UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                  FORM 10-QSB/A
                                 Amendment No. 1


(MARK ONE)

|X|   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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: 000-51379

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

                           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


--------------------------------------------------------------------------------
   (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 |_|.

                                   -----------

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

<PAGE>

                      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 July 31, 2006 was 7,380,000.

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

                           CHINA MEDICINE CORPORATION

TABLE OF CONTENTS

PART I     FINANCIAL INFORMATION                                           Page
------     ---------------------                                           ----

Item 1.      Financial Statements & Notes .....................................3

Item 2.      Management's Discussion and Analysis or Plan of Operation. ......24

Item 3.      Controls and Procedures..........................................31

PART II    OTHER INFORMATION
-------    -----------------

Item  6.     Exhibits.........................................................31

Signatures   .................................................................32

Exhibits/Certifications

                                       2
<PAGE>


      This quarterly report on Form 10-QSB/A ("Form 10-QSB/A") is being filed to
amend our  quarterly  report on Form 10-QSB for the quarter  ended June 30, 2006
(the  "Original  Form 10-QSB")  which was filed with the Securities and Exchange
Commission  ("SEC") on August  14,  2006 to  reflect  changes  in the  financial
statements  consistent  with  changes in the  financial  statements  for the six
months ended June 30, 2006 that were made in Amendment No. 3 to our Registration
Statement on Form SB-2.  Pursuant to Rule 12b-15 under the  Securities  Exchange
Act of 1934, as amended, the Form 10-QSB/A contains current dated certifications
from the principal  executive officer and the principal  financial  officer.  We
have  not  updated  the  information   contained  herein  for  events  occurring
subsequent to August 14, 2006, the filing date of the Original Form 10-QSB.


                          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 JUNE 30, 2006 AND DECEMBER 31, 2005

                                   ASSETS

<TABLE>
<CAPTION>
                                                                           June 30,     December 31,
                                                                             2006          2005
                                                                          -----------   -----------
                                                                          (Unaudited)
                                                                          -----------   -----------
<S>                                                                       <C>           <C>
CURRENT ASSETS:
     Cash                                                                 $   508,297   $    91,964
     Accounts receivable, trade, net of allowance for doubtful accounts
        of $12,452 and $12,333 as of June 30, 2006 and
        December 31, 2005, respectively                                     3,549,584     2,410,824
     Inventories                                                            2,731,384     1,382,929
     Other receivables                                                        324,805        38,301
     Advances to suppliers                                                  1,860,867     1,075,546
                                                                          -----------   -----------
        Total current assets                                                8,974,937     4,999,564
                                                                          -----------   -----------

EQUIPMENT, net                                                                847,746       330,015
                                                                          -----------   -----------

OTHER ASSETS
     Investment deposit                                                       626,000            --
                                                                          -----------   -----------
           Total assets                                                   $10,448,683   $ 5,329,579
                                                                          ===========   ===========

                       LIABILITIES AND SHAREHOLDERS'EQUITY

CURRENT LIABILITIES:
     Accounts payable, trade                                              $   742,274   $   170,196
     Short-term loans                                                              --        95,480
     Other payables and accrued liabilities                                    14,809        97,449
     Customer deposits                                                         38,420        37,292
     Taxes payable                                                            446,430       170,456
                                                                          -----------   -----------
        Total current liabilities                                           1,241,933       570,873
                                                                          -----------   -----------
OTHER LIABILITIES:
     Contingent liabilities                                                    44,003            --
                                                                          -----------   -----------
        Total liabilities                                                   1,285,936       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                                                        4,354,063       120,347
     Statutory reserves                                                       722,909       722,909
     Retained earnings                                                      3,911,895     3,813,665
     Accumulated other comprehensive income                                   172,830       101,132
                                                                          -----------   -----------
        Total shareholders' equity                                          9,162,747     4,758,706
                                                                          -----------   -----------

           Total liabilities and shareholders' equity                     $10,448,683   $ 5,329,579
                                                                          ===========   ===========
</TABLE>

The accompanying notes are an integral part of this statement.


                                       3
<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 AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                         For the three months ended   For the six months ended
                                                                 June 30,                     June 30,
                                                         -------------------------    --------------------------
                                                            2006          2005           2006           2005
                                                         -----------   -----------    -----------    -----------
<S>                                                      <C>           <C>            <C>            <C>
REVENUES                                                 $ 3,977,960   $ 2,901,581    $ 7,489,939    $ 5,630,167

COST OF GOOD SOLD                                          2,960,726     1,914,601      5,420,276      3,743,598
                                                         -----------   -----------    -----------    -----------

GROSS PROFIT                                               1,017,234       986,980      2,069,663      1,886,569
                                                         -----------   -----------    -----------    -----------

OTHER OPERATING INCOME                                        63,121       679,041        359,224      1,103,669
                                                         -----------   -----------    -----------    -----------

OPERATING EXPENSES
     Research and development expenses                       184,677       204,815        239,341        204,974
     Selling, general and administrative expenses            611,511       132,045        898,677        229,762
                                                         -----------   -----------    -----------    -----------
        Total operating expenses                             796,188       336,860      1,138,018        434,736
                                                         -----------   -----------    -----------    -----------

INCOME  FROM OPERATIONS                                      284,167     1,329,161      1,290,869      2,555,502

ACQUISITION TRANSACTION EXPENSE                                   --            --        931,270             --
OTHER INCOME (EXPENSE)                                         2,380          (206)        (7,112)           (28)
                                                         -----------   -----------    -----------    -----------

INCOME BEFORE INCOME TAXES                                   286,547     1,328,955        352,487      2,555,474

PROVISION FOR INCOME TAXES                                    88,676            --        254,257             --
                                                         -----------   -----------    -----------    -----------

NET INCOME                                                   197,871     1,328,955         98,230      2,555,474

OTHER COMPREHENSIVE INCOME :
     Foreign currency translation adjustment                  26,858            --         71,698             --
                                                         -----------   -----------    -----------    -----------

COMPREHENSIVE INCOME                                     $   224,729   $ 1,328,955    $   169,928    $ 2,555,474
                                                         ===========   ===========    ===========    ===========

Earning per share - basic                                $      0.03   $      0.20    $      0.01    $      0.39
                                                         ===========   ===========    ===========    ===========

Earning per share - diluted                              $      0.03   $      0.20    $      0.01    $      0.39
                                                         ===========   ===========    ===========    ===========

Weighted average number of shares outstanding - basic      7,186,389     6,530,000      7,186,389      6,530,000
                                                         ===========   ===========    ===========    ===========

Weighted average number of share outstanding - diluted     7,471,339     6,530,000      7,471,339      6,530,000
                                                         ===========   ===========    ===========    ===========
</TABLE>

The accompanying notes are an integral part of this statement.


                                       4
<PAGE>

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

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 FOR THE SIX MONTHS ENDED JUNE 30, 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, June 30, 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                                      607,425
                 Issuance of preferred stock                                                3,120,000            312      2,401,303
                 Issuance of common stock A warrants                                                                        815,268
                 Issuance of common stock B warrants                                                                        566,117
                 Stock option granted                                                                                        43,613
                 Foreign currency translation adjustments
                                                              ---------    -----------      ---------    -----------    -----------
BALANCE, June 30, 2006 (Unaudited)                            7,380,000    $       738      3,120,000    $       312    $ 4,354,063
                                                              =========    ===========      =========    ===========    ===========
<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                                                   2,555,474                   2,555,474
                                                              -----------   -----------   -----------   -----------
BALANCE, June 30, 2005 (Unaudited)                                722,909     3,790,446            --     4,634,355
                 Net income                                                   3,134,696                   3,134,696
                 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                                                      98,230                      98,230
                 Reverse acquisition, February 8, 2006                                                      (32,398)
                 Shares redeemed in connection with
                    reverse acquisition                                                                    (167,602)
                 Shares issued for acquisition services                                                     607,500
                 Issuance of preferred stock                                                              2,401,615
                 Issuance of common stock A warrants                                                        815,268
                 Issuance of common stock B warrants                                                        566,117
                 Stock option granted                                                                        43,613
                 Foreign currency translation adjustments                                      71,698        71,698
                                                              -----------   -----------   -----------   -----------
BALANCE, June 30, 2006 (Unaudited)                            $   722,909   $ 3,911,895   $   172,830   $ 9,162,747
                                                              ===========   ===========   ===========   ===========
</TABLE>

The accompanying notes are an integral part of this statement.


                                       5
<PAGE>

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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                              2006           2005
                                                          -----------    -----------
<S>                                                       <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                           $    98,230    $ 2,555,474
     Adjustments to reconcile net income to cash
        used in operating activities:
           Depreciation                                        66,355         52,153
           Gain on sale of intangible assets                   15,613             --
           Stock issued for services                          607,500             --
           Stock option granted                                43,613
     Change in operating assets and liabilities:
        (Increase) decrease in assets:
           Accounts receivable, trade                      (1,110,262)       211,876
           Inventories                                     (1,328,887)      (674,133)
           Other receivables                                 (284,807)       (41,498)
           Other receivables - related parties                     --          2,263
           Advances to suppliers                             (771,322)    (1,759,280)
        Increase (decrease) in liabilities:
           Accounts payable, trade                            567,786         90,413
           Other payables and accrued liabilities             (83,195)       (12,110)
           Other payables - related parties                   (32,398)        69,135
           Customer deposits                                      764       (573,947)
           Taxes payable                                      273,054        (16,705)
           Contingent liabilities                              44,003             --
                                                          -----------    -----------
              Net cash used in operating activities        (1,893,953)       (96,359)
                                                          -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of equipment                                   (594,121)       (24,411)
     Deposit for investment                                  (625,000)            --
                                                          -----------    -----------
              Net cash used in investing activities        (1,219,121)       (24,411)
                                                          -----------    -----------

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 provided by financing activities     3,519,702             --
                                                          -----------    -----------

EFFECT OF EXCHANGE RATE ON CASH                                 9,705             --
                                                          -----------    -----------

INCREASE (DECREASE) IN CASH                                   416,333       (120,770)

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

CASH, end of period                                       $   508,297    $   122,750
                                                          ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for income taxes                                $     2,900    $        --
                                                          ===========    ===========

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

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:

Stock issued for services                                 $   607,500    $        --
                                                          ===========    ===========


Stock option granted                                      $    43,613    $        --
                                                          ===========    ===========
</TABLE>


The accompanying notes are an integral part of this statement.


                                       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 year 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 reflect the activities of
its 100% owned subsidiary, Konzern, that is located in the 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 the PRC are covered by  insurance.  As of June
30, 2006 and December 31, 2005,  the Company had deposits in excess of federally
insured limits total of $506,686 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 the 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 June 30, 2006
and December 31, 2005 amounted to $12,452 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>

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.

<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 reporting currency of the Company is the US dollar. 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 $71,698 and $0 for the six months ended June 30, 2006 and 2005,
respectively. The balance sheet amounts with the exception of equity at June 30,
2006 were  translated  at 7.99 RMB to $1.00 USD as  compared to 8.26 RMB at June
30, 2005. The equity accounts were stated at their  historical rate. The average
translation  rate of 8.02 RMB for the six months ended June 30, 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
June 30, 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.

                                       10
<PAGE>

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 June 30, 2006 and 2005 amounted
to $254,257 and $843,306,  respectively. The net effect on earnings per share if
the income tax had been applied would decrease  earnings (losses) per share from
$0.01 to ($0.02) for 2006 and $0.39 to $0.26 for 2005, respectively.


The provision for income taxes at June 30 consisted of the following:

                                           2006                  2005
                                    -------------------    ------------------
                                        Unaudited              Unaudited
                                    -------------------    ------------------
Provision for China Income Tax      $           254,257    $                -
Provision for Local Tax                               -                     -
                                    -------------------    ------------------
Totals                              $           254,257    $                -
                                    ===================    ==================

                                       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)

The  following  table  reconciles  the U.S.  statutory  rates  to the  Company's
effective tax rate for the six months ended June 30:

                                            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.

                                       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)

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  between  $0.17 to 0.23 per share
subject to the 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 is 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.

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

<TABLE>
<CAPTION>
Assumption                             Preferred Stock      Warrants A       Warrants B         Stock options
------------------------------------   ----------------  ---------------- ----------------- ------------------
<S>                                    <C>               <C>              <C>               <C>
Common stock - fair value              $            0.81 $           0.81 $            0.81 $              0.81
$1,581,756,   representing   approximately   15.14%  of  our  total  assets  and
approximately  20.45% of our
Volatility                                                            50%               50%                 50%
Risk-free rate                                                      4.55%             4.55%               4.65%

</TABLE>

                                       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)


MAJOR SUPPLIERS

For the six months  ended June 30, 2006 and the year ended  December  31,  2005,
five suppliers  accounted for  approximately 68% and 74%,  respectively,  of the
Company's purchases.

MAJOR CUSTOMERS

For the six months  ended June 30, 2006 and the year ended  December  31,  2005,
five customers  accounted for  approximately 60% and 65%,  respectively,  of the
Company's sales.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2006, the FASB issued SFAS No. 155,  "Accounting  for Certain Hybrid
Financial  Instruments" ("FAS 155"), which amends SFAS No. 133,  "Accounting for
Derivative  Instruments  and Hedging  Activities"  ("FAS 133") and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of  Liabilities"  ("FAS  140").  FAS  155  provides  guidance  to  simplify  the
accounting for certain hybrid instruments by permitting fair value remeasurement
for any hybrid  financial  instrument that contains an embedded  derivative,  as
well as, clarifies that beneficial interests in securitized financial assets are
subject to FAS 133. In addition, FAS 155 eliminates a restriction on the passive
derivative  instruments that a qualifying  special-purpose entity may hold under
FAS 140. FAS 155 is effective for all financial instruments acquired,  issued or
subject to a new basis occurring after the beginning of an entity's first fiscal
year that begins after September 15, 2006.


In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial  Assets" ("FAS 156"),  which amends SFAS No. 140. FAS 156 specifically
provides  guidance  addressing  the  recognition  and  measurement of separately
recognized servicing assets and liabilities, common with mortgage securitization
activities,  and  provides  an  approach  to  simplify  efforts to obtain  hedge
accounting  treatment.  FAS  156 is  effective  for  all  separately  recognized
servicing  assets and  liabilities  acquired or issued after the beginning of an
entity's  fiscal year that begins after  September 15, 2006, with early adoption
being permitted.


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"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial  statements in accordance with FAS 109, "Accounting for
Income  Taxes".  FIN 48  prescribes  a  recognition  threshold  and  measurement
attribute for the  financial  statement  recognition  and  measurement  of a tax
position  taken or expected to be taken in a tax  return.  FIN 48 also  provides
guidance on derecognition, classification, interest and penalties, accounting in
interim  periods,  disclosure and  transition.  The  requirements  of FIN 48 are
effective for our fiscal year beginning January 1, 2007.

                                       14
<PAGE>


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, (continued)


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.

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 subsidiary.  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 June 30,
2006  and  December  31,  2005,  and  the  results  of  operations,  changes  in
shareholders'  equity and cash flows for the six months  ended June 30, 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.

                                       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

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.


The following is a  reconciliation  of the basic and diluted  earnings per share
computations for the six months ended June 30, 2006 and 2005:

                                                         2006         2005
                                                      ----------   ----------
                                                       Unaudited   Unaudited
                                                      ----------   ----------
Net income for basic earnings per share               $   98,230   $2,555,474
                                                      ==========   ==========
Shares of common stock and common
     stock equivalents:
Weighted average shares used in basic computation      7,186,389    6,530,000
                                                                   ==========
Diluted effect of convertible preferred stock            284,950
                                                      ----------
Weighted average shares used in diluted computation    7,471,339
                                                      ==========
Earnings per share:
Basic                                                 $     0.01   $     0.39
                                                      ==========   ==========
Diluted                                               $     0.01
                                                      ==========



NOTE 5 - ACCOUNTS RECEIVABLE, TRADE

Accounts receivable, trade as of June 30, 2006 and December 31, 2005 consisted
of the following:

                                       June 30,            December 31,
                                         2006                  2005
                                  --------------------   -----------------
                                       Unaudited
                                  --------------------   -----------------
Accounts receivable               $          3,562,036   $       2,423,157
Less: allowance for
      doubtful accounts                         12,452              12,333
                                  --------------------   -----------------
Totals                            $          3,549,584   $       2,410,824
                                  ====================   =================

                                       16
<PAGE>
                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC)

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - INVENTORIES

Inventories consisted of the following:

                                      June 30,            December 31,
                                        2006                  2005
                                 -------------------    ------------------
                                     Unaudited
                                 -------------------    ------------------
Chemical medicine                $         2,731,150    $        1,382,929
Traditional Chinese Medicine                     234                     -
                                 -------------------    ------------------
Totals                           $         2,731,384    $        1,382,929
                                 ===================    ==================


NOTE 7 - ADVANCES TO SUPPLIERS

Advances to  suppliers  as of June 30, 2006 and  December  31, 2005  amounted to
$1,860,867 and $1,075,546, respectively. They represent advances to suppliers on
inventory purchases.

NOTE 8 - INVESTMENT DEPOSIT


Investment  deposit in the amount of $626,000  represents the advance payment on
the investment for the Joint Cooperation Agreement with Guangzhou Ji'nan Science
& Technology  Industrial  Group Co., Ltd. and an individual Mr. Dongsheng Yao to
jointly  form  a  new  Chinese  company  for  the  purpose  of  development  and
application of Aflatonxin-Detoxifizyme.  See Note 17 - Subsequent event for more
details.


NOTE 9 - EQUIPMENT

Equipment is summarized as follows:

                                       June 30,             December 31,
                                         2006                   2005
                                  --------------------    ------------------
                                       Unaudited
                                  --------------------    ------------------
Furniture and fixtures            $             63,133    $          160,081
Office equipment                               779,712               369,459
Motor vehicles                                 197,315               132,804
                                  --------------------    ------------------
                     Total                   1,040,160               662,344
Less accumulated depreciation                  192,414               332,329
                                  --------------------    ------------------
Equipment, net                    $            847,746    $          330,015
                                  ====================    ==================

Depreciation expense for the six months ended June 30, 2006 and
2005 amounted to $66,355 and $52,153 respectively.

                                       17
<PAGE>
                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC)

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - 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 $38,420 and $37,292 as of June 30,
2006 and December 31, 2005, respectively.

NOTE 11 - TAXES PAYABLE

Taxes payable consisted of the following:

                                       June 30,            December 31,
                                         2006                  2005
                                  ------------------     -----------------
                                     Unaudited
                                  ------------------     -----------------
Income taxes payable              $          252,540     $               -
Individual income tax                            343                   205
Value added tax                              193,547               170,251
                                  ------------------     -----------------
Totals                            $          446,430     $         170,456
                                  ==================     =================


NOTE 12 - 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.

                                                 June 30,          December 31,
                                                   2006                 2005
                                              ----------------    --------------
                                                 Unaudited
                                              ----------------    --------------
Citic Industrial Bank due February 1, 2006,
     annual interest rate at 5.22%            $              -    $      95,480
                                              ================    ==============


NOTE 13 - 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 six months  ended  June,  2006 and the year ended
December 31, 2005 amounted to $20,886 and $31,282, respectively.

                                       18
<PAGE>
                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC)

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13 - COMMITMENTS AND CONTINGENCIES, (CONTINUED)

OPERATING LEASE, (CONTINUED)

As of June 30, 2006, the future  minimum  annual lease payments  required are as
follows:

           Year                            Amount
----------------------------            -------------
           2006                       $       27,682
        Thereafter                                 -



CONTINGENT LIABILITIES

The Company has incurred  liquidated damages to its investors as provided in the
registration  rights  agreement as described in Note 16. The Company is required
to issue 1,025 shares of Series A preferred  stock to the investors for each day
that the  Company  failed  to meet the  schedule  dates  or  failed  to keep the
registration statement effective thereafter.

The Company has accrued  $44,003 as liquidated  damages and expensed that amount
in the six months ended June 30, 2006.  See Note 16. This amount is based on the
shares  accrued from August 9, 2006 through  September  30, 2006 the fair market
value of the Series A preferred stock of $0.81 per share.

NOTE 14 - 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 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 PRC GAAP.
Appropriations to the  discretionary  surplus reserve are made at the discretion
of the Board of Directors.

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.

                                       19
<PAGE>
                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC)

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 - STATUTORY RESERVES

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 June 30, 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 15 - 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 $12,258 and $23,575 during the six
months ended June 30, 2006 and the year ended December 31, 2005, respectively.


NOTE 16 - STOCKHOLDERS' EQUITY

SALE OF PREFERRED STOCK

Contemporaneously  with the  reverse  acquisition,  the Company  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, 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 and at any time, into 3,120,000  shares of common stock. 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. 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.


                                       20
<PAGE>
                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC)

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16 - STOCKHOLDERS' EQUITY, (CONTINUED)

SALE OF PREFERRED STOCK, (CONTINUED)

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.  Further,  the Series A Preferred  Stock can not be
converted  and the warrants can not be exercised if such  conversion or exercise
would result in the holder and its affiliates  owning more than 4.9% of the then
outstanding number of shares of common stock.

The  Company  valued  the  warrants  at the time  they  were  issued  using  the
Cox-Ross-Rubinstein  binomial model, based on the exercise price and term of the
warrants  and the  following  assumptions:  fair value of common  stock - $0.81;
volatility - 50%;  interest  rate - 4.55%.  Because there is currently 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  publically-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  is
required  to  file  a  registration  statement  registering  the  common  shares
underlying  conversion of the preferred stock and exercise of the warrants.  The
registration  statement  was  filed on  April  13,  2006 but has not yet  become
effective. Accordingly, effective August 8, 2006, the Company has begun to incur
liquidated  damages  under the  Registration  Rights  Agreement.  The Company is
required to pay to the investors liquidated damages of 1,025 shares of preferred
stock each day until the  registration  statement is effective,  up to a maximum
total of 375,000 shares. After the registration statement becomes effective, the
Company is required to maintain its  effectiveness  until the  expiration of two
years after the date of the agreement or until the investors  hold less than 10%
of the  registerable  securities.  As of June 30, 2006,  the Company has accrued
$44,003  for the  liquidated  damages  that  it  expects  to  incur  under  this
agreement.  This  amount  has been  included  into  general  and  administrative
expenses.


                                       21
<PAGE>
                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC)

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16 - STOCKHOLDERS' EQUITY, (CONTINUED)

SALE OF PREFERRED STOCK, (CONTINUED)

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  of  $3,783,000,
representing  the gross  proceeds  received  of  $3,900,000,  net of $117,000 of
commissions, has been credited to additional paid-in capital.

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.  There is no  established  market  for the
Company's common stock. Accordingly, the fair value of the common stock of $0.81
has been estimated 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 six months ended June 30, 2006.


NOTE 17 - SUBSEQUENT EVENT

On July 7, 2006,  Guangzhou  Konzern  Medicine  Co. Ltd.  ("Konzern"),  our 100%
subsidiary  in  China,   entered  into  a  Joint   Cooperation   Agreement  (the
"Agreement")  with Guangzhou  Ji'nan Science & Technology  Industrial Group Co.,
Ltd.  ("JSIG") and an individual Mr. Dongsheng Yao ("Mr. Yao") to jointly form a
new Chinese company  ("NewCo") 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 in respect of the Agreement.

Aflatoxins  ("AFT") are  carcinogenic  toxins  classified  as a Group-A  natural
carcinogen by the  International  Research  Institution  of the Cancer.  AFT can
cause  cancer in humans such as liver  cancer,  stomach  cancer and lung cancer.
They pollute food, fodder,  agricultural products and dairy products. ADTZ is an
enzyme  which  eliminates  AFT from food and animal  feed.  It is produced  from
edible fungi and has been proven to be harmless to humans and animals.

                                       22
<PAGE>
                    CHINA MEDICINE CORPORATION AND SUBSIDIARY
                (FORMERLY KNOWN AS LOUNSBERRY HOLDINGS III, INC)

            CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 17 - SUBSEQUENT EVENT, (CONTINUED)


Mr. Yao is the inventor of the four patents on ADTZ and Ji'nan University,  with
which JSIG is the agent,  is the holder of the four patents on ADTZ,  which have
been  valued at RMB7.5  million  (approximately  US$937,500).  JSIG and Mr.  Yao
contributed  the four  patents  into the NewCo in exchange for 15% equity of the
NewCo.  In  addition,  JSIG and Mr.  Yao are to be paid a total of RMB1  million
(approximately US$125,000) as a technology contribution fee from the New Co.

Under  the  Agreement,  Konzern  is to  contribute  a  total  of  RMB17.5million
(approximately   US$2,187,500)   to  the   NewCo,   RMB5million   (approximately
US$625,000)  of which was paid within 15 days from the date of the Agreement and
the  remaining  amount  is to be paid  within  two  years  from  the date of the
formation  of the New-Co.  The NewCo owns the patent  rights,  know-how  and any
improvements;  and  JSIG and Mr.  Yao  shall be the  holders  of any  copyrights
arising therefrom.

The  formation of the NewCo is pending the  approval and license from  Guangzhou
Industrial and Commerce Bureau in China.

                                       23
<PAGE>

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


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


Overview

      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"). 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.

      Through  Konzern we distribute  approximately  1,100 medicine  products in
China,  including  traditional  pharmaceutical  medicines,  traditional  Chinese
medicines  (finished  medicines  made  of  Chinese  herbs),  Chinese  herbs  and
nutritional  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 manufacturers' sole distributor
in the PRC for our five largest suppliers for certain products they produce.

      Our five largest suppliers,  which were the same in each period, accounted
for 68% and 75% of our  purchases in the six months ended June 30, 2006 and June
30, 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.  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
$1,860,867  as of  June  30,  2006.  As of June  30,  2006,  we have  nationwide
exclusive  sales right from our suppliers  for six products they produce,  which
accounted  for  $3,281,397,  or 44% of revenue in the six months  ended June 30,
2006, and $1,413,502, or 25% of revenue in the comparable period of 2005.

      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 60%
and 71% of our revenue for the six months ended June 30, 2006 and June 30, 2005,
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.

                                       24
<PAGE>

      Because a  substantial  portion of our sales are made to a small number of
customers,  our  accounts  receivable  from a  small  number  of  customers  may
represent a large percentage of our accounts  receivable and assets. Our largest
account  receivable at June 30, 2006 was  approximately  $781,210,  representing
approximately 7.48% of our total assets and approximately  10.10% of our working
capital,   and  our  three  largest  accounts   receivable  were   approximately
$1,581,756,   representing   approximately   15.14%  of  our  total  assets  and
approximately  20.45% of our working  capital.  This  concentration  of accounts
receivable   represents  a   significant   credit  risk.

      The Drug Administration Law and the Pricing Law of the PRC provide for the
government to rationally fix and adjust prices for pharmaceutical  products,  in
order to ensure  that  price is  commensurate  with  quality,  and to  eliminate
excessively  high price,  and  protect the  legitimate  interests  of users.  In
general,  the prices of our products are  determined  by us and our customers on
the  basis of  negotiation  due to the fact that our  customers  are not the end
user.  However,  commencing in 2006 some of our products became subject to price
controls,  which  negatively  affected our gross margin for the six months ended
June 30, 2006. It is possible  that  additional  products may become  subject to
price controls.  However, even products that are not subject to government price
control may be affected by the policy reflected in the price controls, including
a desire to effect a reduction  in drug  prices,  and it is often  difficult  to
increase prices. For these products,  we may have to maintain existing prices or
reduce prices.  We aim to increase the distribution of the medical products with
our own  intellectual  property rights which are less influenced by governmental
price controls.

      We have four new medicines and products  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
pre-clinical  studies for Yutian capsule in the first six months of 2006.  These
products are designed for marketing in the PRC in compliance with PRC regulatory
requirements.

      On July 7, 2006,  we  entered  into an  agreement  with  Guangzhou  Ji'nan
Science & Technology  Industrial  Group and  Dongsheng Yao to jointly form a new
Chinese  company to develop  applications of  alfatoxin-detoxifizyme,  an enzyme
that can eliminate aflatoxin from food and animal feed. Guangzhou Ji'nan Science
& Technology Industrial Group is the agent for Ji'nan University.  The agreement
provides for us to set up a Chinese joint venture  company in which we will be a
70% owner and Guangzhou Ji'nan Science & Technology Industrial Group and Mr. Yao
will each have a 15% interest.  The agreement  provides that we are to invest at
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.  The joint
venture is to pay Guangzhou Ji'nan Science & Technology Industrial Group and Mr.
Yao a technology fee in the amount of approximately $125,000. Although we do not
have any present  plans to form other joint  ventures or enter into research and
development  agreements,  it is possible that we may enter into other agreements
relating to the development of medicine products.

      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.

      Under  the laws of the PRC,  we are  required  to make  appropriations  to
reserve funds, comprising the statutory surplus reserve,  statutory welfare fund
and discretionary surplus reserve,  based on our after-tax net income determined
in accordance  with generally  accepted  accounting  principles of PRC (the "PRC
GAAP").  The appropriation to the statutory surplus reserve is required to be at
least 10% of the after tax net income  until the  reserve is equal to 50% of our
registered  capital.  At June, 2006, the registered capital was approximately $3
million.  Appropriations to the statutory public welfare fund are required to be
between 5% and 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. The allocations to these reserve funds are
treated as a component of stockholders'  equity. 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.  Our board of directors decided not
to make appropriation to this reserve.

                                       25
<PAGE>

Results of Operations

      The following  table sets forth our statements of operations for the three
months and six months ended June 30, 2006 and 2005, in U.S. dollars:


<TABLE>
<CAPTION>
                                                Three Months Ended June 30,          Six Months Ended June 30,
                                               ------------------------------      ------------------------------
                                                   2006              2005              2006              2005
                                               ------------      ------------      ------------      ------------
<S>                                            <C>               <C>               <C>               <C>
Revenue                                        $  3,977,960      $  2,901,581      $  7,489,939      $  5,630,167

Costs of goods sold                               2,960,726         1,914,601         5,420,276         3,743,598

Gross profit                                      1,017,234           986,980         2,069,663         1,886,569

Other operating income                               63,121           679,041           359,224         1,103,669

R&D expenses                                        184,677           204,815           239,341           204,974

Selling, general and administrative costs           611,511           132,045           898,677           229,762

Income from operations                              284,167         1,329,161         1,290,869         2,555,502

Reverse acquisition expenses                              0                 0           931,270                 0

Other income (expense), net                           2,380              -206            -7,112               -28

Income before income taxes                          286,547         1,328,955           352,487         2,555,474

Provision for income taxes                           88,676                 0           254,257                 0

Net income                                          197,871         1,328,955            98,230         2,555,474

Other comprehensive income                           26,858                 0            71,698                 0

Comprehensive income                           $    224,729      $  1,328,955      $    169,928      $  2,555,474
</TABLE>


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

                                       26
<PAGE>

<TABLE>
<CAPTION>
                        Three Months Ended June 30,                          Six Months Ended June 30,
                     2006                       2005                        2006                      2005
                   ----------                ----------                 ----------                 ----------
<S>                <C>               <C>      <C>               <C>      <C>               <C>      <C>               <C>
Traditional
Pharmaceutical
Medicine           $2,733,380        68.71%   $2,218,583        76.46%   $5,210,517        69.57%   $4,191,858        74.45%
Traditional
Chinese Medicine    1,222,626        30.73%      634,299        21.86%    2,254,500        30.10%    1,343,994        23.87%
Chinese Herbs          21,954         0.55%       48,699         1.68%       24,922         0.33%       94,315         1.68%
Total              $3,977,960          100%   $2,901,581          100%   $7,489,939          100%   $5,630,167          100%
</TABLE>

QUARTER ENDED JUNE 30, 2006 COMPARED TO QUARTER ENDED JUNE 30, 2005

      The Revenue for the three months ended June 30, 2006 were  $3,977,960,  an
increase  of  $1,076,379,  or  37%,  from  the  revenue  of  $2,901,581  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. We have developed thirty-five new clients all over China during
the second quarter of 2006, which attributed to the increase of revenues.

      Cost of revenue for the three months  ended June 30, 2006 was  $2,960,726,
an increase of $1,046,125,  or 55%, from $1,914,601 for the comparable period in
2005.  Gross profit for the three months ended June 30, 2006 was $1,017,234,  an
increase of $30,254, or 3%, from $986,980 for the comparable period of 2005. Our
gross margin for the three  months ended June 30, 2006 was 26% as compared  with
34% for the three months  ended June 30, 2005.  The drop in our gross margin was
due to the decrease of the medicine  prices as  influenced  by the  strengthened
price  control  policy over the medicine  industry by the Chinese  government in
early 2006.

      Other  operating  income were  $63,121 and  $679,041  for the three months
ended June 30, 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 $184,677 for the three months ended
June 30, 2006 which was for the pre-clinical  study of Yutian capsule.  Research
and development expenses for the same period of 2005 were $204,815.


      Selling,  general and administrative  expenses were $611,511 for the three
months  ended June 30,  2006,  an  increase of $479,466  from  $132,045  for the
comparable  period in 2005.  The  increase  was mainly  caused by the  increased
transportation,  advertising,  and marketing expenses. Also, additional expenses
occurred  associated  with our  status as a  reporting  company,  including  the
maintenance  of the 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
contributed  to the  increase in  administrative  expenses.  The  increase  also
included an accrual of $44,003 for the  liquidated  damages  resulting  from our
failure to register shares as required by the registration rights agreement.


      Provision for income taxes was $88,676 for the three months ended June 30,
2006 as compared with zero taxes for the comparable period in 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 the years of 2006, 2007 and 2008.


      Comprehensive  income  for the  three  months  ended  June  30,  2006  was
$224,729,  a decrease of $1,104,226 from $1,328,955 for the comparable period in
2005. The decrease was mainly due to the increase on selling  expenses,  general
and administrative expenses, and income taxes.


THE SIX MONTHS  ENDED JUNE 30, 2006  COMPARED  TO THE SIX MONTHS  ENDED JUNE 30,
2005

                                       27
<PAGE>

      Revenues  for the six  months  ended  June 30,  2006 were  $7,489,939,  an
increase  of  $1,859,772,  or  33%,  from  the  revenue  of  $5,630,167  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. We have developed thirty-five new clients all over China during
the second quarter of 2006, which attributed to the increase of revenues.

      Cost of revenue for the six months ended June 30, 2006 was $5,420,276,  an
increase of $1,676,678,  or 45%, from  $3,743,598  for the comparable  period in
2005.  Gross  profit for the six months ended June 30, 2006 was  $2,069,663,  an
increase of $183,094,  or 9.7%,  from  $1,886,569 for the  comparable  period of
2005.  Our  gross  margin  for the six  months  ended  June 30,  2006 was 28% as
compared with 34% for the six months ended June 30, 2005.  The drop in our gross
margin was due to the  decrease  of the  medicine  prices as  influenced  by the
strengthened  price  control  policy over the  medicine  industry by the Chinese
government in early 2006.

      Other  operating  income were $359,224 and  $1,103,669  for the six months
ended June 30, 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 $239,341 for the six months ended
June 30, 2006 which was for the pre-clinical  study of Yutian capsule.  Research
and development expenses for the same period of 2005 were $204,974.


      Selling,  general and  administrative  expenses  were $898,677 for the six
months  ended June 30,  2006,  an  increase of $668,915  from  $229,762  for the
comparable  period in 2005.  The  increase  was mainly  caused by the  increased
transportation,  advertising,  and marketing expenses. Also, 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 contributed
to the  increase in  administrative  expenses.  The  increase  also  included an
accrual of $44,003  for the  liquidated  damages  resulting  from our failure to
register shares as required by the registration rights agreement.

      Reverse  acquisition  expenses  were $931,270 in the six months ended June
30, 2006. These expenses were one-time expenses which include the value of stock
issued to  employees,  including two of our  officers,  and a service  provider;
warrants issued to investors,  and legal, accounting and investment banking fees
paid during the first quarter of 2006.


      Provision  for income taxes was $254,257 for the six months ended June 30,
2006 as compared with zero taxes for the comparable period in 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 the years of 2006, 2007 and 2008.


      Comprehensive  income for the six months ended June 30, 2006 was $169,928,
a decrease of $2,385,546 from $2,555,474 for the comparable  period in 2005. The
decrease  was mainly due to the  increase  on selling  expenses,  G&A  expenses,
reverse acquisition expenses and income taxes.


Liquidity and Capital Resources

                                       28
<PAGE>

      Prior to  February  2006,  we  financed  our  operations  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  $3.8
million,  we had working  capital of $8,138,564,  an increase of $3,709,873 from
$4,428,691 from December 31, 2005.

      The gross proceeds from the February private  placement were $3.9 million,
from  which we  received  net  proceeds  of  approximately  $3.8  million  after
deducting  finders' fees of $117,000.  In connection with the private placement,
we also paid $167,602 to Capital  Markets to purchase  928,000  shares of common
stock  and  $32,398  to pay debt to  Capital  Markets,  and  incurred  legal and
accounting  expenses of $120,000,  a $50,000 due diligence fee payable to Barron
Partners  and an  investment  banking fee of  approximately  $102,000,  with the
result that the total cash received by us was approximately $3.3 million.


      We used cash of $1,893,878 in our operations for the six months ended June
30, 2006,  an increase of $1,800,519  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 the accounts receivable and inventories.


      The following table sets forth the changes in certain balance sheet items,
in dollars and percentages,  from December 31, 2004 to December 31, 2005 to June
30, 2006 (dollars in thousands).


<TABLE>
<CAPTION>
                                 Change in dollars         Percentage Change       Change in dollars         Percentage Change
                                 ------------------        -----------------       ------------------        -----------------
Balance Sheet Caption          12/31/04 to 12/31/05     12/31/04 to 12/31/05      12/31/05 to 6/30/06      12/31/05 to 6/30/06
---------------------          --------------------     --------------------      -------------------      -------------------
<S>                            <C>                      <C>                       <C>                      <C>
Accounts receivable                          $1,050                      23%               $    1,139                      47%
Inventories                                     620                      81%                    1,348                      98%
Advances to suppliers
                                                637                     145%                      785                      73%
Accounts payable                                307                      64%                      572                     336%
Customer deposits                               657                      64%                        1                       3%
</TABLE>


      The change in these balance sheet captions reflects the nature of the cash
requirements of our business.  The increase in accounts receivable reflected the
increase  in sales.  Because the  collection  period  typically  runs from three
months to one year,  the increase in accounts  receivable  reflects not only the
increase in sales but also the long collection period. 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. In addition,  our
payment  cycle is  considerably  shorter than our  receivable  cycle  because we
typically pay our  suppliers  all or a portion of the purchase  price in advance
and for some  suppliers we must maintain a deposit for future  orders.  However,
from December 31, 2005 to June 30, 2006, our payables  increased 336% 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 increase. In addition,  our customer deposits increased 3% from
December 31, 2005 to June 30, 2006  reflecting  increased  sales. We require our
customers to pay certain percentage of the sales price as deposit before we ship
products to the  customers.  The  percentage  varies from  customer to customer.
During  the  course of  business,  we reduce the  deposit  requirement  for some
customers with good credit. To the extent that we cannot satisfy our cash needs,
whether  from  operations  or from a financing  source,  our  business  would be
impaired in that it may be difficult for us to obtain  products which could,  in
turn, impair our ability to generate sales.

      In January  2006, we repaid  $95,696 short term loans to CITIC  Industrial
Bank with $1,582 interest payment. As of June 30, 2006, the Company did not have
long-term or short-term debt.

      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.

                                       29
<PAGE>

      In the course of our business,  we must make  significant  deposits to our
suppliers when we place an order. At June 30, 2006, our advance  payments to our
suppliers   totaled   approximately   $1,860,867,   and  our  cash  balance  was
approximately $508,297.

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.

                                       30
<PAGE>

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 June 30,  2006 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  our
      disclosure  controls and  procedures  were effective in alerting them in a
      timely  manner to  information  relating  to the  Company  required  to be
      disclosed in this report and that information  required to be disclosed in
      the reports that we file or submit  under the Exchange Act is  accumulated
      and communicated to our management,  including our chief executive officer
      and chief financial officer,  to allow timely decisions regarding required
      disclosure.


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

                            PART II OTHER INFORMATION

Item 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.

                                       31
<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: September 20, 2006.                    BY: /s/ Senshan Yang
                                                 -----------------------
                                                 Senshan Yang
                                                 Chief Executive Officer


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

                                       32