UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB





(MARK
      ONE)





[X]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007 OR





[
      ]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________





COMMISSION
      FILE NUMBER : 000-51379





_______________





**_______________CHINA
      MEDICINE CORPORATION__________________________**


(EXACT
      NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)





**DELAWARE**      **51-0539830_______________________**


(STATE
      OR
      OTHER JURISDICTION OF    (I.R.S.
      EMPLOYER IDENTIFICATION NO.)


INCORPORATION
      OR ORGANIZATION







**___
      24A Jefferson Plaza, Princeton, NJ**     **08540______**


(ADDRESS
      OF PRINCIPAL EXECUTIVE OFFICES)  (ZIP
      CODE)





**_________** **732
      438 8866_____________**


ISSUER
      'S
      TELEPHONE NUMBER














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


___________


Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No x .





**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**


**PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS**





Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
      under a plan confirmed by a court. Yes o No o .








**APPLICABLE
      ONLY TO CORPORATE ISSUERS**




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





The
      number of shares of Common Stock of the Registrant, par value $.0001 per share,
      outstanding at May 10, 2007 was 12,759,764.





Transitional
      Small business Disclosure Format (Check one): Yes o ;
      No x .

















**CHINA
      MEDICINE CORPORATION**














TABLE
      OF
      CONTENTS





PART
                  I
              
              FINANCIAL
                  INFORMATION
              ****
              PageItem
                  1.
              
              Financial
                  StatementsConsolidated
                  Balance Sheets
                As
                  of March 31, 2007 (Unaudited) and December 31, 2006
              
              2Consolidated
                  Statements of Income and Other Comprehensive Income
                Three
                  Months Ended March 31, 2007and 2006 (Unaudited)
              
              3Consolidated
                  Statements of Shareholders’ Equity
                Three
                  Months Ended March 31, 2007and 2006 (Unaudited)
              
              4Consolidated
                  Statements of Cash Flows
                Three
                  Months Ended March 31, 2007and 2006 (Unaudited)
              
              5Notes
                  to Consolidated Financial Statements
                March
                  31, 2007 (Unaudited)
              
              6Item
                  2.
              
              Management’s
                  Discussion and Analysis or Plan of Operation.
              
              22Item
                  3.
              
              Controls
                  and Procedures
              
              28PART
                  II
              
              OTHER
                  INFORMATION
              
              29Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds..
              
              29Item
                  6.
              
              Exhibits
              
              30Signatures
              
              
              
              31Exhibits/Certifications




1


**PART
      I. FINANCIAL INFORMATION**





**Item
      1. Financial Statements**


CHINA
      MEDICINE CORPORATION AND SUBSIDIARIES





CONSOLIDATED
      BALANCE SHEETS


AS
      OF
      MARCH 31, 2007 AND DECEMBER 31, 2006





ASSETSMarch
                31,
            
            December
                31,2007
            
            2006UnauditedCURRENT
                ASSETSCash
            
            $
            2,311,955
            
            $
            371,480Accounts
                receivable, trade, net of allowance for doubtful accountsof
                $34,366 and $34,021 as of March 31, 2007 andDecember
                31, 2006, respectively
            
            
            7,011,143
            
            
            7,034,911Inventories
            
            
            3,034,106
            
            
            1,900,467Advances
                to suppliers
            
            
            4,883,541
            
            
            4,077,412Other
                current assets
            
            
            87,276
            
            
            42,136Total
                current assets
            
            
            17,328,021
            
            
            13,426,406EQUIPMENT,
                net
            
            
            1,207,028
            
            
            1,215,311OTHER
                ASSETS - Intangible assets
            
            
            130,171
            
            
            682Total
                assets
            
            $
            18,665,220
            
            $
            14,642,399LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIESAccounts
                payable, trade
            
            $
            237,444
            
            $
            188,877Other
                payables - related parties
            
            
            30,000
            
            
            30,000Other
                payables and accrued liabilities
            
            
            17,791
            
            
            23,265Customer
                deposits
            
            
            72,901
            
            
            17,980Taxes
                payable
            
            
            335,844
            
            
            295,902Liquidated
                damages payable
            
            
            44,003
            
            
            44,003Total
                liabilities
            
            
            737,983
            
            
            600,027MINORITY
                INTEREST
            
            
            913,794
            
            
            908,480SHAREHOLDERS'
                EQUITYPreferred
                stock, $0.0001 par value; 10,000,000 shares authorized,1,890,000
                shares issued and outstanding at March 31, 2007 and2,340,000
                shares issued and outstanding at December 31, 2006
            
            
            189
            
            
            234Common
                stock, $0.0001 par value; 90,000,000 shares authorized,10,231,750
                shares issued and outstanding at March 31, 2007 and8,160,000
                shares issued and outstanding at December 31, 2006
            
            
            1,023
            
            
            816Paid-in
                capital
            
            
            7,256,150
            
            
            4,396,971Contribution
                receivable
            
            
            (961,500
            )
            
            (961,500
            )Statutory
                reserves
            
            
            1,345,206
            
            
            1,345,206Retained
                earnings
            
            
            8,742,963
            
            
            7,979,242Accumulated
                other comprehensive income
            
            
            629,412
            
            
            372,923Total
                shareholders' equity
            
            
            17,013,443
            
            
            13,133,892Total
                liabilities and shareholders' equity
            
            $
            18,665,220
            
            $
            14,642,399





The
      accompanying notes are an integral part of this statement.




2


CHINA
      MEDICINE CORPORATION AND SUBSIDIARIES





CONSOLIDATED
      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME


FOR
      THE
      THREE MONTHS ENDED MARCH 31, 2007 AND 2006


(Unaudited)





2007
            
            2006REVENUESProduct
                sales
            
            $
            4,883,209
            
            $
            3,511,979Medical
                formula sales
            
            
            209,786
            
            
            296,103Total
                revenues
            
            
            5,092,995
            
            
            3,808,082COST
                OF GOOD SOLD
            
            
            3,405,417
            
            
            2,459,550GROSS
                PROFIT
            
            
            1,687,578
            
            
            1,348,532OPERATING
                EXPENSESResearch
                and development
            
            
            100,112
            
            
            54,664Selling,
                general and administrative
            
            
            643,846
            
            
            503,468Reverse
                acquisition
            
            
            -
            
            
            323,770Total
                operating expenses
            
            
            743,958
            
            
            881,902INCOME
                FROM OPERATIONS
            
            
            943,620
            
            
            466,630OTHER
                INCOME (EXPENSE), NET
            
            
            (2,972
            )
            
            (9,492
            )INCOME
                BEFORE INCOME TAXES AND MINORITY INTEREST
            
            
            940,648
            
            
            457,138PROVISION
                FOR INCOME TAXES
            
            
            199,959
            
            
            165,581INCOME
                BEFORE MINORITY INTEREST
            
            
            740,689
            
            
            291,557MINORITY
                INTEREST
            
            
            23,032
            
            
            -NET
                INCOME
            
            
            763,721
            
            
            291,557OTHER
                COMPREHENSIVE INCOMEForeign
                currency translation adjustment
            
            
            256,489
            
            
            44,765COMPREHENSIVE
                INCOME
            
            $
            1,020,210
            
            $
            336,322Earning
                per share - basic
            
            $
            0.08
            
            $
            0.04Earning
                per share - diluted
            
            $
            0.06
            
            $
            0.04Weighted
                average number of shares outstanding - basic
            
            
            9,152,458
            
            
            6,992,778Weighted
                average number of shares outstanding - diluted
            
            
            12,808,226
            
            
            7,193,678





The
        accompanying notes are an integral part of this statement.
  3


CHINA
      MEDICINE CORPORATION AND SUBSIDIARIES





CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY


FOR
      THE
      THREE MONTHS ENDED MARCH 31, 2007 AND 2006





AccumulatedPreferred
                Stock
            
            Common
                Stock
            
            
            
            
            Retained
                Earnings
            otherPar
            
            
            
            Par
            
            Paid-in
            
            Contribution
            
            Statutory
            
            
            
            comprehensiveShares
            
            Value
            
            Shares
            
            Value
            
            capital
            
            receivable
            
            reserves
            
            Unrestricted
            
            income
            
            TotalsBALANCE,
                December 31, 2005
            
            
            -
            
            $
            -
            
            
            6,530,000
            
            $
            653
            
            $
            120,347
            
            $
            -
            
            $
            722,909
            
            $
            3,813,665
            
            $
            101,132
            
            $
            4,758,706Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            291,557
            
            
            
            
            
            291,557Reverse
                acquisition, February 8, 2006
            
            
            
            
            
            
            
            
            1,028,000
            
            
            103
            
            
            (32,501
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (32,398
            )Shares
                redeemed in connection with
                reverse
                  acquisition
            
            
            
            
            
            
            
            
            (928,000
            )
            
            (93
            )
            
            (167,509
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (167,602
            )Shares
                issued for acquisition services
            
            
            
            
            
            
            
            
            750,000
            
            
            75
            
            
            238,694
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            238,769Issuance
                of preferred stock
            
            
            3,120,000
            
            
            312
            
            
            
            
            
            
            
            
            3,782,688
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,783,000Foreign
                currency translation adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            44,765
            
            
            44,765BALANCE,
                March 31, 2006 (Unaudited)
            
            
            3,120,000
            
            $
            312
            
            
            7,380,000
            
            $
            738
            
            $
            3,941,719
            
            $
            -
            
            $
            722,909
            
            $
            4,105,222
            
            $
            145,897
            
            $
            8,916,797Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,496,317
            
            
            
            
            
            4,496,317Adjustment
                of statutory reserve
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            622,297
            
            
            (622,297
            )
            
            
            
            
            -Re-evaluation
                of fair value of
                shares
                  issued for acquisition services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            368,731
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            368,731Preferred
                stock converted to common stock
            
            
            (780,000
            )
            
            (78
            )
            
            780,000
            
            
            78
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Stock
                options granted
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            86,521
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            86,521Contribution
                receivable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (961,500
            )
            
            
            
            
            
            
            
            
            
            
            (961,500
            )Foreign
                currency translation adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            227,026
            
            
            227,026BALANCE,
                December 31, 2006
            
            
            2,340,000
            
            $
            234
            
            
            8,160,000
            
            $
            816
            
            $
            4,396,971
            
            $
            (961,500
            )
            $
            1,345,206
            
            $
            7,979,242
            
            $
            372,923
            
            $
            13,133,892Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            763,721
            
            
            
            
            
            763,721Preferred
                stock converted to common stock
            
            
            (450,000
            )
            
            (45
            )
            
            450,000
            
            
            45
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Warrant
                exercised
            
            
            
            
            
            
            
            
            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
            
            $
            629,412
            
            $
            17,013,443





The
        accompanying notes are an integral part of this statement.
  4


CHINA
      MEDICINE CORPORATION AND SUBSIDIARIES





CONSOLIDATED
      STATEMENTS OF CASH FLOWS


FOR
      THE
      THREE MONTHS ENDED MARCH 31, 2007 AND 2006


(Unaudited)





2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            763,721
            
            $
            291,557Adjustments
                to reconcile net income to cashused
                in operating activities:Minority
                interest
            
            
            (23,032
            )
            
            -Depreciation
                and amortization
            
            
            55,946
            
            
            21,478Provision
                for doubtful accounts
            
            
            345
            
            
            79Loss
                on sale of assets
            
            
            -
            
            
            15,570Stock
                issued for services
            
            
            -
            
            
            238,769Employee
                stock option
            
            
            21,279
            
            
            -Change
                in operating assets and liabilities:(Increase)
                decrease in assets:Accounts
                receivable, trade
            
            
            94,745
            
            
            (893,170
            )Inventories
            
            
            (1,110,151
            )
            
            (858,049
            )Other
                receivables
            
            
            -
            
            
            (75,143
            )Other
                receivables - related parties
            
            
            -
            
            
            (60,442
            )Advances
                to suppliers
            
            
            (761,889
            )
            
            (997,672
            )Other
                current assets
            
            
            (44,544
            )
            
            -Increase
                (decrease) in liabilities:Accounts
                payable, trade
            
            
            46,475
            
            
            833,982Other
                payables and accrued liabilities
            
            
            (5,688
            )
            
            (94,462
            )Customer
                deposits
            
            
            54,531
            
            
            5,962Taxes
                payable
            
            
            36,802
            
            
            195,031Net
                cash used in operating activities
            
            
            (871,460
            )
            
            (1,376,510
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of equipment
            
            
            (35,399
            )
            
            (483,292
            )Purchase
                of intangible asset
            
            
            (129,010
            )
            
            -Net
                cash used in investing activities
            
            
            (164,409
            )
            
            (483,292
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Payments
                on short-term loans
            
            
            -
            
            
            (95,696
            )Proceeds
                from issuance of preferred stocks
            
            
            -
            
            
            3,783,000Proceeds
                from exercised of warrants
            
            
            2,838,062
            
            
            -Cash
                paid on shares redeemed
            
            
            -
            
            
            (167,602
            )Net
                cash provided by financing activities
            
            
            2,838,062
            
            
            3,519,702EFFECT
                OF EXCHANGE RATE ON CASH
            
            
            138,282
            
            
            6,415INCREASE
                IN CASH
            
            
            1,940,475
            
            
            1,666,315CASH,
                beginning of period
            
            
            371,480
            
            
            91,964CASH,
                end of period
            
            $
            2,311,955
            
            $
            1,758,279


The
        accompanying notes are an integral part of this statement.
  5




CHINA
      MEDICINE CORPORATION AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2007


(Unaudited)





**Note
      1 - Organization**





Organization





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





Effective
      February 8, 2006, the Company entered into a Stock Exchange Agreement ("Exchange
      Agreement") with Guangzhou Konzern Medicine Co., Ltd. ("Konzern"). Pursuant
      to
      the Exchange Agreement, the Company, at closing, acquired all of the capital
      of
      Konzern from Konzern’s three principal shareholders (“Konzern Stockholders”) in
      exchange for 6,530,000 shares of the Company's common stock. For accounting
      purposes, the acquisition of Konzern was treated as a recapitalization of
      Konzern with Konzern as the acquirer. The historical financial statements prior
      to February 8, 2006 are those of Konzern. Contemporaneously with the reverse
      acquisition, the Company redeemed 928,000 shares of common stock from its then
      principal stockholder who is not affiliated with the Konzern Stockholders or
      any
      member of the investor group for $167,602 and paid off loans from a related
      party for $32,398. The 928,000 shares purchased constituted approximately 90.3%
      of the 1,028,000 shares of common stock outstanding prior to the issuance of
      the
      shares of common stock pursuant to the Exchange Agreement. We issued 750,000
      shares of common stock as disclosed in Note 15.





Konzern
      was privatized from a state-owned medicine company on July 25, 2000 in
      Guangzhou, People's Republic of China (PRC). The registered capital was
      $121,000. The Company has increased Konzern's registered capital by $2,300,000
      with the proceeds received from the sale of preferred stock (see Note 15).
      Konzern’s business license provides for a 24 year term and will end on September
      2, 2024.





On
      July
      7, 2006, Konzern entered into a Joint Cooperation Agreement with Guangzhou
      Ji'nan Science & Technology Industrial Group Co., Ltd. ("JSIG") and an
      individual, Mr. Dongsheng Yao, to jointly form Guangzhou Co-win Bioengineering
      Co., Ltd. (“Co-win”) for the purpose of development and application of
      aflatoxin-detoxifizyme ("ADTZ"). Konzern does not have any material relationship
      with JSIG or Mr. Yao other than this Agreement. The business license was issued
      by Guangzhou Commercial and Administrative Bureaus on October 27, 2006. The
      registered capital is RMB 25,000,000, approximately $3,200,000 with a 2-year
      term from June 5, 2006 to June 5, 2008. As of March 31, 2007, Konzern owns
      a 70%
      ownership in Co-win.





Operating
      Activities





The
      Company’s business operations consist of the wholesale of prescription and over
      the counter medicines, traditional Chinese medicines, which are medicines
      derived from Chinese herbs, dietary supplements, medical instruments and
      the sale of medical formula.


6
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


**Note
      2 - Summary of significant accounting policies**





Basis
      of presentation





The
      consolidated financial statements of the Company reflect its wholly-owned
      subsidiary, Konzern, and its 70% owned subsidiary, Co-win, both are located
      in
      the PRC. The consolidated financial statements have been presented as if the
      Exchange Agreement of the subsidiary (Konzern) occurred at the beginning of
      2006
      due to common management and ownership.





The
      accompanying financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America. All
      material transactions and balances have been eliminated in the
      consolidation.





Use
      of
      estimates





In
      preparing financial statements in conformity with generally accepted accounting
      principles, management is required to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and the disclosure of contingent
      assets and liabilities at the date of the financial statements and revenues
      and
      expenses during the reported period. Actual results could differ from those
      estimates.





Cash
      and concentration of risk





For
      purposes of the cash flow statements, the Company considers all highly liquid
      investments with original maturities of three months or less at the time of
      purchase to be cash equivalents. Cash includes cash on hand and demand deposits
      in accounts maintained with state owned banks within PRC and the United
      States.





The
      Company's operations may be adversely affected by significant political,
      economic and social uncertainties in China. Although the Chinese government
      has
      pursued economic reform policies in the past, there is no assurance that the
      Chinese government will continue to pursue such policies or that such policies
      may not be significantly altered, especially in the event of a change in
      leadership, social or political disruption or unforeseen circumstances affect
      China's political, economic and social conditions. There is also no guarantee
      that the Chinese government's pursuit of economic reforms will be consistent
      or
      effective.





Financial
      instruments, which subject the Company to concentration of credit risk, consist
      of cash. The Company maintains balances at financial institutions which, from
      time to time, may exceed Federal Deposit Insurance Corporation insured limits
      for the bank that is located in the Unites States, no deposits with the state
      owned banks within the PRC are covered by insurance. As of March 31, 2007 and
      December 31, 2006, the Company had deposits in excess of federally insured
      limits total of $1,547,050 and $225,467 ,
      respectively. The Company has not experienced any losses in such accounts and
      believes it is not exposed to any significant risks on its cash in bank
      accounts.


7
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


Accounts
      receivable, trade





The
      Company extends unsecured credit to its customers. Management reviews its
      accounts receivable on a regular basis to determine if the bad debt allowance
      is
      adequate for potential uncollectible amounts due to deterioration of customer
      operations. As such, the Company records a provision for bad debts that ranges
      from 0.3%
      to
      1.0% of the
      outstanding accounts receivable. The allowance for doubtful accounts as of
      March
      31, 2007 and December 31, 2006 amounted to $34,366 and $34,021 ,
      respectively.





Inventories





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





Equipment





Equipment
      is stated at the actual cost of acquisition less accumulated depreciation and
      amortization. Depreciation and amortization are provided for in amounts
      sufficient to relate the cost of depreciation of assets to operations over
      their
      estimated service lives, principally on a straight-line basis. The estimated
      lives used in determining depreciation are:





Furniture
            
            
            3
                - 5 yearsEquipment
            
            
            3
                - 5 yearsMotor
                vehicles
            
            
            4
                - 10 years





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





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





Intangibles





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





The
      Company acquired the technology to manufacture aflatoxin-detoxifizyme ("ADTZ")
      amounted $129,500. The Company will begin amortizing costs once manufacturing
      begins.


8
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


Impairment
      of long-lived assets





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





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





Revenue
      recognition





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





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





VAT
      on
      sales and VAT on purchases amounted to $833,201 and $770,027 for the three
      months ended March 31, 2007 and $465,627 and $431,153 for the three months
      ended
      March 31, 2006, respectively. Sales and purchases are recorded net of VAT
      collected and paid as the Company acts as an agent for the government. VAT
      taxes
      are not impacted by the income tax holiday.





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 their functional currency. Results of operations
      and cash flow are translated at average exchange rates during the period, and
      assets and liabilities are translated at the unified exchange rate as quoted
      by
      the People’s Bank of China at the end of the period. Translation adjustments
      resulting from this process are included in accumulated other comprehensive
      income in the statement of shareholders’ equity.


9
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


Translation
      adjustments amounted to $629,412 and $372,923 as of March 31, 2007 and December
      31, 2006, respectively. Asset and liability accounts at March 31, 2007 were
      translated at 7.72 RMB to $1.00 USD as compared to 7.80 RMB at December 31,
      2006. Equity accounts were stated at their historical rate. The average
      translation rates applied to income statements accounts for the three months
      ended March 31, 2007 and 2006 were 7.75 RMB and 8.05 RMB, respectively. Cash
      flows are also translated at average translation rates for the period,
      therefore, amounts reported on the statement of cash flows will not necessarily
      agree with changes in the corresponding balances on the balance sheet.





Transaction
      gains and losses that arise from exchange rate fluctuations on transactions
      denominated in a currency other than the functional currency are included in
      the
      results of operations as incurred. Historically, the Company has not entered
      any
      currency trading or hedging transactions, although there is no assurance that
      the Company will not enter into such transactions in the future.





Income
      taxes





The
      Company adopted Statement of Financial Accounting Standards No. 109, "Accounting
      for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of deferred
      income tax liabilities and assets for the expected future tax consequences
      of
      temporary differences between income tax basis and financial reporting basis
      of
      assets and liabilities. Provision for income taxes consist of taxes currently
      due plus deferred taxes. There are no deferred tax amounts at March 31, 2007
      and
      December 31, 2006.





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




Deferred
      tax is accounted for using the balance sheet liability method in respect of
      temporary differences arising from differences between the carrying amount
      of
      assets and liabilities in the financial statements and the corresponding tax
      basis used in the computation of assessable tax profit. In principle, deferred
      tax liabilities are recognized for all taxable temporary differences, and
      deferred tax assets are recognized to the extent that it is probably that
      taxable profit will be available against which deductible temporary differences
      can be utilized. Deferred tax is calculated at the tax rates that are expected
      to apply to the period when the asset is realized or the liability is settled.
      Deferred tax is charged or credited in the income statement, except when it
      related to items credited or charged directly to equity, in which case the
      deferred tax is also dealt with in equity. Deferred tax assets and liabilities
      are offset when they relate to income taxes levied by the same taxation
      authority and the Company intends to settle its current tax assets and
      liabilities on a net basis.


10
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


The
      Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
      Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
      benefit only if it is “more likely than not” that the tax position would be
      sustained in a tax examination, with a tax examination being presumed to occur.
      The amount recognized is the largest amount of tax benefit that is greater
      than
      50% likely of being realized on examination. For tax positions not meeting
      the
“more likely than not” test, no tax benefit is recorded. The adoption had no
      affect on the Company’s financial statements.





China
      Medicine Corporation was incorporated in the United States and has incurred
      net
      operating losses for income tax purposes for 2006 and 2005. The net operating
      loss carry forwards for United States income taxes amounted to $1,467,593 which
      may be available to reduce future years’ taxable income. These carry forwards
      will expire, if not utilized, through 2025 and 2026. Management believes that
      the realization of the benefits from these losses appears uncertain due to
      the
      Company’ limited operating history and continuing losses for United States
      income tax purposes. Accordingly, the Company has provided a 100% valuation
      allowance on the deferred tax asset benefit to reduce the asset to zero. The
      valuation allowance at December 31, 2006 was $499,000. The net change in the
      valuation allowance for 2006 was an increase of $499,000. Management will review
      this valuation allowance periodically and make adjustments as
      warranted.




Fair
      value of financial instruments





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





Stock-based
      compensation





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




Major
      suppliers





For
      the
      three months ended March 31, 2007 and 2006, five suppliers accounted for
      approximately 65 %
      and
      54%, respectively, of the Company's purchases. These five suppliers represent
      32% of the Company’s total advances to suppliers as of March 31, 2007.


11
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


Major
      customers





For
      the
      three months ended March 31, 2007 and 2006, four customers accounted for
      approximately 46% and 63%, respectively, of the Company's sales. The accounts
      receivable balance of these four customers amounted $1,274,422 as of March
      31,
      2007.





Earnings
      per share





The
      Company reports earnings per share in accordance with the provisions of SFAS
      No.
      128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
      diluted earnings per share in conjunction with the disclosure of the methodology
      used in computing such earnings per share. Basic earnings per share is computed
      by dividing income available to common stockholders by the weighted average
      common shares outstanding during the period. Diluted earnings per share takes
      into account the potential dilution that could occur if securities or other
      contracts to issue common stock were exercised and converted into common
      stock.





The
      following is a reconciliation of the basic and diluted earnings per share
      computations for the three months ended March 31:





2007
            
            2006Unaudited
            
            UnauditedNet
                income for earnings per share
            
            $
            763,721
            
            $
            291,557Shares
                of common stock and commonstock
                equivalents:Weighted
                average shares used in basic computation
            
            
            9,152,458
            
            
            6,992,778Diluted
                effect of stock options, warrants,and
                preferred stocks
            
            
            3,655,768
            
            
            200,900Weighted
                average shares used in diluted computation
            
            
            12,808,226
            
            
            7,193,678Earnings
                per share:Basic
            
            $
            0.08
            
            $
            0.04Diluted
            
            $
            0.06
            
            $
            0.04





All
      options and warrants have been included in the calculation of diluted earnings
      per share.





Reclassifications





Certain
      prior period amounts have been reclassified to conform to current period
      presentation. These reclassifications have no effect on net income or cash
      flows.





Recently
      issued accounting pronouncements





In
      June
      2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF No.
      06-3, How Taxes Collected from Customers and Remitted to Governmental
      Authorities Should Be Presented in the Income Statement (EITF No. 06-3). EITF
      No. 06-3 permits that such taxes may be presented on either a gross basis or
      a
      net basis as long as that presentation is used consistently. The adoption of
      EITF No. 06-3 on January 1, 2007 did not impact our consolidated financial
      statements. We present the taxes within the scope of EITF No. 06-3 on a net
      basis.


12
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109”
(“FIN 48”). The Company adopted Interpretation No. 48 on January 1, 2007. (See
      Note 2 - Income taxes)





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
      addresses the measurement of fair value by companies when they are required
      to
      use a fair value measure for recognition or disclosure purposes under GAAP.
      SFAS
      No. 157 provides a common definition of fair value to be used throughout GAAP
      which is intended to make the measurement of fair value more consistent and
      comparable and improve disclosures about those measures. SFAS No. 157 will
      be
      effective for an entity's financial statements issued for fiscal years beginning
      after November 15, 2007. The Company is currently evaluating the effect SFAS
      No.
      157 will have on its consolidated financial position, liquidity, or results
      of
      operations.





In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
      Assets and Financial Liabilities — Including an amendment of FASB Statement No.
      115 (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial
      instruments and certain other items at fair value that  are
      not
      currently required to be measured at fair value. The objective of SFAS 159
      is to
      provide opportunities to mitigate volatility in reported earnings caused
      by  measuring
      related assets and liabilities differently without having to apply hedge
      accounting provisions. SFAS 159 also establishes presentation and
      disclosure  requirements
      designed to facilitate comparisons between companies that choose different
      measurement attributes for similar types of assets and liabilities.
      SFAS  159
      will
      be effective in the first quarter of fiscal 2009. The Company is evaluating
      the
      impact that this statement will have on its consolidated financial  statements.





**Note
      3 - Contribution receivable**





On
      July
      7, 2006, Konzern, our 100% subsidiary in China, 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.





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


13
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


The
      contribution receivable represents the capital contribution to be made by
      Guangzhou Jinan Keji Chanyu Group Ltd. and Dongsheng Yang to Co-win by June
      30,
      2007. The contribution receivable amounted $961,500 as of March 31,
      2007.





The
      agreement provides that the joint venture entity will have the intellectual
      property rights to any products developed by the joint venture pursuant to
      the
      agreement. The Company requires government approval as to the organization
      and
      business license for the joint venture company. The business license for the
      operation of the joint venture was issued by Guangzhou Commercial and
      Administrative Bureaus on October 27, 2006.





**Note
      4 - Inventories**





Inventories
      consisted of the following:


March
                31,
            
            December
                31,2007
            
            2006UnauditedChemical
                Medicine
            
            $
            3,031,502
            
            $
            1,897,789Traditional
                Chinese Medicine
            
            
            2,604
            
            
            2,678Totals
            
            $
            3,034,106
            
            $
            1,900,467




**Note
      5 - Advances to suppliers**





Advances
      to suppliers for inventory purchases and future research and development service
      as of March 31, 2007 and December 31, 2006 amounted to $4,883,541 and
      $4,077,412, respectively.





**Note
      6 - Equipment**





Equipment
      consisted of the following:


March
                31,
            
            December
                31,2007
            
            2006UnauditedFurniture
                and fixtures
            
            $
            171,152
            
            $
            205,182Equipment
            
            
            1,124,611
            
            
            1,076,368Motor
                vehicles
            
            
            264,561
            
            
            227,933Total
            
            
            1,560,324
            
            
            1,509,483Less
                accumulated depreciation
            
            
            353,296
            
            
            294,172Equipment,
                net
            
            $
            1,207,028
            
            $
            1,215,311




Depreciation
      expense for the three months ended March 31, 2007 and 2006 amounted to $55,928
      and $21,478 respectively.





**Note
      7 - Customer deposits**





The
      Company requires their customers to deposit monies with the Company when they
      place an order for their products. The Company does not pay interest on these
      amounts. Customer deposits amounted to $72,901 and $17,980 as of March 31,
      2007
      and December 31, 2006, respectively.


14
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


**Note
      8 - Taxes**





The
      Company is organized in the United States and no tax benefit is expected from
      tax credits in the future.





Beginning
      January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
      existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
      (“FIEs”).





The
      key
      changes are:




a.
            The
                new standard EIT rate of 25% will replace the 33% rate currently
                applicable to both DES and FIEs, except for High Tech companies who
                pays a
                reduced rate of 15%;


b.
            Companies
                established before March 16, 2007 will continue to enjoy tax holiday
                treatment approved by local government for a grace period of either
                for
                the next 5 years or until the tax holiday term is completed, whichever
                is
                sooner. These companies will pay the standard tax rate as defined
                in point
                “a” above when the grace period expires.





The
      company and its subsidiaries were established before March 16, 2007 and
      therefore are qualified to continue enjoying the reduced tax rate as described
      before. Since the detailed guidelines of the new tax law is not publicized
      yet,
      the Company can not determined what the new tax rate (15% or 25%) will be
      applicable to the Company and its subsidiaries after the end of their respective
      tax holiday terms.





Under
      the
      existing Income Tax Laws of PRC, the Company is generally subject to an income
      tax at an effective rate of 33% (30% state income taxes plus 3% local income
      taxes) on income reported in the statutory financial statements after
      appropriate tax adjustments, unless the enterprise is located in a specially
      designated region where it allows foreign enterprises a two-year income tax
      exemption and a 50% income tax reduction for the following three years.





The
      Company’s two subsidiaries, Konzern and Co-win are located and are doing
      business in China. Konzern was approved as a foreign Joint-venture enterprise
      in
      2004 and as a wholly-owned foreign enterprise in 2006. Konzern has an income
      tax
      exemption for 2004 and 2005 and a 50% reduction the income tax rate for 2006,
      2007 and 2008. Co-win has not obtained the approval for the tax exemption in
      2006, and was subjected to an effective rate of 33%.





The
      estimated tax savings for the period ending March 31, 2007 and 2006 amounted
      $199,959 and $165,581 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, 2007 and from $0.04 to $0.02
      for the three months ended March 31, 2006, respectively.


15
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


The
      provision for income taxes at March 31 consisted of the following:





2007
            
            2006Unaudited
            
            UnauditedProvision
                for China Income Tax
            
            $
            181,781
            
            $
            150,528Provision
                for Local Tax
            
            
            18,178
            
            
            15,053Total
            
            $
            199,959
            
            $
            165,581





The
      following table reconciles the U.S. statutory rates to the Company's effective
      tax rate for the three months ended March 31:





2007
            
            2006U.S.
                Statutory rates
            
            
            34.0
            %
            
            34.0
            %Foreign
                income not reognized in USA
            
            
            (34.0
            )
            
            (34.0
            )China
                income taxes
            
            
            33.0
            
            
            33.0Income
                tax exemption
            
            
            (16.5
            )
            
            (16.5
            )Effective
                tax rate
            
            
            16.5
            %
            
            16.5
            %





Taxes
      payable consisted of the following at March 31:





March
                31,
            
            December
                31,2007
            
            2006UnauditedIncome
                taxes payable
            
            $
            181,827
            
            $
            (15,380
            )Individual
                income tax
            
            
            1,416
            
            
            487Value
                added tax
            
            
            152,601
            
            
            310,795Total
            
            $
            335,844
            
            $
            295,902





**Note
      9 - Related party transactions**





As
      of
      March 31, 2007 and December 31, 2006, amounts due to related parties totaled
      $30,000. Those amounts were generated from making cash advances to or from
      the
      shareholders for ordinary business expenses. These amounts are unsecured, non
      interest bearing, and have no fixed terms of repayment.





**Note
      10 - Minority interest**





Minority
      interest consists of the interest of minority shareholders in Co-win. The
      Company’s wholly owned subsidiary Konzern owns 70% ownership interest in
      Co-win.





**Note
      11 - Commitments and contingencies**





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


16
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


As
      of
      March 31, 2007, the future minimum annual lease payments required are as
      follows:





Year
                Ending December 31,
            
            Amount2007
            
            
            130,9152008
            
            
            134,0112009
            
            
            134,011Thereafter
            
            
            ---





Total
      rental expense for the three months ended March 31, 2007 and 2006 amounted
      to
      $38,090 and $11,583, respectively.





**Notes
      12 - Supplemental disclosure of cash flows**





The
      Company paid $0 and $1,649 for interest and $3,366 and $0 for income tax for
      the
      three months ended March 31, 2007 and 2006, respectively.





**Note
      13 - Statutory reserves**





The
      laws
      and regulations of the People’s Republic of China require that before an
      enterprise distributes profits to its partners, it must first satisfy all tax
      liabilities, provide for losses in previous years, and make allocations, in
      proportions determined at the discretion of the board of directors, after the
      statutory reserve. The statutory reserves include surplus reserve fund and
      the
      enterprise fund and represent
      restricted retained earnings.





Surplus
      reserve fund





The
      Company is required to transfer 10% of its net income, as determined in
      accordance with the PRC accounting rules and regulations, to a statutory surplus
      reserve fund until such reserve balance reaches 50% of the Company’s registered
      capital.





The
      transfer to this reserve must be made before distribution of any dividend to
      shareholders. For
      the
      three months ended March 31, 2007 and
      2006,
      the Company did not transfer any fund to this reserve. The surplus reserve
      fund
      is non-distributable other than during liquidation and can be used to fund
      previous years’ losses, if any, and may be utilized for business expansion or
      converted into share capital by issuing new shares to existing shareholders
      in
      proportion to their shareholding or by increasing the par value of the shares
      currently held by them, provided that the remaining reserve balance after such
      issue is not less than 25% of the registered capital.





Enterprise
      fund





The
      enterprise fund may be used to acquire plant and equipment or to increase the
      working capital to expend on production and operation of the business. No
      minimum contribution is required and the company did not make any contribution
      to this fund for the three months ended March 31, 2007.


17
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


**Note
      14 - Retirement benefit plans**





Regulations
      in the PRC require the Company to contribute to a defined contribution
      retirement plan for all permanent employees. The contribution is based on a
      percentage required by the local government and the employees' current
      compensation. The Company contributed $12,402 and $17,947 for the three months
      ended March 31, 2007 and 2006, respectively.





**Note
      15 - Shareholders’ equity**





Sale
      of preferred stock





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


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





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





The
      conversion rate of the Series A Preferred Stock and the exercise price of the
      warrants (but not the number of shares obtainable on exercise) are subject
      to
      adjustment in certain events, including the failure to achieve specified levels
      of adjusted earnings before interest, taxes, depreciation and amortization
      or
      fully diluted pre-tax income per share, computed as set forth in the applicable
      agreements. Because pre-tax targets were not met, the conversion price of the
      preferred stock would have been reduced from $1.25 to $1.22 resulting in
      approximately 80,000 additional common shares to be issued. The exercise price
      of the warrants would have been reduced from $1.75 to $1.70. There would have
      been no effect on the financial statements for this change. On April 23, 2007,
      the Company and the holders of the preferred shares and warrants executed a
      Waiver and Agreement that reduced the conversion price for preferred stock
      and
      the exercise price of the warrants by 3% of the original conversion amounts.
      The
      new agreement also requires the Company to redistribute the 750,000 shares
      issued to AiDi Financial Investment LLC, if recovered, as follows: 50% to the
      Company’s senior executives and 50% to the holders of preferred shares. The
      Company is currently evaluating the impact of this amendment. Further, the
      Series A Preferred Stock cannot be converted and the warrants cannot be
      exercised if such conversion or exercise would result in the holder and its
      affiliates owning more than 4.9% of the then outstanding number of shares of
      common stock.


18
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


The
      Company valued the warrants at the time they were issued using the
      Cox-Ross-Rubinstein binomial model, based on the exercise price and term of
      the
      warrants and the following assumptions: fair value of common stock - $0.81;
      volatility - 50%; interest rate - 4.55%. Because there was no public market
      for
      the Company's common stock, the Company estimated the expected volatility of
      the
      Company's common stock over the term of the warrants based on a review of the
      historical volatility of other publicly-traded companies considered by
      management to be comparable to the Company. The fair value of the common stock
      and the Series A Preferred Stock was estimated based on the implicit value
      paid
      by the investors. As a result, based on these factors, the Series A Preferred
      Stock was valued at $2,518,615 and the warrants were valued at $1,381,385,
      reflecting the aggregate gross proceeds paid by the investors of
      $3,900,000.





Under
      a
      Registration Rights Agreement with the investors, the Company was required
      to
      file a registration statement registering the common stock issuable upon
      conversion of the series A preferred stock and exercise of the warrants. The
      registration statement was filed on April 13, 2006, and was declared effective
      October 17, 2006. The Company incurred liquidated damages under the Registration
      Rights Agreement of $44,003 for the period from August 8, 2006 through October
      17, 2006; these amounts are accrued liabilities and were recorded as interest
      expense. Additionally, the Company is required to maintain its effectiveness
      until the expiration of two years after the date of the agreement or until
      the
      investors hold less than 10% of the registrable securities or more liquidated
      damages of approximately $19,000 per month will be incurred.





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





Common
      stock





The
      Company issued 750,000 shares of common stock to individuals for services
      performed and of which 150,000 shares were issued to Ms. Meiyi Xia and 37,500
      shares were issued to Ms. Lin Li, who are officers of the Company. There is
      no
      established market for the Company's common stock. The value of the stocks
      was
      originally estimated $0.32 per share, totaled of $238,769. The Company
      re-evaluated the fair value of the common stock by determining the fair value
      that would equate the aggregate fair values of the Series A Preferred Stock
      and
      the Warrants to the gross cash proceeds received from the third-party investors,
      keeping all other valuation factors constant. Therefore, the Company valued
      the
      common stock at $0.81 per share for a total of $607,500 for the 750,000 shares
      issued, which amount was expensed during the year ended December 31,
      2006.




19




CHINA
      MEDICINE CORPORATION AND SUBSIDIARIES





NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


March
      31,
      2007


(Unaudited)








For
      the
      three months ended March 31, 2007, holders of preferred stock converted 450,000
      shares of Series A Convertible Preferred Stock into 450,000 shares of common
      stock, par value $0.0001 per share. 1,621,750 shares of warrants were exercised
      at $1.75 per share for the three months ended March 31, 2007.





Stock
      options





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





SFAS
      No.
      123 requires that compensation expense related to options granted be calculated
      based on the fair value of the options as of the date of grant. The fair value
      calculations take into account the exercise prices and expected lives of the
      options, the current price of the underlying stock, its expected volatility,
      the
      expected dividends on the stock, and the current risk-free interest rate for
      the
      expected life of the option. Because there is no trading market for the
      Company's common stock, no historical data on which to base an estimate of
      volatility. The Company has considered the volatility that might be expected
      to
      occur for companies comparable to the Company and, selected three
      publicly-traded companies whose business are similar to the Company's and who
      are classified in the same SIC code as the Company, have assumed a volatility
      of
      50% as being reasonably representative of the volatility that could be expected
      to occur in the future over the relevant periods. The risk-free rates used
      are
      based on Treasury Constant Maturity rates, published by the U.S. Federal
      Reserve. The weighted average risk-free rate was 4.65%.





Since
      the
      Company does not have a history of employee stock options, the estimated life
      is
      based on one half of the sum of the vesting period and the contractual life
      of
      the option.


20
  CHINA
        MEDICINE CORPORATION AND SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 March
        31,
        2007
 (Unaudited)


The
      Company used the Cox-Ross-Rubinstein binomial model to value the options,
      Warrants and the embedded conversion option of the Series A Preferred Stock.
      The
      following assumptions were used in the preparation of the above valuations
      at
      inception:





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





OptionsSummary
                of stock option activities:
            
            Outstanding
            
            Exercisable
            
            Unvested
            
            Weighted-Average
                Exercise Price
            
            Weighted-Average
                Remaining Contractual Term (years)Outstanding
                as of December 31, 2006
            
            
            1,370,000
            
            
            516,000
            
            
            854,000
            
            
            1.25
            
            
            1.48Exercised
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Outstanding
                as of March 31, 2007
            
            
            1,370,000
            
            
            516,000
            
            
            854,000
            
            
            1.25
            
            
            1.23





WarrantsSummary
                of warrants activities:
            
            Outstanding
            
            Fair
                Market Vaue
            
            Weighted-Average
                Exercise Price
            
            Weighted-Average
                Remaining Contractual Term (years)Outstanding
                as of December 31, 2006
            
            
            7,389,476
            
            
            0.81
            
            
            2.13
            
            
            4.17Exercised
            
            
            (1,621,750
            )
            
            3.15
            
            
            1.75Forfeited
            
            
            -Outstanding
                as of March 31, 2007
            
            
            5,767,726
            
            
            3.05
            
            
            2.23
            
            
            3.92








21







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





The
      pharmaceutical products we distribute include prescription and over the counter
      pharmaceutical products, traditional Chinese medicines (finished medicines
      made
      of Chinese herbs), Chinese herbs, nutritional supplements, dietary supplements
      and medical instruments (Konzern obtained the approval for the distribution
      of
      medical supply and medical devices in November 2006. It began to sell and
      distribute medical supply such as bandages and cotton swabs in the first quarter
      of 2007). In addition, we sell medical formulations which we develop from an
      early stage technology and then sell the improved technology and gain proceeds.





Our
      business is dependent upon our ability both to acquire our products and
      distribute our products in the Chinese markets. We purchase our products from
      the PRC pharmaceutical manufacturers. Beginning in 2007, in an effort by the
      Guangdong government to help consolidate the provincial medicine acquisition
      market and promote a transparent bidding process, an on-line bidding system
      was
      established which known as “Guangdong Sunshine Medicine Public Internet Bidding
      System.” The new system provides us with more opportunities competing for
      medicine distribution rights. We obtained the rights to sell and distribute
      a
      total of 774 new products for the year of 2007, which brings the number of
      the
      total products we have rights to sell and distribute to 2,200.





Our
      five
      largest suppliers, which were the same in each period, accounted for 65% and
      54%
      of our purchases in the three months ended March 31, 2007 and March 31, 2006,
      respectively. Our agreements with our suppliers generally have a term of one
      year and provide that the suppliers will provide us with the products we order.
      None of our supply agreements has any minimum purchase requirements on our
      part.
      However, we are frequently required to make a significant down-payment when
      we
      place an order. These down payments are made pursuant to contracts with the
      suppliers, and to the extent that we reduce the size of the order, we will
      receive a credit from the supplier. Our advances to suppliers balance were
      $4,883,541 as of March 31, 2007. As of March 31, 2007, we had nationwide
      exclusive sales rights from our suppliers for seven products they produce,
      which
      accounted for $1,501,031, or 29.47% of our sales in the three months ended
      March
      31, 2007. During the same period in 2006, we had the nationwide exclusive sales
      rights for six products which accounted for $1,596,938, or 41.94% of sales
      in
      that period.





22


Our
      contracts with our customers do not provide for minimum purchases, and our
      customers are not restricted from purchasing competitive products from others.
      Our customers are typically wholesale medical products companies, hospitals
      and
      retail drug stores. Our five largest customers accounted for 48.6% and 61.5%
      of
      our sales for the three months ended March 31, 2007 and 2006, respectively.





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





Because
      a
      substantial portion of our sales are made to a small number of customers, our
      accounts receivable from a small number of customers may represent a large
      percentage of our accounts receivable and assets. Our largest account receivable
      at March 31, 2007 was approximately $610,887, representing approximately 3.27%
      of our total assets and approximately 3.68% of our working capital, and our
      three largest accounts receivable were approximately $1,622,783, representing
      approximately 8.69% of our total assets and approximately 9.78% of our working
      capital. This concentration of accounts receivable represents a significant
      credit risk.




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




**Results
      of Operations**




The
      following table sets forth our statements of operations for the three months
      ended March 31, 2007 and 2006, in U.S. dollars:




23






Three
                Months Ended March 31,2007
            
            2006Revenue
            
            $
            5,092,995
            
            $
            3,808,082Product
                sales
            
            
            4,883,209
            
            
            3,511,979Medical
                formula sales
            
            
            209,786
            
            
            296,103Costs
                of goods sold
            
            
            3,405,417
            
            
            2,459,550Gross
                profit
            
            
            1,687,578
            
            
            1,348,532R&D
                expenses
            
            
            100,112
            
            
            54,664Selling,
                general and administrative costs
            
            
            643,846
            
            
            503,468Reverse
                acquisition expenses
            
            
            0
            
            
            323,770Income
                from operations
            
            
            943,620
            
            
            466,630Other
                (expense) income, net
            
            
            -2,972
            
            
            -9,492Income
                before income taxes & Minority interest
            
            
            940,648
            
            
            457,138Provision
                for income taxes
            
            
            199,959
            
            
            165,581Income
                before minority interest
            
            
            740,689
            
            
            291,557Minority
                interest
            
            
            23,032
            
            
            0Net
                income
            
            
            763,721
            
            
            291,557Other
                comprehensive income
            
            
            256,489
            
            
            44,765Comprehensive
                income
            
            $
            1,020,210
            
            $
            336,322





Our
      revenue is derived primarily from the sale of prescription and over the counter
      medicines, traditional Chinese medicines, which are medicines derived from
      Chinese herbs, Chinese herbs, dietary supplements and medical instruments
      (Collectively “Product Sales”) and the sale of medical
      formulation (“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 31,2007
            
            2006Prescription
                and Over the Counter Medicine
            
            $
            3,553,355
            
            
            69.77
            %
            $
            2,477,138
            
            
            65.05
            %Traditional
                Chinese Medicine
            
            
            1,306,029
            
            
            25.64
            %
            
            1,031,874
            
            
            27.10
            %Chinese
                Herbs
            
            
            2,433
            
            
            0.05
            %
            
            2,968
            
            
            0.08
            %Dietary
                Supplements
            
            
            5,485
            
            
            0.11
            %
            
            0
            
            
            0Medical
                Instruments
            
            
            15,907
            
            
            0.31
            %
            
            0
            
            
            0Medical
                Formula
            
            
            209,786
            
            
            4.12
            %
            
            296,103
            
            
            7.78
            %Total
            
            $
            5,092,995
            
            
            100
            %
            $
            3,808,082
            
            
            100
            %








24




THE
      QUARTER ENDED MARCH 31, 2007 COMPARED TO THE QUARTER ENDED MARCH 31,
      2006






Sales




Total
      revenues for the three months ended March 31, 2007 were $5,092,995, an increase
      of $1,284,913, or 33.74%, from total revenues of $3,808,082 for the comparable
      period in 2006.




The
      revenues from the Product Sales for the three months ended March 31, 2007 were
      $4,883,209, an increase of $1,371,230, or 39.04%, from $3,511,979 for the
      comparable period in 2006. The increase was attributable to the sales and
      distribution of approximately $772,181 of new products, which includes $250,364
      from sale and distribution of new products for which we have exclusivity in
      Guangdong and $210,457 from sales and distribution of the new product
“Fengduoxin” (Antibiotic) in China for which we have nationwide exclusivity. The
      increase in revenues from the Product Sales was also attributable to the
      increase in the sales of products for which we already had distribution rights
      in 2006. With our increase in working capital and the development of our sales
      network, revenues attributable to products we distributed in 2006 increased
      approximately $599,049 in the first quarter of 2007.




Revenues
      from Medical Formula Sales were $209,786, a decrease of $86,317, or 29.15%,
      from
      $296,103 for the comparable period in 2006. Medical Formula Sales revenues
      represented proceeds from the sale of certain technology and know-how for the
      production of several medicines. We improve and develop the technology in its
      early stages and then sell the improved technology to other pharmaceutical
      companies. The decrease in our Medical Formula Sales revenues was due to waiting
      times for approvals from 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 which require more time for review. As a result, we
      estimate that our Medical Formula Sales revenues in 2007 will decrease.




Cost
      of Sales




Cost
      of
      revenue for the three months ended March 31, 2007 was $3,405,417, an increase
      of
      $945,867, or 38.46%, from $2,459,550 for the comparable period in 2006. Gross
      profit for the three months ended March 31, 2007 was $1,687,578, an increase
      of
      $339,046, or 25.14%, from $1,348,532 for the comparable period of 2006. Our
      gross margin for the three months ended March 31, 2007 was 33.14% as compared
      with 35.41% for the three months ended March 31, 2006, a decrease of 2.27
      percentage points. The decrease in our gross margin was due to the decrease
      of
      the sales in high gross margin product, Medical Formula Sales. Although our
      total revenues in the first three months of the year grew as compared to that
      of
      the same period in 2006, such growth was derived from relatively low margin
      Product Sales, instead of the relatively high margin Medical Formula Sales.
      As a
      result, our gross margin decreased.




Research
      and Development




Research
      and development expenses were $100,112 for the three months ended March 31,
      2007, which was for the further study and technology improvement of Yutian
      capsule. Research and development expenses for the same period of 2006 were
      $54,664.




25


Selling,
      General and Administrative Expenses




Selling,
      general and administrative expenses were $643,846 for the three months ended
      March 31, 2007, an increase of $140,378 from $503,468 for the comparable period
      in 2006. We incurred expenses of $77,233 for the maintenance of Co-win
      Bioengineering Company (Subsidiary company of Konzern) for the three months
      ended March 31, 2007, while there were no such expenses for the comparable
      period last year. Selling, general and administrative expenses of Konzern
      including transportation, trade show and advertising expenses increased $119,423
      for the three months ended March 31, 2007 as compared to the same period in
      2006, which contributed to the overall increase in the selling, general and
      administrative expenses of the Company.




Income
      Taxes




Provision
      for income taxes was $199,959 for the three months ended March 31, 2007 as
      compared with $165,581 for the comparable period in 2006. The increase was
      due
      to the increase of product sales and operating income.




Net
      Income




Net income
      for the three months ended March 31, 2007 was $763,721, an increase of $472,164
      from $291,557 for the comparable period in 2006. The increase was principally
      due to the increase in revenues from Product Sales and the fact that we incurred
      reverse acquisition expenses during the same period last year.







**Liquidity
      and Capital Resources**




Prior
      to
      February 2006, we financed our operations and met capital expenditure
      requirements primarily through short-term bank loans and trade credit. As
      of March 31, 2007, as a result of the sale of preferred stock and warrants,
      from
      which we received net proceeds of approximately $2.83 million, we had working
      capital of $16,590,038, an increase of $8,451,475 from $8,138,563 as of March
      31, 2006.




The
      gross
      proceeds from our February 2006 private placement were $3.9 million, from which
      we received net proceeds of approximately $3.3 million.




We
      used
      cash of $871,460 in our operations for the three months ended March 31, 2007,
      a
      decrease of $505,050 from the cash used for the comparable period of 2006.
      The
      decrease in net cash used in operations was largely due to the increase of
      $472,164 in net income of the first quarter 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 12/31/06 to 03/31/07
            
            Percentage
                Change
              12/31/06
                to 03/31/07Accounts
                receivable
            
            $
            -23,768
            
            
            -0.34
            %Inventories
            
            
            1,133,639
            
            
            59.65
            %Advances
                to suppliers
            
            
            806,129
            
            
            19.77
            %Accounts
                payable
            
            
            48,567
            
            
            25.71
            %Customer
                deposits
            
            
            54,921
            
            
            305.45
            %






26


The
      change in these balance sheet items 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, 2006 to March 31, 2007, our
      inventories increased 59.65%. Our advances to suppliers increased 19.77% because
      of an increase in our purchases resulting from increased sales and our payment
      policies, whereby we try to pay our suppliers (other than required down
      payments) once or twice a year. As a result, until we pay our suppliers, our
      accounts payable will increase. In addition, our customer deposits increased
      305.45% from December 31, 2006 to March 31, 2007 reflecting increased sales.
      We
      require our customers to pay a certain percentage of the sales price as deposit
      before we ship products to customers. The percentage varies from customer to
      customer. During the course of business, we reduce the deposit requirement
      for
      some customers with good credit.





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





In
      the
      course of our business, we must make significant deposits to our suppliers
      when
      we place an order. As of March 31, 2007, our advance payments to our suppliers
      totaled approximately $4,883,541, and our cash balance was approximately
      $2,311,955.








**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) 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.





27


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





Research
      and development costs




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





Use
      of
      estimates





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





Inventories




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













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







(a)  *Evaluation
      of disclosure controls and procedures* . At
      the
      conclusion of the period ended March 31, 2007 we carried out an evaluation,
      under the supervision and with the participation of our management, including
      our Chief Executive Officer and Chief Financial Officer, of the effectiveness
      of
      the design and operation of our disclosure controls and procedures (as defined
      in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules
      13a-15e and 15d-15e). Based upon that evaluation, our Chief Executive Officer
      and Chief Financial Officer concluded that as of the end of the period covered
      by this report, our disclosure controls and procedures were effective and
      adequately designed to ensure that the information required to be disclosed
      by
      us in the reports we submit under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the applicable
      rules and forms and that such information was accumulated and communicated
      to
      our Chief Executive Officer and Chief Financial Officer, in a manner that
      allowed for timely decisions regarding required disclosure.





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





A
      control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control systems are met.
      Because of the inherent limitations in all control systems no evaluation of
      controls can provide absolute assurance that all control issues, if any, within
      a company have been detected. Such limitations include the fact that human
      judgment in decision-making can be faulty and that breakdowns in internal
      control can occur because of human failures, such as simple errors or mistakes
      or intentional circumvention of the established process.





28





**PART
      II OTHER INFORMATION**








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





From
      January 1, 2007 through the date of this report, the Company has issued an
      aggregate of 1,345,745 shares of common stock, par value $.0001 per share
      (“Common Stock”) , upon the
      conversion of the Series A preferred stock par value $.0001 per share (“Series A
      Preferred Stock”) by the four holders (the “Initial Investors”) listed below.
      Pursuant to a preferred stock purchase agreement dated February 8, 2006
      (“PSPA”), the four Initial Investors were issued an aggregated of 3,120,000
      shares of Series A Preferred Stock and warrants to purchase an aggregate of
      7,389,476 shares of Common Stock (the “Warrants”) for $3,900,000. The initial
      conversion price of the Series A Preferred Stock is $1.25, subject to adjustment
      as set forth in the PSPA. As a result of the conversion of the Series A
      Preferred Stock (780,000 shares of the Series A Preferred Stock converted in
      the
      fourth quarter ended December 31, 2006 and 1,345,745 shares of the Series A
      Preferred Stock converted in the first quarter through the date of this report),
      as of the date of this report, there are 994,255 shares of the Series A
      Preferred Stock outstanding.





**Holders’
                Names**
            
            **Conversion
                Date/Date of Notice**
            
            **Preferred
                Stock Converted**
            
            **Common
                Stock Issued Upon Conversion**Barron
                Partners, LP
            
            
            1/10/2007
            
            
            190,000
            
            
            190,0004/18/2007
            
            
            
            
            
            202,245
            
            
            208,500*4/18/2007
            
            
            
            
            
            242,500
            
            
            250,000*4/24/2007
            
            
            
            
            
            291,000
            
            
            300,000***Sub-total**
            
            
            
            
            
            **925,745**
            
            
            **948,500**Ray&
                Amy Rivers
            
            
            2/8/2007
            
            
            100,000
            
            
            100,000William
                M. Denkin
            
            
            2/26/2007
            
            
            160,000
            
            
            160,000Steve
                Mazur
            
            
            4/30/2007
            
            
            160,000
            
            
            164,948***Total**
            
            
            
            
            
            **1,345,745**
            
            
            **1,373,448**





**
      As
      of April 23, 2007, because the Company’s Pre-Tax Income for the year ended
      December 31, 2006 was between $0.40 and $0.20 (50% decline) per share on a
      fully-diluted basis ,the Company was required to pay penalties under the
      provisions of the PSPA, the Certificate of Designations for our Series A
      Convertible Preferred Stock (the “Certificate”) and the Warrants. Therefore, the
      Company and the four Initial Investors entered into a Waiver and Amendment
      (the
“Amendment”), and agreed that the “conversion price” of the Series A Preferred
      Stock as defined in the Certificate and the exercise price of the Warrants
      shall
      each be reduced by 3% of their values as of the date of the Amendment instead
      of
      by 22.3% as calculated by the Initial Investors under the PSPA and Certificate.*





From
      January 1, 2007 through the date of this report, the Company has issued an
      aggregate of 3,315,790 shares of Common Stock upon the exercise of the warrants
      (Warrant A - see definitions below) by the following holders for an aggregate
      of
      $5,717,930.50 proceeds. Pursuant to the PSPA, the four Initial Investors were
      issued two warrants to purchase up to 3,694,738 shares of the Company’s Common
      Stock at $1.75 per share (“Warrant A”) and 3,694,738 shares of Common Stock at
      $2.50 per share (“Warrant B”), subject to adjustment set forth in the warrants
      issued to the Initial Investors dated February 8, 2006. As of the date of this
      report, the Company has 378,948 of Warrant A outstanding. No Warrant B has
      been
      exercised. As of the date of this report, the Company has 3,694,738 Warrant
      B
      outstanding.





29





**Holders’Names**
            
            **Exercise
                Date/Date of Notice**
            
            **Common
                Stock Issued upon the Warrant Exercise**
            
            **Exercise
                Price**Barron
                Partners, LP
            
            
            1/5/2007
            
            
            425,500
            
            $
            1.751/8/2007
            
            
            225,000
            
            $
            1.751/9/2007
            
            
            74,250
            
            $
            1.753/22/2007
            
            
            183,100
            
            $
            1.753/27/2007
            
            
            216,900
            
            $
            1.753/28/2007
            
            
            497,000
            
            $
            1.754/23/2007
            
            
            452,500
            
            $
            1.70*5/2/2007
            
            
            100,000
            
            $
            1.70*5/3/2007
            
            
            96,400
            
            $
            1.70*5/4/2007
            
            
            125,000
            
            $
            1.70*5/7/2007
            
            
            365,000
            
            $
            1.70*5/7/2007
            
            
            365,666
            
            $
            1.70***Sub-total**
            
            
            
            
            
            **3,126,316**William
                M. Denkin
            
            
            4/26/2007
            
            
            100,000
            
            $
            1.70*5/3/2007
            
            
            89,474
            
            $
            1.70*Sub-total
            
            
            
            
            
            189,474**Total**
            
            
            
            
            
            **3,315,790**





**
      As
      of April 23, 2007, because the Company’s Pre-Tax Income for the year ended
      December 31, 2006 was between $0.40 and $0.20 (50% decline) per share on a
      fully-diluted basis ,the Company was required to pay penalties under the
      provisions of the PSPA, the Certificate of Designations for our Series A
      Convertible Preferred Stock (the “Certificate”) and the Warrants. Therefore, the
      Company and the four Initial Investors entered into a Waiver and Amendment
      (the
“Amendment”), and agreed that the “conversion price” of the Series A Preferred
      Stock as defined in the Certificate and the exercise price of the Warrants
      shall
      each be reduced by 3% of their values as of the date of the Amendment instead
      of
      by 22.3% as calculated by the Initial Investors under the PSPA and Certificate.*





The
      Initial Investors are accredited investors and our issuance of Common Stock
      to
      them was exempt from registration pursuant Sections 3(a)(9) and Section 4(2)
      of
      the Securities Act.








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





(a)
      Exhibits





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





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





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





30


SIGNATURES


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





Date:
      May
      15, 2007




CHINA
      MEDICINE CORPORATION





BY: /s/
        Senshan Yang________________


Senshan
      Yang


Chief
      Executive Officer


(principal
      executive officer)








BY: /s/
      Huizhen Yu________________


Huizhen
      Yu


Chief
      Financial Officer


(principal
      financial officer and accounting officer)






31