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, 2006 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: 000-23889

                                 ---------------

                           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


                          51 Everett Drive; Suite A-20;
         West Windsor Professional Center, Princeton Junction, NJ  08550
        --------------------------------------------------------------------
                     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)    (ZIP CODE)

         ISSUER 'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609)799-1889

                          Lounsberry Holdings III, Inc.
--------------------------------------------------------------------------------
   (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
                                    REPORT)


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

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

Transitional Small business Disclosure Format (Check one): Yes [_]; No [X].


                                      -1-
<PAGE>


                                                 CHINA MEDICINE CORPORATION
                                            INDEX TO MARCH 31, 2006 FORM 10-QSB

<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                      ------
<S>                                                                                                   <C>
Part I - Financial Information                                                                             3

Item 1 - Financial Statements (unaudited)                                                                  3

Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005                                     3

Consolidated Statements of Shareholders' Equity for the Three Months ended March 31, 2006
and March 31, 2005                                                                                         4

Consolidated Statements of Income and Other Comprehensive Income for the Three Months
ended March 31, 2006 and March 31, 2005                                                                    5

Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and
March 31, 2005                                                                                             6

Consolidated Notes to Consolidated Financial Statements                                               7 - 20

Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition            21

Item 3 - Controls and Procedures                                                                          26

Part II - Other Information                                                                               26

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds                                      26

Item 6 - Exhibits                                                                                         26

Signature Page                                                                                            28
</TABLE>


                                      -2-
<PAGE>


                          PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

                            CONSOLIDATED BALANCE SHEETS
                     AS OF MARCH 31, 2006 AND DECEMBER 31, 2005

                                     ASSETS

<TABLE>
<CAPTION>
                                                                          March 31,     December 31,
                                                                            2006            2005
                                                                        -------------  -------------
                                                                         (Unaudited)      (Audited)
                                                                        -------------  -------------
CURRENT ASSETS:
<S>                                                                     <C>            <C>
    Cash                                                                $   1,758,279  $      91,964
    Accounts receivable, trade, net of allowance for doubtful accounts
       of $12,412 and $12,333 as of March 31, 2006 and
       December 31, 2005, respectively                                      3,323,205      2,410,824
    Inventories                                                             2,253,491      1,382,929
    Other receivables                                                         114,006         38,301
    Other receivables - related parties                                        60,695             --
    Advances to suppliers                                                   2,084,331      1,075,546
                                                                        -------------  -------------
       Total current assets                                                 9,594,007      4,999,564
                                                                        -------------  -------------

EQUIPMENT, net                                                                778,234        330,015
                                                                        -------------  -------------

         Total assets                                                   $  10,372,241  $   5,329,579
                                                                        =============  =============
</TABLE>

                      LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S>                                                                     <C>            <C>
    Accounts payable, trade                                             $   1,041,302  $     170,196
    Short-term loans                                                               --         95,480
    Other payables and accrued liabilities                                      3,220         97,449
    Customer deposits                                                          43,520         37,292
    Taxes payable                                                             367,402        170,456
                                                                        -------------  -------------
       Total current liabilities                                            1,455,444        570,873
                                                                        -------------  -------------

SHAREHOLDERS' EQUITY:
    Preferred stock, $0.0001 par value; 10,000,000 shares
       authorized, 3,120,000 shares issued and outstanding                        312             --
    Common stock, $0.0001 par value; $90,000,000 shares
       authorized, 7,380,000 shares issued and outstanding                        738            653
    Paid-in capital                                                         3,941,719        120,347
    Statutory reserves                                                        722,909        722,909
    Retained earnings                                                       4,105,222      3,813,665
    Accumulated other comprehensive income                                    145,897        101,132
                                                                        -------------  -------------
       Total shareholders' equity                                           8,916,797      4,758,706
                                                                        -------------  -------------

         Total liabilities and shareholders' equity                     $  10,372,241  $   5,329,579
                                                                        =============  =============
</TABLE>



                                      -3-
<PAGE>


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

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
               FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

<TABLE>
<CAPTION>
                                                             Common Stock              Preferred Stock
                                                      -------------------------   ------------------------      Paid-in
                                                         Shares      Par Value      Shares        Par Value     capital
                                                      -----------   -----------   -----------   -----------   -----------
<S>                                                   <C>         <C>             <C>           <C>           <C>
BALANCE, December 31, 2004                              6,530,000   $       653            --   $        --   $   120,347
     Net income
                                                      -----------   -----------   -----------   -----------   -----------
BALANCE, March 31, 2005 (Unaudited)                     6,530,000           653            --            --       120,347
     Net income
     Distributions
     Foreign currency translation adjustments
                                                      -----------   -----------   -----------   -----------   -----------
BALANCE, December 31, 2005                              6,530,000           653            --            --       120,347
     Net income
     Reverse acquisition, February 8, 2006              1,028,000           103                                   (32,501)
     Shares redeemed in connection with
        reverse acquisition                              (928,000)          (93)                                 (167,509)
     Shares issued for acquisition services               750,000            75                                   238,769
     Issuance of preferred stock                                                    3,120,000           312     3,782,688
     Foreign currency translation adjustments
                                                      -----------   -----------   -----------   -----------   -----------
BALANCE, March 31, 2006 (Unaudited)                     7,380,000   $       738     3,120,000   $       312   $ 3,941,719
                                                      ===========   ===========   ===========   ===========   ===========
</TABLE>

                                   238,694

<TABLE>
<CAPTION>
                                                                                Accumulated
                                                                                   other
                                                       Statutory    Retained   comprehensive
                                                       reserves     earnings       income       Totals
                                                      ----------  -----------  -------------  ----------
<S>                                                   <C>         <C>          <C>            <C>
BALANCE, December 31, 2004                            $  722,909  $ 1,234,972  $          --  $2,078,881
     Net income                                                     1,226,519                  1,226,519
                                                      ----------  -----------  -------------  ----------
BALANCE, March 31, 2005 (Unaudited)                      722,909    2,461,491             --   3,305,400
     Net income                                                     4,463,651                  4,463,651
     Distributions                                                 (3,111,477)                (3,111,477)
     Foreign currency translation adjustments                                        101,132     101,132
                                                      ----------  -----------  -------------  ----------
BALANCE, December 31, 2005                               722,909    3,813,665        101,132   4,758,706
     Net income                                                       291,557                    291,557
     Reverse acquisition, February 8, 2006                                                       (32,398)
     Shares redeemed in connection with
        reverse acquisition                                                                     (167,602)
     Shares issued for acquisition services                                                      238,769
     Issuance of preferred stock                                                               3,783,000
     Foreign currency translation adjustments                                         44,765      44,765
                                                      ----------  -----------  -------------  ----------
BALANCE, March 31, 2006 (Unaudited)                   $  722,909    4,105,522  $     145,897  $8,916,797
                                                      ==========  ===========  =============  ==========
</TABLE>


                                      -4-
<PAGE>


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

        CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
               FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

<TABLE>
<CAPTION>
                                                            2006           2005
                                                        ------------   ------------
                                                          Unaudited      Unaudited
                                                        ------------   ------------

<S>                                                     <C>            <C>
REVENUES                                                $  3,511,979   $  2,728,586

COST OF GOOD SOLD                                          2,459,550      1,828,997
                                                        ------------   ------------

GROSS PROFIT                                               1,052,429        899,589
                                                        ------------   ------------

OTHER OPERATING INCOME                                       296,103        424,628
                                                        ------------   ------------

OPERATING EXPENSES
     Research and development expenses                        54,664            159
     Selling expenses                                        100,102         39,429
     General and administrative expenses                     403,366         58,288
                                                        ------------   ------------
        Total operating expenses                             558,132         97,876
                                                        ------------   ------------

INCOME  FROM OPERATIONS                                      790,400      1,226,341

ACQUISITION TRANSACTION EXPENSE                              323,770             --
OTHER (EXPENSE) INCOME                                        (9,492)           178
                                                        ------------   ------------

INCOME BEFORE INCOME TAXES                                   457,138      1,226,519

PROVISION FOR INCOME TAXES                                   165,581             --
                                                        ------------   ------------

NET INCOME                                                   291,557      1,226,519

OTHER COMPREHENSIVE INCOME :
     Foreign currency translation adjustment                  44,765             --
                                                        ------------   ------------

COMPREHENSIVE INCOME                                    $    336,322   $  1,226,519
                                                        ============   ============

Earning per share - basic                               $       0.04   $       0.19
                                                        ============   ============

Earning per share - diluted                             $       0.04   $       0.19
                                                        ============   ============

Weighted average number of shares outstanding - basic      6,992,778      6,530,000
                                                        ============   ============

Weighted average number of share outstanding - diluted     7,193,678      6,530,000
                                                        ============   ============
</TABLE>


                                      -5-
<PAGE>


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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

<TABLE>
<CAPTION>
                                                                   2006             2005
                                                               -------------   -------------
                                                                 Unaudited       Unaudited
                                                               -------------   -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                            <C>             <C>
    Net income                                                 $     291,557   $   1,226,519
    Adjustments to reconcile net income to cash
      used in operating activities:
        Depreciation                                                  21,478          25,794
        Gain on sale of intangible assets                             15,570              --
        Stock issued for services                                    238,769              --
    Change in operating assets and liabilities:
      (Increase) decrease in assets:
        Accounts receivable, trade                                  (893,091)        171,033
        Inventories                                                 (858,049)       (492,890)
        Other receivables                                            (75,143)        (36,003)
        Other receivables - related parties                          (60,442)        (40,387)
        Advances to suppliers                                       (997,672)       (679,741)
      Increase (decrease) in liabilities:
        Accounts payable, trade                                      833,982         314,548
        Other payables and accrued liabilities                       (94,462)          6,600
        Customer deposits                                              5,962        (585,644)
        Taxes payable                                                195,031         (17,760)
                                                               -------------   -------------
          Net cash used in operating activities                   (1,376,510)       (107,931)
                                                               -------------   -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of equipment                                           (483,292)        (18,968)
                                                               -------------   -------------
          Net cash provided by (used in) investing activities       (483,292)        (18,968)
                                                               -------------   -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Payments on short-term loan                                      (95,696)             --
    Proceeds from issuance of preferred stock                      3,783,000              --
    Cash paid on shares redeemed                                    (167,602)             --
                                                               -------------   -------------
          Net cash used in financing activities                    3,519,702              --
                                                               -------------   -------------

EFFECT OF EXCHANGE RATE ON CASH                                        6,415              --
                                                               -------------   -------------

INCREASE (DECREASE) IN CASH                                        1,666,315        (126,899)
                                                               -------------   -------------

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

CASH, end of period                                            $   1,758,279   $     116,621
                                                               =============   =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for income taxes                                     $          --   $          --
                                                               =============   =============

Cash paid for interest expense                                 $       1,582   $          --
                                                               =============   =============

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:

Stock issued for services                                      $     238,769   $          --
                                                               =============   =============
</TABLE>


                                      -6-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization

Organization

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

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

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

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

Note 2 - Summary of significant accounting policies

Basis of presentation

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


                                      -7-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Basis of presentation, (continued)

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

Use of estimates

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

Cash and cash equivalents

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.

Concentration of credit risk

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 PRC are covered by insurance.  As of March 31,
2006 and  December  31,  2005,  the Company had  deposits in excess of federally
insured  limits total of $1,900,350 and $78,319,  respectively.  The Company has
not  experienced  any losses in such  accounts and believes it is not exposed to
any significant risks on its cash in bank accounts.


                                      -8-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Accounts receivable, trade

The Company conducts its business operations in PRC. During the normal course of
business,  the Company  extends  unsecured  credit to its customers.  Management
reviews its accounts  receivable on a regular basis to determine if the bad debt
allowance is adequate.  However,  the Company  records a provision  for accounts
receivable  trade  that  ranges  from 0.3% to 1.0% of the  outstanding  accounts
receivable balance in accordance with generally accepted  accounting  principles
in the PRC.  The  allowance  for  doubtful  accounts  as of March  31,  2006 and
December 31, 2005 amounted to $12,412 and $12,333, respectively.

Inventories

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

Plant and equipment

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

            Furniture                           3 -  5 years
            Office equipment                    3 -  5 years
            Motor vehicles                      4 -10 years

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

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

Intangibles

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


                                      -9-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Impairment of long-lived assets

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

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

Revenue recognition

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

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

Research and development costs

Research and development  costs are expensed as incurred.  The costs of material
and  equipment  that are acquired or  constructed  for research and  development
activities,   and  have  alternative   future  uses,   either  in  research  and
development,  marketing,  or sales,  are classified as property and equipment or
depreciated over their estimated useful lives.


                                      -10-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Foreign currency translation

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

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

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

Translation  adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders' equity
and  amounted  to $44,765 and $0 for the three  months  ended March 31, 2006 and
2005,  respectively.  The balance  sheet amounts with the exception of equity at
March 31, 2006 were  translated at 8.01 RMB to $1.00 USD as compared to 8.26 RMB
at March 31, 2005. The equity accounts were stated at their historical rate. The
average  translation  rate of 8.04 RMB for the three months ended March 31, 2006
was applied to income statement accounts.

Income taxes

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

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


                                      -11-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Income taxes, (continued)

Deferred  tax is  accounted  for using the  balance  sheet  liability  method is
respect of temporary  differences  arising from differences between the carrying
amount  of  assets  and   liabilities  in  the  financial   statements  and  the
corresponding  tax basis used in the  computation of assessable  tax profit.  In
principle,  deferred tax  liabilities  are recognized for all taxable  temporary
differences,  and  deferred tax assets are  recognized  to the extent that it is
probably  that  taxable  profit  will  be  available  against  which  deductible
temporary differences can be utilized.

Deferred  tax is  calculated  at the tax rates that are expected to apply to the
period when the asset is realized or the  liability is settled.  Deferred tax is
charged or  credited  in the income  statement,  except when it related to items
credited or charged  directly to equity,  in which case the deferred tax is also
dealt with in equity.

Deferred tax assets and  liabilities are offset when they relate to income taxes
levied by the same  taxation  authority  and the  Company  intends to settle its
current tax assets and liabilities on a net basis.

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

The estimated tax savings for the period ending March 31, 2006 and 2005 amounted
to $165,581 and $404,751,  respectively. The net effect on earnings per share if
the income tax had been applied would decrease  earnings per share from $0.04 to
$0.01 for 2006 and $0.19 to $0.13 for 2005, respectively.

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

                                                       2006             2005
                                                   -----------       -----------
                                                    Unaudited         Unaudited
                                                   -----------       -----------
Provision for China Income Tax                     $   165,581       $        --
Provision for Local Tax                                     --                --
                                                   -----------       -----------
Totals                                             $   165,581       $        --
                                                   ===========       ===========


                                      -12-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Income taxes, (continued)

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

                                                            2006       2005
                                                          -------     -------

U.S. Statutory rates                                         34.0%       34.0%
Foreign income not reognized in USA                         (34.0)      (34.0)
China income taxes                                           33.0          --
50% tax reduction                                           (16.5)         --
                                                          -------     -------
Effective income tax rate                                    16.5%         -%
                                                          =======     =======

Value added tax

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

Fair value of financial instruments

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

Stock-based compensation

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


                                      -13-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Stock-based compensation, (continued)

On February 8, 2006, contemporaneously with the reverse acquisition, the Company
granted options to purchase 430,000 of common stock of which options to purchase
390,000  shares were granted to officers and other key employees of Konzern.  On
March 22, 2006, the Company  granted  options to purchase an additional  850,000
shares of common stock to two officers.  The options all have an exercise  price
of $1.25, 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 $0.10 per  shares  subject  to the
options. The Company intends to seek stockholder approval of the plan during the
second quarter of 2006.

Major suppliers

For the three months ended March 31, 2006 and the year ended  December 31, 2005,
five suppliers  accounted for  approximately 54% and 74%,  respectively,  of the
Company's purchases.

Major customers

For the three months ended March 31, 2006 and the year ended  December 31, 2005,
five customers  accounted for  approximately 67% and 65%,  respectively,  of the
Company's sales.

Recently issued accounting pronouncements

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


                                      -14-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Recently issued accounting pronouncements, (continued)

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

Note 3 - Consolidated financial statements and condensed footnotes

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

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

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

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

Note 4 - Earnings per share

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


                                      -15-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Earnings per share, (continued)

The following is a  reconciliation  of the basic and diluted  earnings per share
computations for the three months ended March 31, 2006 and 2005:

                                                         2006             2005
                                                      ----------      ----------
                                                      Unaudited        Unaudited
                                                      ----------      ----------
Net income for basic earnings per share               $  256,557      $1,226,519
                                                      ==========      ==========
Shares of common stock and common
     stock equivalents:
Weighted average shares used in basic computation      6,992,778       6,530,000
                                                                      ==========
Diluted effect of convertible preferred stock            200,900
                                                      ----------
Weighted average shares used in diluted computation    7,193,678
                                                      ==========
Earnings per share:
Basic                                                 $     0.04      $     0.19
                                                      ==========      ==========
Diluted                                               $     0.04
                                                      ==========


Note 5 - Accounts receivable, trade

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

                                                   March 31,        December 31,
                                                     2006              2005
                                                 ------------       ------------
                                                   Unaudited          Audited
                                                 ------------       ------------
Accounts receivable                              $  3,335,617       $  2,423,157
Less: allowance for
      doubtful accounts                                12,412             12,333
                                                 ------------       ------------
Totals                                           $  3,323,205       $  2,410,824
                                                 ============       ============

Note 6 - Inventories

Inventories consisted of the following:

                                                   March 31,        December 31,
                                                     2006              2005
                                                 ------------       ------------
                                                   Unaudited          Audited
                                                 ------------       ------------
Chemical medicine                                $  2,253,257       $  1,382,929
Traditional Chinese Medicine                              234                 --
                                                 ------------       ------------
Totals                                           $  2,253,491       $  1,382,929
                                                 ============       ============


                                      -16-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Advances to suppliers

Advances to suppliers  as of March 31, 2006 and  December  31, 2005  amounted to
$2,084,332 and $1,075,546, respectively. They represent advances to suppliers on
inventory purchases.

Note 8 - Equipment

Equipment is summarized as follows:

                                                   March 31,        December 31,
                                                     2006              2005
                                                 ------------       ------------
                                                   Unaudited          Audited
                                                 ------------       ------------
Furniture and fixtures                           $     59,982       $    160,081
Office equipment                                      668,483            369,459
Motor vehicles                                        196,685            132,804
                                                 ------------       ------------
                     Total                            925,150            662,344
Less accumulated depreciation                         146,916            332,329
                                                 ------------       ------------
Equipment, net                                   $    778,234       $    330,015
                                                 ============       ============


Depreciation  expense for the three  months ended March 3, 2006
and 2005 amounted to $21,478 and $25,794 respectively.

Note 9 - 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 $43,520 and $37,292 as of March 31,
2006 and December 31, 2005, respectively.


Note 10 - Taxes payable

Taxes payable consisted of the following:

                                                   March 31,        December 31,
                                                     2006              2005
                                                 ------------       ------------
                                                   Unaudited          Audited
                                                 ------------       ------------
Income taxes payable                             $    166,273       $         --
Individual income tax                                     380                205
Value added tax                                       200,749            170,251
                                                 ------------       ------------
Totals                                           $    367,402       $    170,456
                                                 ============       ============


                                      -17-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 11 - Short-term bank loan payable

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

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

Note 12 - Commitments and contingencies

Operating lease

The Company leases its facilities under short-term and long-term, non-cancelable
operating  lease  agreements  expiring  through August 2006. The  non-cancelable
operating  lease  agreement  states  that the  Company  pays  certain  operating
expenses applicable to the leased premises.

Total  rental  expense  for the three  months  ended March 31, 2006 and the year
ended December 31, 2005 amounted to $11,583 and $31,282, respectively.

As of March 31, 2006, the future  minimum annual lease payments  required are as
follows:

      Year Ending December 31,
            2006                         $  36,985
            2007 and thereafter                 --

Note 13 - Statutory reserves

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


                                      -18-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 13 - Statutory reserves, continued)

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

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

The  discretionary  surplus  fund  may be used to  acquire  fixed  assets  or to
increase  the  working  capital to expend on  production  and  operation  of the
business.  The Company's Board of Directors decided not to make appropriation to
this reserve. According to Konzern's articles, Konzern should appropriate 10% of
the net profit as statutory  surplus reserve and 6% as statutory public welfare.
As of March 31, 2006, Konzern's statutory reserve did not reach 50% of Konzern's
registered  capital due to the increase in  registered  capital of $2.3 millions
and reserve will be made at the end of 2006.

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  $17,947 and $23,575 during the
three  months  ended  March  31,  2006 and the year  ended  December  31,  2005,
respectively.

Note 15 - Stockholders' equity

Sale of preferred stock

Contemporarily with the reverse  acquisition,  the Company, on February 8, 2006,
entered into a Preferred Stock Purchase Agreement,  dated February 8, 2006, with
Barron Partners L.P., Ray and Amy Rivers,  JTROS, Steve Mazur and William Denkin
pursuant to which the Company  issued and sold an aggregate of 3,120,000  shares
of its Series A Convertible Preferred Stock, a newly-created series of preferred
stock, which are convertible into 3,120,000 shares of common stock, and warrants
to purchase an  additional  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 warrants  have a
term of five years and it also provides that,  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.

                                      -19-
<PAGE>


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

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Note 15 - Stockholders' equity

Sale of preferred stock , (continued)

The  conversion  rate of the Series A Preferred  Stock and the exercise price of
the warrants are subject to adjustment in certain events,  including the failure
to  achieve  specified  levels of  adjusted  earnings  before  interest,  taxes,
depreciation  and  amortization  or fully  diluted  pre-tax  income  per  share,
computed as set forth in the applicable agreements.  Further, Series A Preferred
Stock can not be converted and warrants can not be exercised if such  conversion
or exercise  would result in the holder and its  affiliates of more than 4.9% of
the then  outstanding  number of shares of common stock on such date.  The gross
proceeds  from the sale of the  preferred  stock and warrants were $3.9 million,
from which the Company received $3,783,000 net of $117,000 commissions paid.

Common stock

The Company issued  750,000  shares of common stock to individuals  for services
performed  and of which  150,000  shares  were issued to Ms. Mary Xia and 37,500
shares were issued to Ms. Lin Li. The Company  valued the common  stock at $0.32
per share for a total of $238,769 for the 750,000 shares issued.


                                      -20-
<PAGE>



Item 2.  Management's  Discussion  and  Analysis  of Results of  Operations  and
Financial Condition

      FORWARD-LOOKING  INFORMATION  -  Management's  Discussion  and Analysis of
Financial Condition and Results of Operations ("MD&A") includes "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities  Exchange Act of 1934. All statements,  other than
statements of historical  facts,  included in this MD&A  regarding the Company's
financial position,  business strategy and plans and objectives of management of
the  Company  for  future  operations  are  forward-looking  statements.   These
forward-looking  statements  rely on a number of assumptions  concerning  future
events and are subject to a number of uncertainties  and other factors,  many of
which are outside of the Company's  control,  that could cause actual results to
materially  differ from such  statements.  While the Company  believes  that the
assumptions concerning future events are reasonable,  it cautions that there are
inherent  difficulties in predicting certain important  factors,  especially the
timing  and  magnitude  of  technological  advances;  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  information
technology requirements;  the competition in the information technology industry
and the impact of such competition on pricing,  revenues and margins; the degree
to which  business  entities  continue to outsource  information  technology and
business  processes;  uncertainties  surrounding budget reductions or changes in
funding  priorities of existing  government  programs and the cost of attracting
and retaining highly skilled personnel.

Overview

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

      We distribute  1,100  medicine  products in China,  including  traditional
pharmaceutical medicines, traditional Chinese medicines (finished medicines made
of Chinese herbs), Chinese herbs and dietary supplements. These products include
both  prescription  drugs and  over-the-counter  drugs.  Our network  reaches 28
provinces in China,  over 300  hospitals,  500 medicine  companies and 1700 drug
stores.  Our business is dependent upon our ability both to acquire our products
and  distribute  our products in the Chinese  markets.  We purchase our products
from Chinese drug manufacturers,  and we are the manufacturer's sole distributor
in the PRC for our five largest  suppliers.  Our five largest  suppliers,  which
were the same in each period,  accounted for 54% and 57% of our purchases in the
three  months  ended  March 31,  2006,  and March 31,  2005,  respectively.  Our
agreements with our suppliers generally have a term of one year and provide that
the  suppliers  will provide us with the  products we order.  None of our supply
agreements has any minimum purchase  requirements on our part.  However,  we are
frequently  required to make a significant  down-payment when we place an order,
and, at March 31, 2006,  our advances to our suppliers were  approximately  $2.1
million.  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. To date, all of our down payments have been applied to
our orders. As of March 31, 2006, we have nationwide  exclusive sales right from
our suppliers for six products they produce, which accounted for $1,596,938,  or
45% of revenue in the quarter  ended March 31,  2006,  and  $683,772,  or 24% of
revenue in the comparable quarter of 2005. .

      Our  customers  are  typically   wholesale  medical  products   companies,
hospitals and retail drug stores.  Our five largest customers  accounted for 67%
and 60% of our revenue for the three  months  ended March 31, 2006 and March 31,
2005, respectively.


                                      -21-
<PAGE>


      Since 2003, we started to conduct medical research and development through
Konzern's R&D center. We have four new medicines  currently under development by
Konzern:  Yutian  Capsule a traditional  Chinese  medicine  which is used in the
treatment of lung cancer,  Dioscorea  Collettii Hook F Extraction for high blood
pressure  treatment,  EGFR Test kit for lung cancer  testing,  Multi  Functional
Peptide Derivative for intestine cancer treatment.  We have been focusing on the
pre-clinical  study of  Yutian  capsule  in the  first  quarter  of 2006.  These
products are designed for marketing in the PRC in compliance with PRC regulatory
requirements.  None of the claims  with  respect to these  medications  would be
permissible in the United States or any other western country.

      Under certain  regulations in the form of public notices issued by the PRC
State Administration of Foreign Exchange,  or SAFE, our shareholders who are PRC
resident   entities  or   individuals   are  subject  to  certain   registration
requirements.   These  regulations  would  prohibit  Konzern  from  distributing
dividends  or profits to us unless the  registration  requirements  are complied
with.  As of March 31, 2006,  our PRC  shareholders  have not complied  with the
registration requirements under the SAFE regulations. The Company currently does
not have any present plans to pay dividends,  and we are prohibited  from paying
dividends  under the terms of the  purchase  agreement  relating to the series A
preferred stock. The PRC shareholders have advised us that they will comply with
relevant SAFE regulations.

      As a result of the reverse  acquisition,  we became a reporting company in
February 2006. As a result, our general and administrative expenses increased to
reflect  the  establishment  of a United  States  office and  additional  legal,
accounting  and other  expenses  relating to our status as a public  company and
compliance with the reporting  requirements  of the federal  securities laws and
our obligations under the agreement pursuant to which we sold preferred stock to
our investors.

Results of Operations

      The following  table sets forth our statements of operations for the three
months ended March 31, 2006 and 2005,  and the year ended  December 31, 2005, in
U.S. dollars:
                                                               12 Months Ended
                                 Three Months Ended March 31,   December 31,
                                 ----------------------------  ---------------
                                      2006           2005            2005
                                 -------------   ------------  ---------------
Revenue                           $  3,511,979   $  2,728,586  $    12,791,031
Costs of goods sold                  2,459,550      1,828,997        8,656,873
Gross profit                         1,052,429        899,589        4,134,158
Other operating income                 296,103        424,628        2,134,872
R&D expenses                            54,664            159          478,590
Selling expenses                       100,102         39,429          147,020
General and administrative costs       403,366         58,288          364,150
Income from operations                 790,400      1,226,341        5,279,270
Acquisition transaction expense        323,770              0                0
Other income, net                       (9,492)           178          410,900
Income before income taxes             457,138      1,226,519        5,690,170
Provision for income taxes             165,581              0                0
Net income                             291,557      1,226,519        5,690,170
Other comprehensive income              44,765              0          101,132
Comprehensive income              $    336,322   $  1,226,519  $     5,748,501


                                      -22-
<PAGE>


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

<TABLE>
<CAPTION>
                        Year Ended December 31,              Three Months Ended March 31,
                        -----------------------              ----------------------------
                                2005                         2005                      2006
                                ----                         ----                      ----
<S>                      <C>           <C>        <C>           <C>        <C>            <C>
Traditional
Pharmaceutical Medicine  $10,107,138     79%      $ 1,973,275     72%      $ 2,477,138     70.53%

Traditional Chinese
Medicine                   2,545,854     20%          709,695     26%        1,031,874     29.38%

Chinese Herbs                138,039      1%           45,616      2%            2,968      0.08%

Total                    $12,791,031    100%      $ 2,728,586    100%      $ 3,511,979       100%
</TABLE>

      Revenues for quarter ended March 31, 2006 were $3,511,979,  an increase of
$783,393,  or 29%, from the revenue of $2,728,586 for the  comparable  period in
2005. We obtained the  distribution  rights for three new products in the second
half of 2005, which generated significant additional revenues for us.

      Cost of revenue for the quarter  ended March 31, 2006 was  $2,459,505,  an
increase of $630,553, or 34%, from $1,828,997 for the comparable period in 2005.
Gross profit for the quarter ended March 31, 2006 was $1,052,429, an increase of
$152,840,  or 17%, from $899,589 for the  comparable  period of 2005.  Our gross
margin for the quarter ended March 31, 2006 was 30% as compared with 33% for the
quarter  ended  March  31,  2005.  The drop in our gross  margin  was due to the
decrease of the medicine prices which was adjusted by the Chinese government.


                                      -23-
<PAGE>


      Other  operating  income of $296,103 and  $424,628  for the quarter  ended
March 31, 2006 and 2005, respectively, represented the proceeds from the sale of
certain  technology  and  know-how on the  production  of  medicines  to certain
nonaffiliated  drug  manufacturers.  We bought the technology in its preliminary
stage  from  other  companies  and then sold the  improved  technology  to other
pharmaceutical companies.

      Research and development expenses were $54,664 for the quarter ended March
31, 2006 which was for the  pre-clinical  study of Yutian capsule.  The Research
and development expense for the first quarter of 2005 was nominal.  Our research
and  development  for that period was  performed  pursuant to an agreement  with
Nanhua University,  and, during the first quarter of 2005, Nanhua University did
not perform any significant services for us.

      Selling  expenses  were  $100,102 for the quarter ended March 31, 2006, an
increase of $60,673 from $39,429 for the comparable period in 2005. The increase
of selling expenses was mainly due to the increase of  transportation  expenses,
advertising and marketing expenses.

      General and  administrative  expenses  were $403,366 for the quarter ended
March 31, 2006, an increase of $345,087 from $58,288 for the  comparable  period
in 2005. The increase mainly reflected  additional  expenses associated with our
status as a reporting  company,  including the  establishment of a United States
office and  additional  legal,  accounting  and other  expenses  relating to our
status as a public company and compliance with the reporting requirements of the
federal  securities  laws and our  obligations  under the agreement  pursuant to
which we sold preferred stock to our investors.

      Acquisition  transaction expenses were $323,770 in the first quarter ended
March 31,  2006  which were one time  acquisition  expenses  paid as  investment
banking fees and finder fees.

      Provision  for income  taxes was  $165,581  for the first  quarter of 2006
compared with zero taxes for the first  quarter of 2005.  As a foreign  invested
company in China,  our  subsidiary  Guangzhou  Konzern  Medicine Co., Ltd has an
income tax exemption  for 2004 and 2005 and a 50% reduction  income tax rate for
2006, 2007 and 2008.

      Comprehensive  income for the quarter ended March 31, 2006 was 336,322,  a
decrease of $890,197 from  $1,226,519  for the  comparable  period in 2005.  The
decrease  was  mainly due to the  increase  on selling  expenses,  G&A  expenses
acquisition transaction expenses and income taxes,

Liquidity and Capital Resources

      Prior  to  February  2006,  we  financed  our  operation  and met  capital
expenditure  requirements  primarily through short-term bank loans, trade credit
and equity financing. As of March 31, 2006, as a result of the sale of preferred
stock and warrants,  from which we received net proceeds of  approximately  $3.4
million,  we had working  capital of $8,138,564,  an increase of $3,709,873 from
$4,428,691 from December 31, 2005.

      We used cash of  $1,376,510  in our  operations  for the first  quarter of
2006, an increase of $1,268,579 from the cash required for the comparable period
of 2005.  The  increase  in net cash used in  operations  was largely due to the
increase in accounts receivables and inventories.

      On  February 8, 2006,  we received  net  proceeds  of  approximately  $3.4
million from the sale of preferred stock and warrants.

      In January  2006, we repaid  $95,696 short term loans to CITIC  Industrial
Bank with $1,582  interest  payment.  As of March 31, 2006,  the Company did not
have long-term debt.

      We intend to use our available  funds to accelerate  the  development  and
testing  of new drugs and we may  establish  our own  production  facilities  to
manufacture  our own products.  We believe that our available funds will provide
us with sufficient capital for at least the next twelve months;  however, 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.


                                      -24-
<PAGE>


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.

      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.


                                      -25-
<PAGE>


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 for inventory is sold.

Item 3. Controls and Procedures


      (a) Evaluation of disclosure controls and procedures.  Our chief executive
      officer  and  our  chief   financial   officer,   after   evaluating   the
      effectiveness  of the company's  "disclosure  controls and procedures" (as
      defined in the Securities  Exchange Act of 1934, as amended (the "Exchange
      Act"),  Rules 13a-15e and 15d-15e) as of the end of the period  covered by
      this  report (the  "Evaluation  Date"),  have  concluded  that,  as of the
      Evaluation Date, our disclosure controls and procedures were effective.

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

                                     PART II


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

      On February 8, 2006,  the Company  issued  6,530,000  shares of its common
stock in  exchange  for all the  outstanding  equity  of  Kozern  and  issued an
aggregate  of 3,120,000  shares of a  newly-created  series of preferred  stock,
designated as the Series A Convertible Preferred Stock, and warrants to purchase
an aggregate  of  $7,389,476  shares of common stock of the Company.  Subject to
certain  restrictions  and  adjustments,  one  share  of  Series  A  Convertible
Preferred Stock is initially  convertible into one share of the Company's common
stock. The Company reported these  transactions on the Company's  Current Report
on Form 8-K filed with the Commission on February 14, 2006.

Item 6. Exhibits

   (a) Exhibits

   3.1 - Certificate of Incorporation,  as filed with the Delaware  Secretary of
   State on February 10, 2005.

   3.2 -  Amendment  to the  Certificate  of  Incorporation,  as filed  with the
   Delaware Secretary of State on May 10, 2006

   3.3 -  Certificate  of  Correction,  as filed with the Delaware  Secretary of
   State on February 8, 2006.

   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.


                                      -26-
<PAGE>


                                   SIGNATURES

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

                                                     CHINA MEDICINE CORPORATION


Date: May 19, 2006.                                  BY: /s/ Senshan Yang
                                                     ---------------------------
                                                         Senshan Yang
                                                         Chief Executive Officer


                                                     BY: /s/ Huizhen Yu
                                                     ---------------------------
                                                         Huizhen Yu
                                                         Chief Financial Officer


                                      -27-
<PAGE>


                                INDEX TO EXHIBITS

  EXHIBIT
  NUMBER           DESCRIPTION
  -------          -----------

      3.1   Certificate of Incorporation,  as filed with the Delaware  Secretary
            of State on February 10, 2005

      3.2   Amendment to the  Certificate  of  Incorporation,  as filed with the
            Delaware Secretary of State on May 10, 2006.

      3.3   Certificate of Correction,  as filed with the Delaware  Secretary of
            State on February 8, 2006

      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.