**UNITED STATES**


**SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-Q**





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


For
      the
      quarterly period ended March
      31, 2008





or





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


For
      the
      transition period from _______ to _________





*Commission
      File No. 000-51379*





**CHINA
      MEDICINE CORPORATION**


( Exact
      name of registrant as specified in its charter )




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




Guangri
      Tower, Suite 702


No.
      8
      Siyou South 1st Street


Yuexiu
      District


Guangzhou,
      China 510600


(Address
      of principal executive offices)





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


(Registrant's
      telephone number, including area code)








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





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





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





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





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





The
      number of shares outstanding of the Registrant's Common Stock, $.0001 per share,
      outstanding at May 31, 2008 was 15,164,887.









**CHINA
      MEDICINE CORPORATION**





TABLE
      OF
      CONTENTS





PagePART
                I
            FINANCIAL
                INFORMATION
            3Item
                1.
            Financial
                Statements
            3Item
                2.
            Management’s
                Discussion and Analysis or Plan of Operation
            27Item
                4.
            Controls
                and Procedures
            34PART
                II
            OTHER
                INFORMATION
            35Item
                2.
            Unregistered
                Sales of Equity Securities
            35Item
                6.
            Exhibits
            35SignaturesExhibits/Certifications




2




**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
        BALANCE SHEETS
 AS
        OF
        MARCH 31, 2008 AND DECEMBER 31, 2007
 
 2008
              
              2007UnauditedASSETSCURRENT
                  ASSETSCash
              
              $
              5,177,061
              
              $
              5,767,774Accounts
                  receivable, trade, net of allowance for doubtful accountsof
                  $57,954 and $55,640 as of March 31, 2008 andDecember
                  31, 2007, respectively
              
              
              13,212,089
              
              
              13,626,347Notes
                  receivables
              
              
              1,682,184
              
              
              -Inventories
              
              
              4,923,381
              
              
              3,948,460Advances
                  to suppliers
              
              
              6,908,467
              
              
              5,983,277Other
                  current assets
              
              
              166,236
              
              
              81,221Total
                  current assets
              
              
              32,069,418
              
              
              29,407,079EQUIPMENT,
                  net
              
              
              1,352,430
              
              
              1,388,919OTHER
                  ASSETSDeferred
                  expenses
              
              
              618,131
              
              
              678,237Intangible
                  assets, net
              
              
              1,214,460
              
              
              1,166,003Total
                  other assets
              
              
              1,832,591
              
              
              1,844,240Total
                  assets
              
              $
              35,254,439
              
              $
              32,640,238LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIESAccounts
                  payable, trade
              
              $
              48,664
              
              $
              76,907Other
                  payables and accrued liabilities
              
              
              21,497
              
              
              70,343Customer
                  deposits
              
              
              156,052
              
              
              203,281Taxes
                  payable
              
              
              342,019
              
              
              468,184Liquidated
                  damages payable
              
              
              44,003
              
              
              44,003Total
                  liabilities
              
              
              612,235
              
              
              862,718MINORITY
                  INTEREST
              
              
              866,385
              
              
              893,337SHAREHOLDERS'
                  EQUITYPreferred
                  stock, $0.0001 par value; 10,000,000 shares authorized,60,000
                  and 111,649 shares issued and outstandingat
                  March 31, 2008 and December 31 2007, respectively
              
              
              6
              
              
              11Common
                  stock, $0.0001 par value; 100,000,000 shares authorized,15,164,887
                  and 14,821,641 shares issued and outstandingat
                  March 31, 2008 and December 31, 2007, respectively
              
              
              1,516
              
              
              1,482Paid-in
                  capital
              
              
              12,948,706
              
              
              12,560,078Statutory
                  reserves
              
              
              2,191,230
              
              
              2,191,230Retained
                  earnings
              
              
              15,184,400
              
              
              14,008,587Accumulated
                  other comprehensive income
              
              
              3,449,961
              
              
              2,122,795Total
                  shareholders' equity
              
              
              33,775,819
              
              
              30,884,183Total
                  liabilities and shareholders' equity
              
              $
              35,254,439
              
              $
              32,640,238
 The
          accompanying notes are an integral part of this consolidated
          statement.
  3
 
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR
        THREE
        MONTHS ENDED MARCH 31, 2008 AND 2007
 (Unaudited)
 
 2008
              
              2007REVENUESProduct
                  sales
              
              $
              6,851,384
              
              $
              4,883,209Medical
                  formula sales
              
              
              209,655
              
              
              209,786Total
                  revenues
              
              
              7,061,039
              
              
              5,092,995COST
                  OF GOOD SOLD
              
              
              4,749,019
              
              
              3,405,417GROSS
                  PROFIT
              
              
              2,312,020
              
              
              1,687,578OPERATING
                  EXPENSESResearch
                  and development
              
              
              88,392
              
              
              100,112Selling,
                  general and administrative
              
              
              812,508
              
              
              643,846Total
                  operating expenses
              
              
              900,900
              
              
              743,958INCOME
                  FROM OPERATIONS
              
              
              1,411,120
              
              
              943,620OTHER
                  INCOME (EXPENSE), NET
              
              
              5,983
              
              
              (2,972
              )INCOME
                  BEFORE INCOME TAXES AND
                  MINORITY INTEREST
              
              
              1,417,103
              
              
              940,648PROVISION
                  FOR INCOME TAXES
              
              
              268,767
              
              
              199,959INCOME
                  BEFORE MINORITY INTEREST
              
              
              1,148,336
              
              
              740,689MINORITY
                  INTEREST
              
              
              27,477
              
              
              23,032NET
                  INCOME
              
              
              1,175,813
              
              
              763,721OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation adjustment
              
              
              1,327,166
              
              
              256,489COMPREHENSIVE
                  INCOME
              
              $
              2,502,979
              
              $
              1,020,210EARNINGS
                  PER SHAREBasic
              
              $
              0.08
              
              $
              0.08Diluted
              
              $
              0.08
              
              $
              0.06WEIGHTED
                  AVERAGE SHARES OUTSTANDINGBasic
              
              
              15,029,865
              
              
              9,152,458Diluted
              
              
              15,339,834
              
              
              12,808,226
  The
        accompanying notes are an integral part of this consolidated
        statement.
 4
 
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY
 FOR
        THREE
        MONTHS ENDED MARCH 31, 2008 AND 2007
 
 Accumulated**Retained
                  Earnings**
              
              other**Preferred
                  Stock**
              
              **Common
                  Stock**
              
              Paid-in
              
              Contribution
              
              Statutory
              
              
              
              comprehensiveShares
              
              Par
                  Value
              
              Shares
              
              Par
                  Value
              
              capital
              
              receivable
              
              reserves
              
              Unrestricted
              
              income
              
              **Totals**BALANCE,
                  December 31, 2006
              
              
              2,340,000
              
              $
              234
              
              
              8,160,000
              
              $
              816
              
              $
              4,396,971
              
              $
              (961,500
              )
              $
              1,345,206
              
              $
              7,979,242
              
              $
              501,123
              
              $
              13,262,092Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              763,721
              
              
              
              
              
              763,721Preferred
                  stock converted to common stock
              
              
              (450,000
              )
              
              (45
              )
              
              450,000
              
              
              45
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Warrants
                  exercised for cash @ $1.75
              
              
              
              
              
              
              
              
              1,621,750
              
              
              162
              
              
              2,837,900
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,838,062Stock
                  option granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,279
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,279Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              256,489
              
              
              256,489BALANCE,
                  March 31, 2007 (Unaudited)
              
              
              1,890,000
              
              $
              189
              
              
              10,231,750
              
              $
              1,023
              
              $
              7,256,150
              
              $
              (961,500
              )
              $
              1,345,206
              
              $
              8,742,963
              
              $
              757,612
              
              $
              17,141,643Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,111,648
              
              
              
              
              
              6,111,648Adjustment
                  of statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              846,024
              
              
              (846,024
              )
              
              
              
              
              -Preferred
                  stock converted to common stock
              
              
              (1,778,351
              )
              
              (178
              )
              
              1,833,351
              
              
              183
              
              
              (5
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Warrants
                  exercised for cash @ $1.70
              
              
              
              
              
              
              
              
              1,694,040
              
              
              169
              
              
              2,879,699
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,879,868Warrants
                  exercised for cash @ $2.43
              
              
              
              
              
              
              
              
              725,000
              
              
              73
              
              
              1,761,677
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,761,750Stock
                  options exercised for cash @ $1.25
              
              
              
              
              
              
              
              
              280,000
              
              
              28
              
              
              349,972
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              350,000Stock
                  option granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              133,191
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              133,191Common
                  stock issued for services
              
              
              
              
              
              
              
              
              57,500
              
              
              6
              
              
              179,394
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              179,400Contribution
                  receivable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              961,500
              
              
              
              
              
              
              
              
              
              
              
              961,500Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,365,183
              
              
              1,365,183BALANCE,
                  December 31, 2007
              
              
              111,649
              
              $
              11
              
              
              14,821,641
              
              $
              1,482
              
              $
              12,560,078
              
              $
              -
              
              $
              2,191,230
              
              $
              14,008,587
              
              $
              2,122,795
              
              $
              30,884,183Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,175,813
              
              
              
              
              
              1,175,813Preferred
                  stock converted to common stock
              
              
              (51,649
              )
              
              (5
              )
              
              53,246
              
              
              5
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Stock
                  options exercised for cash @ $1.25
              
              
              
              
              
              
              
              
              290,000
              
              
              29
              
              
              362,471
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              362,500Compensation
                  for options and warrants granted
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              26,157
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              26,157Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,327,166
              
              
              1,327,166BALANCE,
                  MARCH 31, 2008 (Unaudited)
              
              
              60,000
              
              $
              6
              
              
              15,164,887
              
              $
              1,516
              
              $
              12,948,706
              
              $
              -
              
              $
              2,191,230
              
              $
              15,184,400
              
              $
              3,449,961
              
              $
              33,775,819
  The
        accompanying notes are an integral part of this consolidated
        statement.
  5
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 FOR
        THREE
        MONTHS ENDED MARCH 31, 2008 AND 2007
 (Unaudited)
 
 2008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              1,175,813
              
              $
              763,721Adjustments
                  to reconcile net income to cashused
                  in operating activities:Minority
                  interest
              
              
              (27,477
              )
              
              (23,032
              )Depreciation
                  and amortization
              
              
              96,744
              
              
              55,946Bad
                  debt expense
              
              
              -
              
              
              345Amortization
                  of stock option and warrant compensation
              
              
              26,157
              
              
              21,279Amortization
                  of deferred expenses
              
              
              86,431
              
              
              -Change
                  in operating assetsAccounts
                  receivable, trade
              
              
              959,968
              
              
              94,745Notes
                  receivables
              
              
              (1,646,491
              )
              
              -Inventories
              
              
              (793,559
              )
              
              (1,110,151
              )Advances
                  to suppliers
              
              
              (662,079
              )
              
              (761,889
              )Other
                  current assets
              
              
              (79,904
              )
              
              (44,544
              )Change
                  in operating liabilitiesAccounts
                  payable, trade
              
              
              (30,774
              )
              
              46,475Other
                  payables and accrued liabilities
              
              
              (49,957
              )
              
              (5,688
              )Customer
                  deposits
              
              
              (54,499
              )
              
              54,531Taxes
                  payable
              
              
              (142,540
              )
              
              36,802Net
                  cash used in operating activities
              
              
              (1,142,167
              )
              
              (871,460
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of equipment
              
              
              (4,490
              )
              
              (35,399
              )Purchase
                  of intangible asset
              
              
              -
              
              
              (129,010
              )Net
                  cash used in investing activities
              
              
              (4,490
              )
              
              (164,409
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from exercise of warrants and options
              
              
              362,500
              
              
              2,838,062Net
                  cash provided by financing activities
              
              
              362,500
              
              
              2,838,062EFFECT
                  OF EXCHANGE RATE ON CASH
              
              
              193,444
              
              
              138,282INCREASE
                  (DECREASE) IN CASH
              
              
              (590,713
              )
              
              1,940,475CASH,
                  beginning of period
              
              
              5,767,774
              
              
              371,480CASH,
                  end of period
              
              $
              5,177,061
              
              $
              2,311,955
 
 The
        accompanying notes are an integral part of this consolidated
        statement.
  6
 
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (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. The Company issued
        750,000 shares of common stock as disclosed in Note 13.
 
 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 13).
        The
        business license provides for a 24 year term and will end on September 2,
        2024.
 
 Konzern
        US Holding Corporation (“Konzern Holding”) was registered in New Jersey on
        January 12, 2006 for the purpose of distributing and marketing drugs, medical
        supplies and medical equipment. Konzern Holding is wholly owned by Konzern
        with
        100,000 shares of stock authorized. Konzern Holding had no operating activities.
        As of December 31, 2007, Konzern Holding received $200,000 from Konzern as
        its
        initial investment.
 
 On
        July
        7, 2006, Konzern entered into a Joint Cooperation Agreement with Guangzhou
        Ji'nan Science & Technology Industrial Group Co., Ltd. ("JSIG") and Mr.
        Dongsheng Yao, an unrelated third party, to jointly form Guangzhou Co-win
        Bioengineering Co., Ltd. (“Co-win”) for the purpose of development and
        application of aflatoxin-detoxifizyme ("ADTZ"). Mr. Dongsheng Yao became
        a
        member of the board of directors of Co-win. Konzern does not have any material
        relationship with JSIG or Mr. Yao other than this Agreement. The business
        licenses were approved by Guangzhou Commercial and Administrative Bureaus
        on
        October 27, 2006. 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; Co-win will
        renew its business license when it becomes expired in June 2008. As of March
        31,
        2008, Konzern owns a 70% ownership in Co-win.
  7
 
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (Unaudited)
  Operating
        Activities
 
 The
        Company’s business operations consists of the wholesale of prescription and over
        the counter medicines, traditional Chinese medicines, which are medicines
        derived from Chinese herbs, dietary supplements, medical instruments and
        the
        sale of medical formula.
 
 **Note
        2 - Summary of significant accounting policies**
 
 Basis
        of presentation
 
 The
        consolidated financial statements of the Company reflect its wholly-owned
        subsidiary, Konzern, its 70% owned subsidiary, Co-win, both located in the
        PRC,
        and its wholly-owned subsidiary Konzern US Holding. The consolidated financial
        statements have been presented as if the equity Exchange Agreement of Konzern
        occurred at the beginning of 2006 due to common management and
        ownership.
 
 The
        accompanying financial statements have been prepared in accordance with
        accounting principles generally accepted in the United States of America.
        All
        material intercompany transactions and balances have been eliminated in the
        consolidation.
 
 Management
        has included all normal recurring adjustments considered necessary to give
        a
        fair presentation of operating results for the periods presented. Interim
        results are not necessarily indicative of results for a full year. The
        information included in this Form 10-Q should be read in conjunction with
        information included in the 2007 annual report filed on Form
        10-KSB.
 
 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.
  8
 
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (Unaudited)
 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 March 31, 2008
        and
        December 31, 2007, the Company had deposits in excess of federally insured
        limits total of $5,160,331 and $4,987,180, respectively. The Company has
        not
        experienced any losses in such accounts and believes it is not exposed to
        any
        significant risks on its cash in bank accounts.
 
 For
        the
        three months ended March 31, 2008 and 2007, five suppliers accounted for
        approximately 59 %
        and 63%
        of the Company's purchases, respectively. Advances to these five suppliers
        represent 39% of the Company’s total advances to suppliers as of March 31, 2008.
 
 For
        the
        three months ended March 31, 2008 and 2007, four customers accounted for
        approximately 34% and 46% of the Company's total sales, respectively. The
        accounts receivable balance of these four customers amounted $2,680,430,
        representing 20% of the total accounts receivable as of March 31, 2008, and
        $1,274,422, representing 9% of the total accounts receivable as of December
        31, 2007, respectively.
 
 For
        the
        three months ended March 31, 2008 and 2007, the top three products accounted
        for
        approximately 18% and 28% of the Company’s total sales,
        respectively.
 
 Accounts
        receivable, trade
 
 The
        Company extends unsecured credit to its customers. Management reviews accounts
        receivable on a regular basis to determine if the bad debt allowance is adequate
        for potential uncollectible amounts due to deterioration of customer operations.
 
 March 31,
                2008
              
              December 31,
                2007Trade
                  accounts receivable
              
              $
              13,270,043
              
              $
              13,681,987Allowance
                  for bad debts
              
              
              (57,954
              )
              
              (55,640
              )Trade
                  accounts receivable, net
              
              $
              13,212,089
              
              $
              13,626,347
 
 March 31,
                2008Beginning
                  allowance for doubtful accounts
              
              $
              55,640Additions
                  charged to bad debt expense
              
              
              -Foreign
                  currency translation adjustments
              
              
              2,314Ending
                  allowance for doubtful accounts
              
              $
              57,954
  9
 
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (Unaudited)
 
 Notes
        receivables
 
 Notes
        receivables represents trade accounts receivable due from various customers
        where the customers’ banks have guaranteed the payment of the receivables. This
        amount is non-interest bearing and is normally paid within three to six months.
        The Company has the ability to submit a request for payment to the customer’s
        bank earlier than the scheduled payment date, but will incur an interest
        charge
        and a processing fee when it submits the early payment request. The Company
        had
        $1,682,184 and $- outstanding as of March 31, 2008 and December 31, 2007,
        respectively.
 
 Inventories
 
 Inventories
        are stated at the lower of cost or market value, cost is determined using
        the
        weighted average method.
 
 Equipment
 
 Equipment
        is stated at the actual cost of acquisition less accumulated depreciation
        and
        amortization. Depreciation and amortization are provided in amounts sufficient
        to relate the cost of depreciation of assets to operations over their estimated
        service lives, principally on a straight-line basis. The estimated lives
        used in
        determining depreciation are:
 Leasehold
                    improvements
                5
                    yearsEquipment
                5
                    yearsFurniture
                5
                    yearsMotor
                    vehicles
                5
                    -
                    8 years
 
 The
        residual value is estimated to be 5% of the actual cost.
 
 The
        cost
        and related accumulated depreciation of assets sold or otherwise retired
        are
        eliminated from the accounts and any gain or loss is included in the statement
        of operations. Maintenance, repairs and minor renewals are expensed as
        incurred.
 
 Intangibles
 
 Under
        the
        Statement of Accounting Standards ("SFAS") No.142, "Goodwill and Other
        Intangible Assets", all goodwill and certain intangible assets determined
        to
        have indefinite lives will not be amortized but will be tested for impairment
        at
        least annually. Intangible assets other than goodwill will be amortized over
        their useful lives and reviewed for impairment in accordance with SFAS No.
        144,
        "Accounting for Impairment or Disposal of Long-Lived Assets".
 
 The
        Company acquired technology during 2007 to manufacture aflatoxin-detoxifizyme
        ("ADTZ") totaling $1,028,250. The Company will begin amortizing costs once
        manufacturing begins. The Company expects to manufacture the products in
        September 2008.
  10
 CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (Unaudited)
 The
        intangible assets as of March 31, 2008 and December 31, 2007, net of
        amortization, amounted to $1,214,460 and $1,166,003, respectively.
 
 Impairment
        of long-lived assets
 
 Per
        SFAS
        No. 144, long-lived assets are analyzed for impairment. The Company tests
        for
        impairment of long-lived assets at least annually or more often whenever
        there
        is an indication that the carrying amount of the asset may not be recovered.
        Recoverability of these assets is determined by comparing the forecasted
        undiscounted cash flows generated by those assets to the assets' net carrying
        value. The amount of impairment loss, if any, is measured as the difference
        between the net book value of the assets and the estimated fair value of
        the
        related assets.
 
 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. As of March 31, 2008,
        the
        Company believes that there were no significant impairments of long-lived
        assets.
 
 Revenue
        recognition
 
 The
        Company recognizes revenue when all four of the following criteria are met:
        (1)
        persuasive evidence has been received that an arrangement exists; (2) delivery
        of the products and/or services has occurred; (3) the selling price is fixed
        or
        determinable; and (4) collectibility is reasonably assured. The Company follows
        the provisions of SAB No. 104 which sets forth guidelines in the timing of
        revenue recognition based upon factors such as passage of title, installation,
        payments and customer acceptance. Any amounts received prior to satisfying
        the
        Company's revenue recognition criteria is recorded as deferred
        revenue.
 
 Sales
        revenue represents the invoiced value of goods, net of a value-added tax
        (VAT).
        All of the Company's products that are sold in the PRC are subject to a Chinese
        value-added tax at a rate of 17% of the gross sales price. This VAT may be
        offset by VAT paid by the Company on raw materials and other materials included
        in the cost of producing their finished product.
 
 VAT
        on
        sales and VAT on purchases amounted to $1,189,694 and $971,080 for the three
        months ended March 31, 2008 and $833,201 and $770,027 for the three months
        ended
        March 31, 2007, respectively. Sales and purchases are recorded net of VAT
        collected and paid as the Company acts as an agent for the government. VAT
        taxes
        are not impacted by the income tax holiday.
 
 Shipping
        and handling costs related to costs of goods sold are included in selling,
        general and administrative costs and totaled $108,945 and $87,384 for the
        three
        months ended March 31, 2008 and 2007, respectively.
 
 11
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (Unaudited)
 Advertising
        costs
 
 The
        Company expenses the cost of advertising as incurred in selling, general
        and
        administrative costs. For the three months ended March 31, 2008 and 2007,
        advertising expenses amounted to $978 and $1,019, respectively.
 
 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.
  Foreign
        currency translation
  The
        reporting currency of the Company is the US dollar. The Company uses their
        local
        currency, Renminbi (RMB), as its functional currency. Results of operations
        and
        cash flow are translated at average exchange rates during the period, and
        assets
        and liabilities are translated at the unified exchange rate as quoted by
        the
        People’s Bank of China at the end of the period. Because cash flows are also
        translated at average translation rates, amounts reported on the statement
        of
        cash flows will not necessarily agree with changes in the corresponding balances
        on the balance sheet. Translation adjustments resulting from this process
        are
        included in accumulated other comprehensive income in the statement of
        shareholders’ equity.
  Translation
        adjustments amounted to $3,449,961 and $629,411 as of March 31, 2008 and
        March
        31, 2007, respectively. Asset and liability accounts at March 31, 2008 were
        translated at 7.01 RMB to $1.00 USD as compared to 7.30 RMB at December 31,
        2007. Equity accounts were stated at their historical rate. The average
        translation rates applied to income statements accounts for the three months
        ended March 31, 2008 and 2007 were 7.16 RMB and 7.76 RMB, respectively.
 
 Transaction
        gains and losses that arise from exchange rate fluctuations on transactions
        denominated in a currency other than the functional currency are included
        in the
        results of operations as incurred. No material transaction gains and losses
        were
        recognized during the three months ended March 31, 2008, and 2007. Historically,
        the Company has not entered into any currency trading or hedging transactions,
        although there is no assurance that the Company will not enter into such
        transactions in the future.
 
 Income
        taxes
 
 The
        Company records income taxes pursuant to Statement of Financial Accounting
        Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires
        the recognition of deferred income tax liabilities and assets for the expected
        future tax consequences of temporary differences between income tax basis
        and
        financial reporting basis of assets and liabilities. Provision for income
        taxes
        consist of taxes currently due plus deferred taxes. There are no deferred
        tax
        amounts at March 31, 2008 and December 31, 2007.
  12
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (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 three months ended March
        31,
        2008 and 2007. The net operating loss carry forwards for United States income
        taxes amounted to $2,620,884 which may be available to reduce future years’
taxable income. These carry forwards will expire, if not utilized, through
        2027.
        Management believes that the realization of the benefits from these losses
        appears uncertain due to the Company’s limited operating history and continuing
        losses for United States income tax purposes. Accordingly, the Company has
        provided a 100% valuation allowance on the deferred tax asset benefit to
        reduce
        the asset to zero. The valuation allowance at March 31, 2008 was $891,000.
        The
        net change in the valuation allowance for the three months ended March 31,
        2008
        was an increase of $279,000. Management will review this valuation allowance
        periodically and make adjustments as warranted.
  Fair
        value of financial instruments
 
 On
        January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements.
        SFAS
        No. 157 defines fair value, establishes a three-level valuation hierarchy
        for
        disclosures of fair value measurement and enhances disclosures requirements
        for
        fair value measures. The carrying amounts reported in the balance sheets
        for
        receivables and current liabilities each qualify as financial instruments
        and
        are a reasonable estimate of fair value because of the short period of time
        between the origination of such instruments and their expected realization
        and
        their current market rate of interest. The three levels are defined as
        follow:
  13
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (Unaudited)
 ·
              Level
                  1inputs
                  to the valuation methodology are quoted prices (unadjusted) for
                  identical
                  assets or liabilities in active
                  markets.
 
 ·
              Level
                  2inputs
                  to the valuation methodology include quoted prices for similar
                  assets and
                  liabilities in active markets, and inputs that are observable for
                  the
                  asset or liability, either directly or indirectly, for substantially
                  the
                  full term of the financial
                  instrument.
 
 ·
              Level
                  3inputs
                  to the valuation methodology are unobservable and significant to
                  the fair
                  value measurement.
 
 As
        of
        March 31, 2008 the Company did not identify any assets and liabilities that
        are
        required to be presented on the balance sheet at fair value.
 
 Stock-based
        compensation
 
 The
        Company adopted the Statement of Financial Accounting Standards No. 123 (revised
        2004), "Share-Based Payments," ("FAS 123R"), which established standards
        for the
        accounting for transactions in which an entity exchanges its equity instruments
        for goods or services. This statement requires a public entity to measure
        the
        cost of employee services received in exchange for an award of equity
        instruments based on the grant-date fair value of the award (with limited
        exceptions). That cost will be recognized over the period during which an
        employee is required to provide service in exchange for the award.
  Earnings
        per share
 
 The
        Company reports earnings per share in accordance with the provisions of SFAS
        No.
        128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
        diluted earnings per share in conjunction with the disclosure of the methodology
        used in computing such earnings per share. Basic earnings per share is computed
        by dividing income available to common stockholders by the weighted average
        common shares outstanding during the period. Diluted earnings per share takes
        into account the potential dilution that could occur if securities or other
        contracts to issue common stock were exercised and converted into common
        stock.
 
 14
  CHINA
          MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (Unaudited)
 The
        following is a reconciliation of the basic and diluted earnings per share
        computations for the three months ended March 31:
 
 2008
              
              2007Net
                  income
              
              $
              1,175,813
              
              $
              763,721Shares
                        of common stock and common stock
                        equivalents:Weighted
                  average shares used in basic computation
              
              
              15,029,865
              
              
              9,152,458Diluted
                    effect of stock options, warrants,and
                    preferred stocks
              
              
              309,969
              
              
              3,655,768Weighted
                  average shares used in diluted computation
              
              
              15,339,834
              
              
              12,808,226Earnings
                  per share:Basic
              
              $
              0.08
              
              $
              0.08Diluted
              
              $
              0.08
              
              $
              0.06
 
 For
        the
        three months ended March 31, 2008, 2,969,738 warrants whose exercise price
        is
        $2.43; 30,000 warrants whose exercise price is $2.26, and 7,500 options whose
        exercise price is $3.00 are excluded from the calculation because of their
        antidilutive nature. For the three months ended March 31, 2007, all options
        and
        warrants have been included in the calculation of diluted earnings per
        share.
 
 Minority
        interest
 
 Minority
        interest consists of the interest of minority shareholders in the subsidiaries
        of the Company. As of March 31, 2008 and December 31, 2007, minority interest
        amounted to $866,385 and $893,337, respectively.
 
 Recently
        issued accounting pronouncements
 
 In
        February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
        Assets and Financial Liabilities—including an amendment of FASB Statement No.
        115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
        instruments and certain other items at fair value that  are
        not
        currently required to be measured at fair value. The objective of FAS 159
        is to
        provide opportunities to mitigate volatility in reported earnings caused
        by  measuring
        related assets and liabilities differently without having to apply hedge
        accounting provisions. FAS 159 also establishes presentation and
        disclosure  requirements
        designed to facilitate comparisons between companies that choose different
        measurement attributes for similar types of assets and liabilities. SFAS
        No. 159
        is effective as of the beginning of an entity’s first fiscal year that begins
        after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008.
        The Company chose not to elect the option to measure the fair value of eligible
        financial assets and liabilities.
  15
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (Unaudited)
  In
        June
        2007, the
        FASB
        issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
        Payments for Goods or Services Received for use in Future Research and
        Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
        advance payments for goods or services that used or rendered for research
        and
        development activities should be expensed when the advance payment is made
        or
        when the research and development activity has been performed. The Company
        adopted FSP EITF 07-3 and expensed the research and development as
        incurred.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements - an amendment of Accounting Research Bulletin
        No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
        ownership interests in subsidiaries held by parties other than the parent,
        the
        amount of consolidated net income attributable to the parent and to the
        noncontrolling interest, changes in a parent’s ownership interest and the
        valuation of retained non-controlling equity investments when a subsidiary
        is
        deconsolidated. The Statement also establishes reporting requirements that
        provide sufficient disclosures that clearly identify and distinguish between
        the
        interests of the parent and the interests of the non-controlling owners.
        SFAS
        160 is effective for fiscal years beginning after December 15, 2008. The
        Company
        has not determined the effect that the application of SFAS 160 will have
        on its
        consolidated financial statements.
 
 In
        December 2007, Statement of Financial Accounting Standards No. 141(R), *Business
        Combinations* ,
        was
        issued. SFAS No. 141R replaces SFAS No. 141, *Business
        Combinations.* SFAS
        141R
        retains the fundamental requirements in SFAS 141 that the acquisition method
        of
        accounting (which SFAS 141 called the *purchase
        method* )
        be used
        for all business combinations and for an acquirer to be identified for each
        business combination. SFAS 141R requires an acquirer to recognize the assets
        acquired, the liabilities assumed, and any noncontrolling interest in the
        acquiree at the acquisition date, measured at their fair values as of that
        date,
        with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
        required the cost of an acquisition to be allocated to the individual assets
        acquired and liabilities assumed based on their estimated fair values. SFAS
        141R
        also requires the acquirer in a business combination achieved in stages
        (sometimes referred to as a step acquisition) to recognize the identifiable
        assets and liabilities, as well as the noncontrolling interest in the acquiree,
        at the full amounts of their fair values (or other amounts determined in
        accordance with SFAS 141R). SFAS 141R applies prospectively to business
        combinations for which the acquisition date is on or after the beginning
        of the
        first annual reporting period beginning on or after December 15, 2008. An
        entity
        may not apply it before that date. The Company is currently evaluating the
        impact that adopting SFAS No. 141R will have on its financial
        statements.
 
 **Note
        3 – Contribution receivable**
 
 On
        July
        7, 2006, Konzern, entered into a Joint Cooperation Agreement (the “Agreement”)
        with JSIG and an individual, Mr. Dongsheng Yao, to jointly form a new Chinese
        company for the purpose of development and application of aflatoxin-detoxifizyme
        ("ADTZ"). Konzern has no material relationships with JSIG or Mr. Yao other
        than
        the Agreement.
  16
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (Unaudited)
  Pursuant
        to the Agreement, JSIG and Mr. Yao will transfer four patents relating to
        ADTZ
        into the joint venture company for which they will each hold a 15% equity
        interest in the joint venture company. In addition, JSIG and Mr. Yao will
        be
        paid a total of approximately $125,000, as a technology contribution fee
        from
        the joint venture company. The agreement provides that the Company will invest
        a
        total of approximately $2.2 million, of which $840,000 has been paid and
        the
        balance, according to the Chinese government requirements, is due within
        two
        years. Based on the agreement the Company will receive a 70% equity interest
        in
        the joint venture company.
 
 The
        contribution receivable represented the technology required to be contributed
        by
        JSIG and Mr. Yao to Co-win based on the agreement. The four patents’ application
        and ownership were transferred to Co-win in 2007 for the value of $1.02 million
        (RMB 7.5 million).
 
 The
        agreement provides that the joint venture entity will have the intellectual
        property rights to any products developed by the joint venture pursuant to
        the
        agreement. The Company requires government approval as to the organization
        and
        business license for the joint venture company. The business license for
        the
        operation of the joint venture was issued by Guangzhou Commercial and
        Administrative Bureaus on October 27, 2006.
 
 **Note
        4 - Inventories**
 
 Inventories
        consisted of only finished goods as of March 31, 2008 and December 31, 2007,
        as
        follows:
 
 March 31,
                2008
              
              December 31,
                2007Chemical
                  Medicine
              
              $
              4,923,381
              
              $
              3,948,460Totals
              
              $
              4,923,381
              
              $
              3,948,460
 
 **Note
        5 - Equipment**
 
 Equipment
        consisted of the following:
 
 March 31,
                2008
              
              December 31,
                2007Furniture
                  and fixtures
              
              $
              181,324
              
              $
              174,086Equipment
              
              
              1,316,384
              
              
              1,259,434Motor
                  vehicles
              
              
              422,236
              
              
              405,382Leasehold
                  improvement
              
              
              188,553
              
              
              181,027Total
              
              
              2,108,497
              
              
              2,019,929Less
                  accumulated depreciation
              
              
              (756,067
              )
              
              (631,010
              )Equipment,
                  net
              
              $
              1,352,430
              
              $
              1,388,919
  17
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (Unaudited)
 
 Depreciation
        expense for the three months ended March 31, 2008 and 2007 amounted to $96,726
        and $55,928 respectively.
 
 **Note
        6 - Customer deposits**
 
 The
        Company requires its customers to deposit monies with the Company when they
        place an order. The Company does not pay interest on these amounts. Customer
        deposits amounted to $156,052 and $203,281 as of March 31, 2008 and December
        31,
        2007, respectively.
 
 **Note
        7 - Taxes**
 
 The
        Company is organized in the United States and no tax benefit is expected
        from
        tax credits in the future.
 
 Beginning
        January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
        existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
        (“FIEs”).
 The
        key
        changes are:
 
 a.
                The
                    new standard EIT rate of 25% will replace the 33% rate currently
                    applicable to both DES and FIEs, except for High Tech companies
                    who pays a
                    reduced rate of 15%;
 
 b.
                Companies
                    established before March 16, 2007 will continue to enjoy tax
                    holiday
                    treatment approved by local government for a grace period of
                    either for
                    the next 5 years or until the tax holiday term is completed,
                    whichever is
                    sooner. These companies will pay the standard tax rate as defined
                    in point
                    “a” above when the grace period expires.
 
 The
        Company and its subsidiaries were established before March 16, 2007 and
        therefore are qualified to continue enjoying the reduced tax rate as described
        above. Since the detailed guidelines of the new tax law were not publicized
        yet,
        the Company can not determine what the new tax rate (15% or 25%) will be
        applicable to the Company and its subsidiaries
        after the end of their respective tax holiday terms.
  Under
        the
        Income Tax Laws of PRC, the Company is generally subject to income tax at
        an
        effective rate of 33% (30% state income taxes plus 3% local income taxes)
        on
        income reported in the statutory financial statements after appropriate tax
        adjustments, unless the enterprise is located in a specially designated region
        where it allows foreign enterprises a two-year income tax exemption and a
        50%
        income tax reduction for the following three years.
 
 The
        Company’s two subsidiaries, Konzern and Co-win are located and are doing
        business in China. Konzern was approved as a foreign Joint-venture enterprise
        in
        2004 and as a wholly-owned foreign enterprise in 2006. Konzern has an income
        tax
        exemption for 2004 and 2005 and a 50% reduction on the income tax rate for
        2006,
        2007 and 2008. Co-win has not obtained the approval for the tax exemption
        in
        2006, and was subjected to an effective rate of 33%.
  18
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (Unaudited)
 
 The
        estimated tax savings for the three months ended March 31, 2008 and 2007
        amounted $268,767 and $199,959 respectively. The net effect on earnings per share if the income tax had
        been
        applied would decrease earnings per share from $0.08 to $0.06
        for the three months ended March 31, 2008 and from $0.08 to $0.06
        for the three months ended March 31, 2007, respectively.
 
 The
        provision for income taxes for the three months ended March 31, 2008 and
        2007
        consisted of the following:
 
 2008
              
              2007Provision
                  for China Income Tax
              
              $
              244,334
              
              $
              181,781Provision
                  for Local Tax
              
              
              24,433
              
              
              18,178Total
              
              $
              268,767
              
              $
              199,959
 
 The
        following table reconciles the U.S. statutory rates to the Company's effective
        tax rate for the three months ended March 31:
 
 2008
              
              2007U.S.
                  Statutory rates
              
              
              34.0
              %
              
              34.0
              %Foreign
                  income not recognized in USA
              
              
              (34.0
              )
              
              (34.0
              )China
                  income taxes
              
              
              25.0
              
              
              33.0Income
                  tax exemption
              
              
              (8.5
              )
              
              (16.5
              )Effective
                  tax rate
              
              
              16.5
              %
              
              16.5
              %
 
 Taxes
        payable consisted of the following:
 
 March 31,
                2008
              
              December 31,
                2007Income
                  taxes payable
              
              $
              259,537
              
              $
              61,908Value
                  added tax
              
              
              80,387
              
              
              405,264Other
                  income tax
              
              
              2,095
              
              
              1,012Total
              
              $
              342,019
              
              $
              468,184
 
 **Note
        8 - Commitments and contingencies**
 
 The
        Company entered into a non-cancelable purchase commitment with a vendor.
        As of
        March 31, 2008, the Company was obligated under the non-cancelable commitment
        to
        purchase products amounting to $9,234,225. The Company has experienced no
        losses
        on these purchase commitments over the years.
 
 Total
        contribution payable to Co-win amounted approximately $1.3 million (RMB 9.4
        million) will be contributed to the joint venture in June 2008. Since Co-win
        is
        a consolidated entity, contribution payable was eliminated on the consolidated
        financial statements.
  19
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (Unaudited)
 
 The
        Company leases its facilities under short-term and long-term, non-cancelable
        operating lease agreements expiring through June 2010. The non-cancelable
        operating lease agreement states that the Company pays certain operating
        expenses applicable to the leased premises.
 
 As
        of
        March 31, 2008, the future minimum annual lease payments required are as
        follows:
 
 Year Ending March 31,
              
              Amount2008
              
              $
              113,8432009
              
              
              50,8762010
              
              
              5,703Thereafter
              
              
              -
 
 Total
        rent expense for the three months ended March 31, 2008 and 2007 amounted
        to
        $29,282 and $38,090, respectively.
 
 **Notes
        9 – Supplemental disclosure of cash flows**
 
 The
        Company received four patents for the value of $1.02 million (RMB 7.5 million)
        from its minority shareholders and has been offset to the contribution
        receivable.
 
 For
        the
        period ended March 31, 2008, holders of preferred stock converted 51,649
        shares
        of Series A Convertible Preferred Stock into 53,246 shares of common stock,
        par
        value $0.0001 per share.
 
 The
        Company paid $79,539 and $3,366 income taxes for the three months ended March
        31, 2008 and 2007, respectively.
 
 **Note
        10 - Statutory reserves**
 
 The
        laws
        and regulations of the People’s Republic of China require that before an
        enterprise distributes profits to its partners, it must first satisfy all
        tax
        liabilities, provide for losses in previous years, and make allocations,
        in
        proportions determined at the discretion of the board of directors, after
        the
        statutory reserve. The statutory reserves include surplus reserve fund and
        the
        enterprise fund and represent
        restricted retained earnings.
 
 Surplus
        reserve fund
 
 The
        Company is required to transfer 10% of its net income, as determined in
        accordance with the PRC accounting rules and regulations, to a statutory
        surplus
        reserve fund until such reserve balance reaches 50% of the Company’s registered
        capital.
 
 The
        transfer to this reserve must be made before distribution of any dividend
        to
        shareholders. For
        the
        three months ended March 31, 2008 and
        2007,
        the Company did not transfer any fund to this reserve. The surplus reserve
        fund
        is non-distributable other than during liquidation and can be used to fund
        previous years’ losses, if any, and may be utilized for business expansion or
        converted into share capital by issuing new shares to existing shareholders
        in
        proportion to their shareholding or by increasing the par value of the shares
        currently held by them, provided that the remaining reserve balance after
        such
        issue is not less than 25% of the registered capital.
  20
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (Unaudited)
  Enterprise
        fund
 
 The
        enterprise fund may be used to acquire plant and equipment or to increase
        the
        working capital to expend on production and operation of the business. No
        minimum contribution is required and the Company did not make any contribution
        to this fund for the three months ended March 31, 2008 and 2007.
  **Note
        11 - Retirement benefit plans**
 
 Regulations
        in the PRC require the Company to contribute to a defined contribution
        retirement plan for all permanent employees. The contribution is based on
        a
        percentage required by the local government and the employees' current
        compensation. The Company contributed $14,273 and $12,402 for the three months
        ended March 31, 2008 and 2007, respectively.
 
 **Note
        12 - Shareholders’ equity**
 
 Sale
        of preferred stock
 
 Contemporaneously
        with the reverse acquisition, the Company entered into a Preferred Stock
        Purchase Agreement (“PSPA”), dated February 8, 2006, with Barron Partners L.P.,
        Ray and Amy Rivers, JTROS, Steve Mazur and William Denkin pursuant to which
        the
        Company issued and sold an aggregate of 3,120,000 shares of its Series A
        Convertible Preferred Stock, a newly-created series of preferred stock, and
        warrants to purchase 3,694,738 shares of common stock at $1.75 per share
        and
        3,694,738 shares of common stock at $2.50 per share.
  The
        Series A Convertible Preferred Stock is convertible at the option of the
        holder
        at any time, into 3,120,000 shares of common stock, subject to adjustment
        set
        forth in the PSPA. No dividends are payable on the preferred stock and dividends
        may not be paid on the common stock while the preferred stock is outstanding.
        The preferred stock is not redeemable but has a liquidation preference of
        $1.25
        per share. Holders of the preferred stock are not entitled to vote, except
        on
        matters that would adversely affect their rights.
 
 The
        warrants have a term of five years and are exercisable by the holder at any
        time
        within the term. With certain exceptions, if the Company issues common stock
        at
        a price, or warrants or other convertible securities with an exercise or
        conversion price, which is less than the exercise price of the warrants,
        the
        exercise price of the warrants will be reduced to the sales price, exercise
        price or conversion price, as the case maybe, of such other securities. However,
        in such circumstances, the number of shares obtainable on exercise of the
        warrants is not changed.
  21
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (Unaudited)
  The
        conversion rate of the Series A Preferred Stock and the exercise price of
        the
        warrants (but not the number of shares obtainable on exercise) are subject
        to
        adjustment in certain events, including the failure to achieve specified
        levels
        of adjusted earnings before interest, taxes, depreciation and amortization
        or
        fully diluted pre-tax income per share, computed as set forth in the applicable
        agreements. Because pre-tax targets were not met, the conversion price of
        the
        preferred stock has been reduced from $1.25 to $1.22 resulting in approximately
        80,000 additional common shares to be issued. The exercise price of the warrants
        has been reduced from $1.75 to $1.70. There has been no effect on the financial
        statements for this change.
 
 On
        April
        23, 2007, the Company and the holders of the preferred shares and warrants
        executed a Waiver and Agreement that reduced the conversion price for preferred
        stock and the exercise price of the warrants by 3% of the original conversion
        amounts. The new agreement also requires the Company to redistribute the
        750,000
        shares issued to AiDi Financial Investment LLC, if recovered, as follows:
        50% to
        the Company’s senior executives and 50% to the holders of preferred shares.
        Further, the Series A Preferred Stock cannot be converted and the warrants
        cannot be exercised if such conversion or exercise would result in the holder
        and its affiliates owning more than 4.9% of the then outstanding number of
        shares of common stock. The Company evaluated the impact of this amendment
        and
        determined there is no effect on the financial statements, given that both
        instruments were originally accounted for as equity instruments and that
        a
        variation in the conversion and exercise prices was contemplated under the
        original terms of the instruments, the implementation of that condition does
        not
        require any separate accounting recognition.
 
 The
        Company valued the warrants at the time they were issued using the
        Cox-Ross-Rubinstein binomial model, based on the exercise price and term
        of the
        warrants and the following assumptions: fair value of common stock - $0.81;
        volatility - 50%; interest rate - 4.55%. Because there was no public market
        for
        the Company's common stock, the Company estimated the expected volatility
        of the
        Company's common stock over the term of the warrants based on a review of
        the
        historical volatility of other publicly-traded companies considered by
        management to be comparable to the Company. The fair value of the common
        stock
        and the Series A Preferred Stock was estimated based on the implicit value
        paid
        by the investors. As a result, based on these factors, the Series A Preferred
        Stock was valued at $2,518,615 and the warrants were valued at $1,381,385,
        reflecting the aggregate gross proceeds paid by the investors of
        $3,900,000.
 
 Under
        a
        Registration Rights Agreement with the investors, the Company was required
        to
        file a registration statement registering the common stock issuable upon
        conversion of the series A preferred stock and exercise of the warrants.
        The
        registration statement was filed on April 13, 2006, and was declared effective
        October 17, 2006. The Company incurred liquidated damages under the Registration
        Rights Agreement of $44,003 for the period from August 8, 2006 through October
        17, 2006; these amounts are accrued liabilities and were recorded as interest
        expense. Additionally, the Company is required to maintain its effectiveness
        until the expiration of two years after the date of the agreement or until
        the
        investors hold less than 10% of the registerable securities or more liquidated
        damages of approximately $19,000 per month will be incurred.
  22
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (Unaudited)
  The
        Company reviewed the terms of the Series A Preferred Stock and the Warrants,
        in
        accordance with FAS 133 and EITF Issue 00-19. The conversion option related
        to
        the Series A Preferred Stock is an embedded derivative instrument but the
        risks
        and rewards of that embedded derivative are considered to be clearly and
        closely
        related to the risks and rewards of the host instrument and, accordingly,
        the
        embedded derivative instrument has not been bifurcated. The Company has reviewed
        the requirements of EITF Issue 00-19 and concluded that the Warrants should
        be
        accounted for as equity instruments. Accordingly, the net proceeds from the
        sale
        of the preferred stock and warrants totaling $3,783,000, representing the
        gross
        proceeds received of $3,900,000, net of $117,000 of commissions, was recorded
        as
        equity.
 
 Common
        stock
 
 In
        2006,
        the Company issued 750,000 shares of common stock to individuals for services
        performed and of which 150,000 shares were issued to Ms. Meiyi Xia, the former
        officer of the Company, and 37,500 shares were issued to Ms. Lin Li, who
        is a
        officer of the Company. There is no established market for the Company's
        common
        stock. The value of the stocks was originally estimated $0.32 per share,
        totaled
        of $238,769. The Company re-evaluated the fair value of the common stock
        by
        determining the fair value that would equate the aggregate fair values of
        the
        Series A Preferred Stock and the Warrants to the gross cash proceeds received
        from the third-party investors, keeping all other valuation factors constant.
        Therefore, the Company valued the common stock at $0.81 per share for a total
        of
        $607,500 for the 750,000 shares issued, which amount was expensed during
        the
        year ended December 31, 2006.
  For
        the
        year ended December 31, 2007, 1,621,750 shares of warrants were exercised
        at
        $1.75 per share, 1,694,040 shares of warrants were exercised at $1.70 per
        share,
        and 725,000 shares of warrants were exercised at 2.43 per share for the year
        ended December 31, 2007. The Company received total of $7,479,681 cash from
        the
        exercise of warrants as of December 31, 2007.
 
 The
        Company entered into Investor Relations Consulting Agreement with Hayden
        Communication International, Inc. (“HC”) dated October 11, 2006, pursuant to
        which HC is to provide the Company public relations consulting services for
        certain consideration including the issuance of 43,125 shares of the Company’s
        common stock. On July 19, 2007, these shares have been issued to HC. The
        issuance of the shares is exempt from registration pursuant to Section 4(2)
        and
        regulation D promulgated under the Securities Act of 1933, as amended (the
‘1933
        Act”) and should contain a standard 1933 Act restrictive legend. Therefore,
        the Company valued the common stock at $3.12 per share for a total of $179,400
        for the 43,125 shares issued, $179,400 was expensed for the year ended December
        31, 2007.
 
 For
        the
        period ended March 31, 2008, holders of preferred stock converted 51,649
        shares
        of Series A Convertible Preferred Stock into 53,246 shares of common stock,
        par
        value $0.0001 per share. For the year ended December 31, 2007, the Company
        converted 2,228,351 and 780,000 shares of Series A Convertible Preferred
        Stock
        into 2,283,351.
  23
 CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
        31,
        2008
 (Unaudited)
 
 Stock
        options and warrants
 
 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.
 
 For
        the
        year ended December 31, 2007, 280,000 shares of stock options were exercised
        at
        $1.25 per share. The Company received a total of $350,000 cash from the stock
        options that were exercised.
 
 On
        April
        2, 2007, the Company granted a total of 15,000 stock options to three of
        its
        independent directors. The Options become exercisable for 7,500 shares of
        common
        stock six months from the grant date and the remaining 7,500 options, eighteen
        months from the grant date. For
        the
        year ended December 31, 2007, the Company expensed $16,492 related to these
        stock options.
 
 On
        November 22, 2007, the Company granted a total of 70,000 warrants to a third
        party for investor relations services. The Company valued these warrants
        at
        $71,753 using the Black Scholes model with the following factors: market
        price
        of $2.37; volatility of 50%; risk free rate of 3.4%; exercise price of $2.26;
        and an estimated life of 3.86 years. For the period ended March 31, 2008,
        the
        Company expensed $20,501 related to these warrants.
 
 For
        the
        period ended March 31, 2008, 290,000 options were exercised at $1.25 per
        share.
        The Company received a total of $362,500 cash from the exercise of stock
        options.
 
 SFAS
        No.
        123R requires that compensation expense related to the options granted be
        calculated based on the fair value of the options as of the date of grant.
        The
        fair value calculations take into account the exercise prices and expected
        lives
        of the options, the current price of the underlying stock, its expected
        volatility, the expected dividends on the stock, and the current risk-free
        interest rate for the expected life of the option. Because there is no trading
        market for the Company's common stock, no historical data on which to base
        an
        estimate of volatility. The Company has considered the volatility that might
        be
        expected to occur for companies comparable to the Company and, selected three
        publicly-traded companies whose business are similar to the Company's and
        who
        are classified in the same SIC code as the Company, have assumed a volatility
        of
        50% as being reasonably representative of the volatility that could be expected
        to occur in the future over the relevant periods. The risk-free rates used
        are
        based on Treasury Constant Maturity rates, published by the U.S. Federal
        Reserve.
  24
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (Unaudited)
 Since
        the
        Company does not have a history of employee stock options, the estimated
        life is
        based on one half of the sum of the vesting period and the contractual life
        of
        the option. For the three months ended March 31, 2008 and 2007, the Company
        expensed $5,656 and 21,279, respectively, for stock-based compensation.
 
 The
        Company used the Cox-Ross-Rubinstein binomial model to value the options,
        Warrants and the embedded conversion option of the Series A Preferred Stock.
        The
        following assumptions were used in the preparation of the above valuations
        at
        inception:
 
 
 Assumption
              
              Preferred Stock
              
              Warrants A
              
              Warrants B
              
              Stock optionsCommon
                  stock -fair value
              
              $
              0.81
              
              $
              0.81
              
              $
              0.81
              
              $
              0.81Expected
                  life
              
              
              Perpetual
              
              
              5 years
              
              
              5 years
              
              
              2.5 yearsVolatility
              
              
              
              
              
              50
              %
              
              50
              %
              
              50
              %Risk-free
                  rate
              
              
              
              
              
              4.55
              %
              
              4.55
              %
              
              4.65
              %
 
 OptionsSummary of option
                activity:
              
              Outstanding
              
              Exercisable
              
              Unvested
              
              Weighted-
                Average
                Exercise
                Price
              
              Weighted-
                Average
                Remaining
                Contractual
                Term (years)
              
              Intrinsic
                ValueDecember
                  31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Granted
              
              
              1,370,000
              
              
              944,000
              
              
              426,000
              
              
              1.25
              
              
              1.48Exercised
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -December
                  31, 2006
              
              
              1,370,000
              
              
              944,000
              
              
              426,000
              
              
              1.25
              
              
              1.48
              
              $
              2,479,700Granted
              
              
              15,000
              
              
              7,500
              
              
              7,500
              
              
              3.00
              
              
              5.00Exercised
              
              
              (280,000
              )
              
              (280,000
              )
              
              -
              
              
              1.25Forfeited
              
              
              -
              
              
              -
              
              
              -December
                  31, 2007
              
              
              1,105,000
              
              
              671,500
              
              
              433,500
              
              
              1.91
              
              
              0.53
              
              $
              1,041,750Granted
              
              
              -
              
              
              
              
              
              
              
              
              -Exercised
              
              
              (290,000
              )
              
              (290,000
              )
              
              -
              
              
              1.25Forfeited
              
              
              -March
                  31, 2008
              
              
              815,000
              
              
              381,500
              
              
              433,500
              
              
              1.91
              
              
              0.30
              
              $
              320,100
 
 25
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
          31,
          2008
 (Unaudited)
 WarrantsSummary of
                warrant activity:
              
              Outstanding
              
              Fair Market
                Value
              
              Weighted-
                Average Exercise
                Price
              
              Weighted-Average
                Remaining
                Contractual Term
                (years)December
                  31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -Granted
              
              
              7,389,476
              
              
              0.81
              
              
              2.13
              
              
              4.17Exercised
              
              
              -Forfeited
              
              
              -December
                  31, 2006
              
              
              7,389,476
              
              
              0.81
              
              
              2.13
              
              
              4.17Granted
              
              
              70,000
              
              
              2.37
              
              
              2.26
              
              
              3.86Exercised
              
              
              (4,040,790
              )
              
              3.18
              
              
              1.85Forfeited
              
              
              -December
                  31, 2007
              
              
              3,418,686
              
              
              2.85
              
              
              2.35
              
              
              3.17Granted
              
              
              -Exercised
              
              
              -Forfeited
              
              
              -March
                  31, 2008
              
              
              3,418,686
              
              
              2.85
              
              
              2.35
              
              
              2.92
  26




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





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





**Overview**





China
      Medicine Corporation (“we,” “us” or the “Company”), through Guangzhou Konzern
      Medicine Co., Ltd. (“Konzern”), our wholly owned subsidiary organized under the
      laws of the People’s Republic of China (the “PRC” or “China”), is a distributor
      of approximately 2,200 pharmaceutical products in China. Also as a developer
      of
      innovative pharmaceutical products, the Company currently has four patents
      registered with the PRC State Food and Drug Administration (the “SFDA”), and has
      seven other patents pending for approval. Co-win Bio-Engineering Ltd.
      (“Co-Win”), a PRC joint-venture company we created together with another entity
      (Konzern owns 70% ), has three patents related to ADTZ. Co-Win also applied
      for
      patents in 13 different countries and regions in 2007 (including Australia,
      Canada, the European Union, Indonesia, Israel, Japan, South Korea, Mexico,
      Russia, South Africa, the U.S., Hong Kong and India), all of which are under
      review as of the date of this report.




We
      generate revenue in two ways, the distribution of pharmaceutical products
      obtained from suppliers and the transfer of intellectual property, including
      drug formulas and production techniques.





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





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





Our
      distribution business depends on our ability to acquire our products and to
      distribute our products in the Chinese markets. Typically, exclusive nationwide
      or regional distribution rights contribute higher profit margins than
      non-exclusive distribution. Besides our exclusive rights to nationwide
      distribution of seven products made by our suppliers, we also have distribution
      rights throughout Guangdong Province of 774 products made by our suppliers.
      We
      expect to get more distribution rights in the future.





As
      of
      March 31, 2008, we had nationwide exclusive sales rights from our suppliers
      for
      seven products they produced, which accounted for $1,613,032, or 22.8% of our
      sales in the three months ended March 31, 2008, as compared to the nationwide
      exclusive sales rights we had for seven products for the same period in 2007,
      which accounted for $1,748,135, or 34.3% of sales in that period. Sales revenue
      from this part decreased $135,103, which was mainly because $900,000 of sales
      revenue from Iopamidol injection, one of the seven products, has been recognized
      and delivered on December 27, 2007, and has impacted the first quarter of 2008.
      Sales revenue from products that we can distribute in Guangdong province as
      of
      March 31, 2008, is $2,595,407, a $1,463,103 increase for the comparable period
      of 2007 .




27




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 product companies, hospitals
      and
      retail drug stores. Our five largest customers accounted for 39.4% and 50.3%
      of
      our sales for the three months ended March 31, 2008 and 2007, respectively.





Our
      largest account receivable at March 31, 2008 was approximately $1,299,577,
      representing approximately 3.7% of our total assets and approximately 4.1%
      of
      our working capital, and our three largest accounts receivable were
      approximately $3,748,322, representing approximately 10.6% of our total assets
      and approximately 11.9% of our working capital. Because a substantial portion
      of
      our sales are made to a small number of customers, our accounts receivable
      from
      a small number of customers may represent a large percentage of our accounts
      receivable and assets. This concentration of accounts receivable represents
      a
      significant credit risk.





Our
      five
      largest suppliers accounted for 58.7% and 63.2% of our purchases for the three
      months ended March 31, 2008 and March 31, 2007, respectively. Our agreements
      with our suppliers generally have a term of one year and provide that the
      suppliers will provide us with the products we order. None of our supply
      agreements have any minimum purchase requirements on our part. However, we
      are
      frequently required to make a significant down-payment when we place an order.
      These down payments are made pursuant to contracts with the suppliers, and
      to
      the extent that we reduce the size of the order, we will receive a credit from
      the supplier. The balance of our advances to suppliers was $6,908,467 and
      $5,983,277 as of March 31, 2008 and December 31, 2007, respectively.





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





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




**Results
      of Operations**




The
      following table sets forth our statements of operations for the three months
      ended March 31, 2008 and 2007, in U.S. dollars:




28




Three Months Ended March 31,2008
            
            2007Revenue
            
            $
            7,061,039
            
            $
            5,092,995Product
                sales
            
            
            6,851,384
            
            
            4,883,209Medical
                formula sales
            
            
            209,655
            
            
            209,786Costs
                of goods sold
            
            
            4,749,019
            
            
            3,405,417Gross
                profit
            
            
            2,312,020
            
            
            1,687,578R&D
                expenses
            
            
            88,392
            
            
            100,112Selling,
                general and administrative costs
            
            
            812,508
            
            
            643,846Income
                from operations
            
            
            1,411,120
            
            
            943,620Other
                (expense) income, net
            
            
            5,983
            
            
            (2,972
            )Income
                before income taxes & Minority interest
            
            
            1,417,103
            
            
            940,648Provision
                for income taxes
            
            
            268,767
            
            
            199,959Income
                before minority interest
            
            
            1,148,336
            
            
            740,689Minority
                interest
            
            
            27,477
            
            
            23,032Net
                income
            
            
            1,175,813
            
            
            763,721Other
                comprehensive income
            
            
            1,327,166
            
            
            256,489Comprehensive
                income
            
            $
            2,502,979
            
            $
            1,020,210





Our
      revenue is derived primarily from the sale of prescription and over the counter
      medicines, traditional Chinese medicines, which are medicines derived from
      Chinese herbs, dietary supplements and medical instruments (Collectively
“Product Sales”) and the sale of medical
      formula (“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 March 31,****2008**
            
            **2007****Prescription
                and Over the Counter Medicine**
            
            **$**
            **4,079,493**
            
            
            **57.78**
            **%**
            **$**
            **3,553,356**
            
            
            **69.77**
            **%****Traditional
                Chinese Medicine**
            
            
            **2,671,895**
            
            
            **37.84**
            **%**
            
            **1,306,029**
            
            
            **25.64**
            **%****Chinese
                Herbs**
            
            
            **0**
            
            
            **0**
            **%**
            
            **2,432**
            
            
            **0.05**
            **%****Dietary
                Supplements**
            
            
            **37,751**
            
            
            **0.53**
            **%**
            
            **5,485**
            
            
            **0.11**
            **%****Medical
                Instruments**
            
            
            **62,245**
            
            
            **0.88**
            **%**
            
            **15,907**
            
            
            **0.31**
            **%****Medical
                Formula**
            
            
            **209,655**
            
            
            **2.97**
            **%**
            
            **209,786**
            
            
            **4.12**
            **%****Total**
            
            **$**
            **7,061,039**
            
            
            **100**
            **%**
            **$**
            **5,092,995**
            
            
            **100**
            **%**





29




THE
      QUARTER ENDED MARCH 31, 2008 COMPARED TO THE QUARTER ENDED MARCH 31,
      2007




Sales




Total
      revenue for the three months ended March 31, 2008 was $7,061,039, an increase
      of
      $1,968,044, or 39%, from the total revenues of $5,092,995 for the comparable
      period in 2007.




Revenues
      from Product Sales for the three months ended March 31, 2008 was $6,851,384,
      an
      increase of $1,968,175, or 40%, from $4,883,209 for the comparable period in
      2007. Sales revenue from products for which we won distribution rights through
      the online bidding system of Guangdong Province for the three months ended
      March
      31, 2008 were $2,595,407, an increase of $1,463,103 from $1,132,304 for the
      comparable period in 2007.




Revenues
      from the proprietary product sales for the three months ended March 31, 2008
      was
      $640,828, an increase of $169,592 from $471,236 for the comparable period in
      2007. (Proprietary product sales are sales of products for which we own the
      intellectual property, and which we have manufactured by other companies.)
      Revenues from distribution sales for the three months ended March 31, 2008
      were
      $6,210,555, an increase of $1,801,015 from $4,409,540 for the comparable period
      in 2007.




Revenues
      from Medical Formula Sales for the three months ended March 31, 2008 were
      $209,655, a decrease of $131, or 0.06 %, from $209,786 for the comparable period
      in 2007. The Medical Formula Sales revenues represented the proceeds from the
      sale of certain technology and know-how on the production of medicines. We
      improve and develop the technology in its preliminary stage and then sell the
      improved technology to other pharmaceutical companies. The decrease in our
      Medical Formula Sales revenues was due to the market control by the PRC State
      Food and Drug Administration (“SFDA”). In China, every transfer of medical
      formula requires the approval from the SFDA. The SFDA recently strengthened
      its
      approval procedures by setting higher application criteria and more reviewing
      time. As a result, we estimate that our Medical Formula Sales revenues in 2008
      will decrease.




Cost
      of Sales




Cost
      of
      sales for the three months ended March 31, 2008 was $4,749,019, an increase
      of
      $1,343,602, or 39.45%, from $3,405,417 for the comparable period in 2007. Gross
      profit for the three months ended March 31, 2008 was $2,312,020, an increase
      of
      $624,442, or 37 %, from $1,687,578 for the comparable period of 2007. Our gross
      margin for the three months ended March 31, 2008 was 32.7 % as compared with
      33.1% for the three months ended March 31, 2007, a decrease of 0.4%. The gross
      margin for products is 30.69% and 30.26% for the first quarter of 2008 and
      2007
      respectively. The total gross margin decreased because of the decrease in
      medical formula revenue.




Research
      and Development




Research
      and development expenses were $88,392, which accounted for 1.25% of total
      revenue for the three months ended March 31, 2008, which was for the further
      study of mole construction and technology improvement of the Yutian capsule.
      Research and development expenses for the same period of 2007 were $100,112, or
      1.97%
      of total revenue. The R&D expense for the whole year of 2007 was
      $651,989.14, or 1.55% of total revenue. We expect our R & D expense as a
      percentage of revenues will remain consistent for 2008 as 2007.




30




Selling,
      General and Administrative Expenses




Selling,
      general and administrative expenses were $812,508 for the three months ended
      March 31, 2008, an increase of $168,662, or 26.20%, from $643,846 for the
      comparable period in 2007. The selling, general and administrative expenses
      including transportation, travel and salary expenses increased $116,305 for
      the
      three months ended March 31, 2008 as compared to the same period in
      2007.




Income
      Taxes




Provision
      for income taxes was $268,767 for the three months ended March 31, 2008 as
      compared with $199,959 for the comparable period in 2007. The increase was
      due
      to the increase of product sales and operating income.




Comprehensive
      Income




Comprehensive
      income for the three months ended March 31, 2008, was $2,502,979, an increase
      of
      $1,482,769 from $1,020,210 for the comparable period in 2007. The increase
      was
      mainly due to the increase in revenues of our Product Sales as that of the
      same
      period last year.




**Liquidity
      and Capital Resources**




As
      of
      March 31, 2008, we had working capital of $31,457,183, an increase of $2,912,822
      from $28,544,361 as of March 31, 2007.




We
      used
      cash of $1,142,167 in our operations for the three months ended March 31, 2008,
      an increase of $270,707 from $871,460 of cash used for the comparable period
      of
      2007.





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





Balance Sheet Caption
            
            Change in dollars
              12/31/07 to 03/31/08
            
            Percentage Change
              12/31/07 to 03/31/08Accounts
                receivable
            
            $
            (414,258
            )
            
            -3.04
            %Notes
                receivables
            
            
            1,682,184
            
            
            100
            %Inventories
            
            
            974,921
            
            
            24.69
            %Advances
                to suppliers
            
            
            925,190
            
            
            15.46
            %Accounts
                payable
            
            
            (28,243
            )
            
            -36.72
            %Customer
                deposits
            
            
            (47,229
            )
            
            -23.23
            %




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 inventories in order to enable
      us
      to meet anticipated increases in sales. From December 31, 2007 to March 31,
      2008, our inventories increased 24.69%. Our advances to suppliers increased
      15.46% because of an increase in our purchases resulting from increased sales
      and our payment policies, whereby we try to pay our suppliers in advance. In
      addition, our customer deposits decreased 23.23% from December 31, 2007 to
      March
      31, 2008 reflecting increased sales. We require our customers to pay a certain
      percentage of the sales price as deposit before we ship products to the
      customers. During the period ended March 31, 2008, we received $1.7 million
      notes receivables from our customers. The notes receivables are guaranteed
      payments from the customers’ banks.





31





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





**Recently
      Issued Accounting Pronouncements**




In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
      Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting
      enterprise accounts for the acquisition of a business. SFAS No. 141
      (Revised 2007) requires an acquiring entity to recognize all the assets acquired
      and liabilities assumed in a transaction at the acquisition-date fair value,
      with limited exceptions, and applies to a wider range of transactions or events.
      SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
      after December 15, 2008 and early adoption and retrospective application is
      prohibited.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements”, which is an amendment of Accounting Research
      Bulletin (“ARB”) No. 51.  This statement clarifies that a
      noncontrolling interest in a subsidiary is an ownership interest in the
      consolidated entity that should be reported as equity in the consolidated
      financial statements.  This statement changes the way the consolidated
      income statement is presented, thus requiring consolidated net income to be
      reported at amounts that include the amounts attributable to both parent and
      the
      noncontrolling interest.  This statement is effective for the fiscal
      years, and interim periods within those fiscal years, beginning on or after
      December 15, 2008.  Based on current conditions, the Company does not
      expect the adoption of SFAS 160 to have a significant impact on its results
      of
      operations or financial position.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities“. This Statement permits entities to
      choose to measure many financial assets and financial liabilities at fair value.
      Unrealized gains and losses on items for which the fair value option has been
      elected are reported in earnings. SFAS No. 159 is effective as of the beginning
      of an entity’s first fiscal year that begins after November 15, 2007. The
      Company adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect
      the option to measure the fair value of eligible financial assets and
      liabilities.




In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of FASB
      Statements No. 87, 88, 106, and 132(R)”. This statement requires employers to
      recognize the overfunded or underfunded status of a defined benefit
      postretirement plan (other than a multiemployer plan) as an asset or liability
      in its statement of financial position and to recognize changes in that funded
      status in the year in which the changes occur through comprehensive income
      of a
      business entity or changes in unrestricted net assets of a not-for-profit
      organization. This statement also requires an employer to measure the funded
      status of a plan as of the date of its year-end statement of financial position,
      with limited exceptions. The provisions of SFAS No. 158 are effective for
      employers with publicly traded equity securities as of the end of the fiscal
      year ending after December 15, 2006. The adoption of this statement had no
      effect on the Company‘s reported financial position or results of
      operations.




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.





32





**Critical
      Accounting Policies and Estimates**




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




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




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




Revenue
      recognition




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





Sales
      revenue represents the invoiced value of goods, net of a value-added tax (VAT).
      All of the Company’s products, which are sold exclusively in the PRC, are
      subject to a Chinese value-added tax at a rate of 13% to 17% of the gross sales
      price. This VAT may be offset by VAT paid by the Company on raw materials and
      other materials included in the cost of producing their finished
      product.





Research
      and development costs




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





Use
      of
      estimates





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




33




Inventories




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





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




***Disclosure
      Controls and Procedures***





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





As
      required by Rule 13a-15(e) and 15d-15(e) under the Exchange Act, our management
      carried out an evaluation, with the participation and under the supervision
      of
      our Chief Executive Officer, Mr. Senshan Yang and our Chief Financial Officer,
      Ms. Huizhen Yu, assessed the effectiveness of the design and operation of our
      disclosure controls and procedures as of March 31, 2008. Management conducted
      its evaluation of disclosure controls and procedures and determined that as
      of
      March 31, 2008, and as of the date of this Report, our disclosure controls
      and
      procedures were ineffective.




***Changes
      in Internal Controls over Financial Reporting***




Except
      as
      described above, there were no changes in our internal controls over financial
      reporting during the first quarter of fiscal year 2008 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.




34




**PART
      II OTHER INFORMATION**





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





On
      or
      about February 20, 2008, we issued 51,649 shares of our common stock to Barron
      Partners, LP, upon conversion by Barron Partners of 50,100 shares of our Series
      A Preferred Stock. We received no consideration for the issuance. The issuance
      was exempt from registration under Section 4(2) of the Securities Act of 1933
      and Regulation D thereunder because it was part of a transaction that did not
      involve a public offering, did not involve any general solicitation, and
      involved only a small number of purchasers, each of whom was capable of
      evaluating the merits and risks of the investment.




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





(a)
      Exhibits





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





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





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




35




SIGNATURES





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


CHINA
              MEDICINE
              CORPORATIONDate:
              May 15, 2008
            BY:
            /s/ China Medicine LogoSenshan
                YangChief
                Executive Officer
              (principal
                executive officer)


BY:
            /s/ China Medicine LogoHuizhen
                YuChief
                  Financial Officer
                (principal
                  financial officer and accounting
                  officer)





36