
                  
                  
                  1,838,738
                  
                  
                  554,652MINORITY
                      INTEREST
                  
                  
                  29,085
                  
                  
                  -
                  
                  
                  52,117
                  
                  
                  -NET
                      INCOME
                  
                  
                  1,127,134
                  
                  
                  263,095
                  
                  
                  1,890,855
                  
                  
                  554,652OTHER
                      COMPREHENSIVE INCOMEForeign
                      currency translation adjustment
                  
                  
                  559,325
                  
                  
                  26,858
                  
                  
                  559,325
                  
                  
                  71,623COMPREHENSIVE
                      INCOME
                  
                  $
                  1,686,459
                  
                  $
                  289,953
                  
                  $
                  2,450,180
                  
                  $
                  626,275




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,
      Chinese herbs, dietary supplements, medical instruments (collectively, “Product
      Sales”) and the sale of medical formulas (“Medical Formula Sales”). The
      following table sets forth the revenues and percentage of revenues derived
      from
      each of these types of products:








Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2007
            
            2006
            
            2007
            
            2006Prescription
                and Over the Counter Western Medicine
            4,445,567
            
            54%
            
            2,733,380
            
            68%
            
            7,987,256
            
            60%
            
            5,210,517
            
            66%Traditional
                Chinese Medicine
            3,089,981
            
            37%
            
            1,222,626
            
            30%
            
            4,408,274
            
            33%
            
            2,254,500
            
            29%Herbs
                & Medicine materials
            213,473
            
            3%
            
            21,954
            
            0.5%
            
            215,307
            
            2%
            
            24,922
            
            0.3%Dietary
                Supplements
            12,735
            
            0.2%
            
            --
            
            --
            
            18,220
            
            0.1%
            
            --
            
            --Medical
                Instruments
            2,779
            
            0.1%
            
            --
            
            --
            
            18,687
            
            0.1%
            
            --
            
            --Medical
                Formulas
            499,433
            
            6%
            
            63,121
            
            2%
            
            709,219
            
            5%
            
            359,224
            
            5%Total
            8,263,968
            
            
            
            4,041,081
            
            
            
            13,356,963
            
            
            
            7,849,163




THE
      THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
      2006




27




Revenue




Revenue
      for the three months ended June 30, 2007 was $8,263,968, an increase of
      $4,222,887, or 104%, from revenue of $4,041,081 for the comparable period in
      2006.




Revenue
      from Product Sales for the three months ended June 30, 2007 was $7,764,535,
      an
      increase of $3,786,575, or 95%, from the revenue of $3,977,960 for the
      comparable period in 2006. The increase in Product Sales was a result of the
      Company obtaining the regional exclusive distribution rights in Guangdong
      Province for 103 new products in the first half of 2007, which generated
      $892,496 for the three months ended June 30, 2007.




Medical
      Formula Sales were $499,433 and $63,121 for the three months ended June 30,
      2007
      and 2006, respectively, which represented the proceeds from the sale of certain
      technology and know-how on the production of medicines to certain nonaffiliated
      drug manufacturers. We bought the technology in a development stage from other
      companies and then sold the improved technology to other pharmaceutical
      companies. The increase in our Medical Formula Sales revenue was due to a new
      sale of $466,956 to Guangxi Wuzhou Pharmaceutical Company in May 2007. In the
      PRC, every transfer of a medical formula requires State Food and Drug
      Administration (“SFDA”) approval. The SFDA recently enhanced its approval
      procedures by setting higher application criteria which require more time for
      review. As a result, we estimate that our Medical Formula Sales revenues in
      2007
      will decrease by approximately 20% as compared to 2006, despite of the increase
      in the three months ended June 30, 2007.




Cost
      of revenue




Cost
      of revenue for the three months ended June 30, 2007 was $5,859,008, an increase
      of $2,898,282, or 98 %,
      from $2,960,726 for the comparable period in 2006. The increase was primarily
      due to the increase in revenue.




Gross
      Profit and Gross Margin




Gross
      profit for the three months ended June 30, 2007 was $2,404,960, an increase
      of
      $1,324,605, or 122%, from $1,080,355 for the comparable period in 2006. Our
      gross profit margin for the three months ended June 30, 2007 was 29% as compared
      with 27% for the three months ended June 30, 2006. The increase in our gross
      margin was due to the new higher profit margin products we obtained sale and
      distribution rights to in 2007.




Research
      and Development Expenses




Research
      and development expenses were $543 for the three months ended June 30, 2007
      which was for the pre-clinical study of the Yutian capsule. Research and
      development expenses for the same period of 2006 were $184,677, which involved
      substantial research and development on Yutian capsule that time.




Selling,
      General and Administrative Expenses




Selling,
      general and administrative expenses were $960,924 for the three months ended
      June 30, 2007, an increase of $414,637 or 75.9% from $546,287 for the comparable
      period in 2006. The increase was principally caused by increased transportation,
      advertising, trade show and marketing expenses. Also, we continue to incur
      additional expenses as a result of our status as a public company.




Income
      Taxes




28


Provision
      for income taxes was $338,326 for the three months ended June 30, 2007 as
      compared with $88,676 for the comparable period in 2006. The increase was due
      to
      the growth of sales revenue and operating income for the three months ended
      June
      30, 2007.




Net
      Income




Net
      income for the three months ended June 30, 2007 was $1,127,134, an increase
      of
      $864,039 from $263,095 for the comparable period in 2006. The increase was
      principally due to the increase in sales revenue and gross profit, the
      appreciation of Renminbi against the U.S. dollar and a decrease in research
      and
      development expenses.




THE
      SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
      2006




Revenue




The
      total revenue for the six months ended June 30, 2007 was $13,356,963, an
      increase of $5,507,800, or 70%, from the total revenue of $7,849,163 for the
      comparable period in 2006.




Revenue
      from Product Sales for the six months ended June 30, 2007 was $12,647,744,
      an
      increase of $5,157,805, or 69%, from $7,489,939 for the comparable period in
      2006. The increase was attributable to the sale and distribution of
      approximately $2,024,800 worth of new products in the Guangdong province arising
      from our regional-wide exclusive right to sell such products there.
      Additionally, we are the exclusive national distributor for and sold $551,440
      worth of a new product called Fengduoxin”(Antibiotic). With an increase in
      working capital and the development of our sales network, the revenue of the
      products we distributed in 2006 increased in the first half of 2007.




Revenue
      from Medical Formula Sales was $709,219, an increase of $349,995, or 97%, from
      $359,224 for the comparable period in 2006. Medical formula sales represent
      the
      proceeds from the sale of certain technology and know-how on the production
      of
      medicines. We bought the technology in its preliminary stage from other
      companies and then sold the improved technology to other pharmaceutical
      companies. The increase in our Medical Formula Sales revenue was primarily
      due
      to a new sale of $466,956 to Guangxi Wuzhou Pharmaceutical Company in May 2007
      as a result of our efforts made at the end of 2006. In the PRC, every transfer
      of medical formula requires SFDA approval. The SFDA recently enhanced its
      approval procedures by setting higher application criteria and more reviewing
      time. As a result, we estimate that our Medical Formula Sales revenues in 2007
      will decrease by approximately 20% as compared to 2006 despite of the increase
      in the six months ended June 30, 2007.




Cost
      of revenue




Cost
      of revenue for the six months ended June 30, 2007 was $9,264,425, an increase
      of
      $3,844,149, or 71%, from $5,420,276 for the comparable period in 2006.




Gross
      Profit and Gross Margin




Gross
      profit for the six months ended June 30, 2007 was $4,092,538, an increase of
      $1,663,651, or 68%, from $2,428,887 for the comparable period in 2006. Our
      gross
      margin for the six months ended June 30, 2007 was 31% as compared with 31%
      for
      the six months ended June 30, 2006, a decrease of 0.3%. The decrease in our
      gross margin was due to the decrease of the sales in high profit margin products
      and Medical Formula Sales, although our total revenue in the first six months
      grew as compared to that of the same period in 2006. Our gross margin for the
      second quarter ended June 30, 2007 increased by 2%; however, such increase
      was
      offset by the lower gross margin in the first quarter of 2007. As a result,
      our
      gross profit margin in the six months ended June 30, 2007slightly decreased.




29


Research
      and Development Expenses




Research
      and development expenses were $100,655 for the six months ended June 30, 2007,
      which were applied for the further study of mole construction and technology
      improvement of the Yutian capsule. Research and development expenses for the
      same period of 2006 were $239,341, which involved substantial research and
      development on Yutian capsule that time.




Selling,
      General and Administrative Expenses




Selling,
      general and administrative expenses were $1,604,770 for the six months ended
      June 30, 2007, an increase of $555,015 from $1,049,755 for the comparable period
      in 2006. The increase is caused by expenses of $477,728 associated with our
      status as a reporting company, including the maintenance of an office in the
      United States and legal, accounting and other expenses relating to our status
      as
      a public company and compliance with the reporting requirements of the federal
      securities laws. We also incurred expenses of $182,147 for the maintenance
      of
      Co-win Bioengineering Company (a subsidiary of Konzern) for the six months
      ended
      June 30, 2007, while there were no such expenses for the comparable period.




Reverse
      Acquisition Expenses




We
      did not incur any reverse acquisition expenses in the six months ended June
      30,
      2007. The reverse merger expenses of $323,770 incurred in the six months ended
      June 30, 2006 were one-time expenses.




Income
      Taxes




Provision
      for income taxes was $538,285 for the six months ended June 30, 2007 as compared
      with $254,257 for the comparable period in 2006. The increase was due to the
      increase of product sales and operating income.




Comprehensive
      Income




Comprehensive
      income for the six months ended June 30, 2007 was $2,450,180, an increase of
      $1,823,905 from $626,275 for the comparable period in 2006. The increase was
      mainly due to the increase in revenue from Product Sales, appreciation of
      Renminbi against U.S. dollars and the non-occurrence of reverse acquisition
      expenses compared to the same period last year.




**Liquidity
      and Capital Resources**




Prior
      to February 2006, we financed our operations and met capital expenditure
      requirements primarily through short-term bank loans and trade credit. As of
      June 30, 2007, we received net proceeds of approximately $5,718,121 from the
      exercise of warrants. We had working capital of $20,911,483, an increase of
      $13,178,479 from $7,733,004 as of June 30, 2006.




We
      used cash of $3,094,478 in our operations for the six months ended June 30,
      2007, an increase of $1,200,600 from the cash used for the comparable period
      of
      2006. The increase in net cash used in operating activities was largely due
      to
      the increase of advances to suppliers and our inventory of products.





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




30







Balance
                Sheet Caption
            Change
                in dollars 12/31/06 to 06/30/07
            
            Percentage
                Change 12/31/06 to 06/30/07Accounts
                receivable
            $-340,170
            
            -4.84%Inventories
            2,549,185
            
            134%Advances
                to suppliers
            3,461,106
            
            84.88%Accounts
                payable
            -25,466
            
            -13.48%Customer
                deposits
            157,708
            
            877%




The
      change in these balance sheet captions reflects the nature of the cash
      requirements of our business. Because we require one to two months to receive
      products we order, we have been increasing our inventory in order to enable
      us
      to meet anticipated increases in sales. From December 31, 2006 to June 30,
      2007,
      our inventory increased 134%. Our advances to suppliers increased 85% because
      of
      an increase in our purchases resulting from increased sales and our payment
      policies, whereby we try to pay our suppliers (other than required down
      payments) once or twice a year. As a result, until we pay our suppliers, our
      accounts payable will increase. As
      of
      June 30, 2007, our advance payments to our suppliers totaled approximately
      $7,538,518, and our cash balance was approximately $2,702,678. In
      addition, our customer deposits increased 877% from December 31, 2006 to June
      30, 2007 reflecting increased sales. We require our customers to pay a certain
      percentage of the sales price as a deposit before we ship products to them.
      The
      percentage varies from customer to customer. In the course of our business,
      we
      reduce the deposit requirement for some customers with good credit.





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




**Critical
      Accounting Policies and Estimates**




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




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





Revenue
      recognition




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





Sales
      revenue represents the invoiced value of goods, net of a value-added tax (VAT).
      All of our products, which are sold exclusively in the PRC, are subject to
      a
      Chinese VAT at a rate of 0% to 17% of the gross sales price. This VAT may be
      offset by VAT paid by us on raw materials and other materials included in the
      cost of producing their finished product.





31


Research
      and development costs




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





Inventory




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




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




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





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




**PART
      II OTHER INFORMATION**





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




32


During
      the six months ended June 30, 2007, the Company has issued an aggregate of
      3,315,790 shares of Common Stock upon the exercise of the warrants (Warrant
      A -
      see definitions below) by the following holders for an aggregate of $5,718,121
      proceeds, among which, 3,315,790 shares of Common Stock were issued in the
      quarterly period ended June 30, 2007 for an aggregate of $2,879,868 proceeds.
      Pursuant to a Preferred Stock Purchase Agreement dated February 8, 2006
      (“PSPA”), Barron Partners, LP (“Barron”), Ray & Amy Rivers, William Denkin
      and Steve Mazur (the “Initial Investors”) were issued two series of warrants to
      purchase up to 3,694,738 shares of the Company’s Common Stock at $1.75 per share
      (“Warrant A”) and 3,694,738 shares of Common Stock at $2.50 per share (“Warrant
      B”), subject to adjustment set forth in the warrants issued to the initial
      investors dated February 8, 2006. Pursuant to a *Waiver
      and Amendment* dated
      April 23, 2007 between the Company and the Initial Investors, the exercise
      price
      for Warrant A was reduced to $1.70 and for Warrant B to $2.43. As of the date
      of
      this report, the Company has 378,948 shares of Warrant A outstanding. As of
      the
      date of this report, no Warrant B has been exercised and the Company has
      3,694,738 shares of Warrant B outstanding.




**Holders’
                  Names**
              
              **Exercise
                  Date/ Date of Notice**
              
              **Common
                  Stock Issued upon the Warrant**
              
              **Exercise
                  Price**Barron
                  Partners, LP
              
              
              01/05/07
              
              
              650,500
              
              $
              1.7501/09/07
              
              
              74,250
              
              $
              1.7503/22/07
              
              
              183,100
              
              $
              1.7503/26/07
              
              
              216,900
              
              $
              1.7503/28/07
              
              
              497,000
              
              $
              1.7504/19/07
              
              
              431,529
              
              $
              1.7004/23/07
              
              
              20,971
              
              $
              1.7005/03/07
              
              
              100,000
              
              $
              1.7005/04/07
              
              
              96,400
              
              $
              1.7005/07/07
              
              
              125,000
              
              $
              1.7005/08/07
              
              
              730,666
              
              $
              1.703,126,316William
                  M. Denkin
              
              
              04/27/07
              
              
              100,000
              
              $
              1.7005/02/07
              
              
              89,474
              
              $
              1.70189,4743,315,790




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





The
      Initial Investors, HC and Donnelly are accredited investors and our issuance
      of
      Common Stock to them was exempt from registration pursuant Section 4(2) of
      the
      Securities Act.




**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.





33


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





34





SIGNATURES





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





Date:
      August 13, 2007







CHINA
      MEDICINE CORPORATION








BY: /s/
      Senshan Yang


Senshan
      Yang


Chief
      Executive Officer


(principal
      executive officer)








BY: /s/
      Huizhen Yu


Huizhen
      Yu


Chief
      Financial Officer


(principal
      financial officer and accounting officer)








35